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Inflationary pressures ease amid
currency strengthening
Consumer prices rose 0.49% in May, which was down from the more pronounced
1.15% rate observed in April and virtually on target with the 0.47%
anticipated by the Consensus last month. As a result, the annual inflation
rate declined for the first time in five months to 7.7% from 7.9% in
April. Producer prices exhibited a similar pattern in May, experiencing a
modest 0.06% increase over April – the lowest monthly rate since October
2000. The May producer price figure brought the annual variation down from
12.3% in April to 11.6%. Since the beginning of this year, the annual
inflation rate has consistently remained above the Central Bank target
range of 5% to 6% set for 2003. The pass-through of higher prices from the
tax increases appears to have remained contained, while the recent
currency strengthening, resulting from Central Bank intervention and
heightened investor optimism for emerging market assets, has helped to
lower inflationary expectations. In May, the currency appreciated 1.1% in
nominal terms to reach 2,855 pesos to the US$. The May appreciation
followed an even stronger 2.4% appreciation in the previous month. The
peso strengthening observed in the past two months now has the currency
trading 0.3% stronger than at the end of last year. Participants expect
inflation to continue on a downward trend throughout the year with the
annual rate gradually declining to reach 6.6% by year-end. The downward
trend in inflation should persist into next year with prices expected to
rise at a more moderate 5.7%.
Central Bank maintains interest
rates at historical lows
The foreign exchange market intervention and improved prospects for lower
inflationary expectations have enabled the Central Bank to maintain
interest rates at low levels. In May, the benchmark DTF rate remained
virtually unchanged with monetary authorities making only minor upward
adjustments. As a result, the DTF rate rose just 0.04% from the previous
month to 7.76%. Nevertheless, participants expect further adjustments
throughout the year, as the inflationary setting has not yet stabilized
and prospects for a growth-induced rise in inflationary expectations still
looms. In fact, panellists anticipate that the DTF rate will increase more
than 100 basis points to reach 8.3% by year-end.
Fiscal deficit narrows in the first
quarter amid improved tax take
The fiscal deficit reached US$ 1.1 billion (0.5% of GDP) in the first
quarter of the year, which was well below the US$ 1.5 billion (0.7% of
GDP) target agreed to with the International Monetary Fund (IMF) under the
of the US$ 2.1 billion stand-by agreement approved on 15 January. The
central government balances received a strong boost from improved revenues
in light of new tax levies introduced at the beginning of the year. Total
central government revenues rose 29.4% nominally over the first quarter
last year to reach 12.3 trillion pesos (US$ 2.9 billion). In addition,
improved income from state-owned enterprises, particularly the
publicly-owned Empresa Colombiana de Petróleos (Ecopetrol) and electricity
companies, raised public sector income. However, increased stability in
the fiscal balances is likely to be sustainable only if the implementation
of the government’s comprehensive fiscal agenda, which includes labour,
tax, pension and constitutional reform (see January 2003 for details), is
successful. Consensus Forecast participants appear to be convinced that
the government’s fiscal discipline will lower the deficit in 2003, since
the 2.6% of GDP Consensus figure of this month is now just a 0.1
percentage point above the government’s 2.5% of GDP fiscal deficit target
agreed to with the IMF. These forecasts, however, do not reflect the
latest developments in the political arena.
Finance minister resigns
On 6 June, Roberto Junguito resigned as finance minister amid concerns
that the government was not granting him the support necessary to progress
on economic policy. Furthermore, the outgoing minister opposed the
President’s efforts to influence the Central Bank’s monetary and exchange
rate policy. Junguito had led negotiations with the IMF for a new stand-by
programme and was considered the key driver behind the Uribe
administration’s efforts to progress on structural reforms, which included
tax, labour and pension system restructurings. Junguito has been replaced
by the deputy finance minister, Alberto Carrasquilla Barrera. The incoming
Finance Minister has worked as an economist at the Inter-American
Development Bank and at the Comptroller-General's office. Economic policy
is unlikely to undergo significant changes under the incoming minister.
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