Capital Controls in Colombia

Colombia has just announced capital controls on some foreign investments to try to curb the soaring peso, which has made greater gains against the dollar this year than any other currency.

Finance Minister Oscar Zuluaga said that starting immediately, foreign portfolio investors will be required to deposit 40 percent of their investments in non-interest-bearing accounts in the Central Bank for six months. The measure is designed to absorb a surfeit of dollars and discourage speculative financial transactions.

The controls complement similar actions announced May 6 by the Central Bank to freeze 40 percent of offshore loans and deposits repatriated by local companies. The monetary authority has also steadily ratcheted up interest rates to blunt a resurgence of inflation.

Despite those measures, Colombia's peso has strengthened 5 percent in the past three weeks and 14 percent since the start of the year — more than any other currency in the world. On Tuesday, the peso reached a seven-year high of 1,954 to the dollar.
The measures are backed by conservative President Alvaro Uribe, who said Tuesday that "the government must defend exporters' revenues, taking measures to avoid speculative capital that continues to erode our exchange rate."

The potent mix of inflation and a strong peso are hurting flower growers and other major exporters, which are forced to pay more for materials and wages even as margins on their dollar revenues shrink.

The Central Bank said Tuesday that Colombia has received $5.5 billion in net capital inflows so far this year, up from just $360 million in the same period a year ago. A little more than half of that came from direct foreign investment, which economists say is the main force behind the peso's sharp rise.

Colombia's economy expanded 7 percent in 2006 and is expected to surpass 5.5 percent growth this year.