The dollar deepened its decline this Tuesday in the Colombian foreign exchange market, as during the second business day of the week it traded at an intraday low of 3,182.10 pesos, while the Market Representative Rate (TRM) for July 29 stood at 3,205.87 pesos, levels not seen for more than seven years.
Behind that strength of the Colombian peso, however, a little-discussed factor is gaining momentum: in addition to remittances, investment capital, and the interest rate differential, part of the dollars entering the country from illicit economies would also be contributing to the currency’s revaluation, as warned by César Ferrari, Financial Superintendent, during his speech at the 25th Pan-American Congress on LA/FT/FPADM Risk, held by Asobancaria in Cartagena.
So far this year, the Colombian peso has strengthened by about 14.8 percent against the US dollar and is now the second most revalued currency in the world. Although this behavior has been mainly attributed to capital inflows, remittances, and the attractiveness of high interest rates for portfolio investors, Ferrari drew attention to a component that, in his view, is also part of the explanation for the phenomenon and has until now remained practically outside public discussion.
The official explained that legal flows continue to be the most important within the supply of dollars the country receives, but he maintained that resources from illicit economies also increase the availability of foreign currency and favor the appreciation of the peso. “Legal flows are the most important, but illegal flows contribute to this situation,” he stated during his speech.
To support this claim, he presented estimates according to which, in 2022, exports associated with illicit economies generated between 15 billion and 16 billion dollars, while outflows for the purchase of inputs used in those activities amounted to about 375 million. According to the Superintendent, this difference reflects that these resources also end up increasing the supply of dollars circulating in the Colombian economy.
Ferrari’s statements opened a discussion that goes beyond the daily behavior of the dollar and focuses on the consequences that a prolonged revaluation can have on the economy. This concern has also been raised by the co-director of the Board of Directors of the Bank of the Republic, César Giraldo, who considers that the main economic risk the country faces today is precisely the strength of the Colombian peso.
The Financial Superintendent also brought to the table a component that rarely forms part of the public discussion about the Colombian foreign exchange market: the impact that illicit economies themselves have on the supply of foreign currency and the exchange rate of the US dollar in the economy.
The statement gains relevance because, moreover, it comes from the financial superintendent, one of the main members of the economic team of President Gustavo Petro’s government and responsible for overseeing the financial system.
Although various academic sectors and some studies had warned in the past about this phenomenon, few high-ranking officials of the current government had publicly acknowledged that these flows are also part of the factors that help explain the recent revaluation of the Colombian peso.
Ferrari added that high labor informality and widespread use of cash continue to represent obstacles to precisely establishing the magnitude of these resources within the formal economy, which reinforces the need to strengthen traceability and financial control mechanisms.
The other side of the strong peso
Although a cheap dollar reduces the cost of imports and benefits those who travel abroad or buy products priced in that currency, the other side of the revaluation begins to be felt in companies that depend on international sales.
A recent analysis by the economic studies center Anif warns that the Colombian peso accumulates an appreciation far above that of its main regional peers, a situation that has significantly reduced the peso income that exporting companies receive from their foreign sales.
It also points out that the sectors most exposed to this phenomenon are those whose production depends almost exclusively on international markets. Among these are floriculture, where between 88 and 95 percent of production is exported, coffee, with a share close to 88 percent, and bananas, with about 66 percent. For these activities, an increasingly cheap dollar means less local currency income to cover costs, invest, or maintain productive capacity.
Anif adds that the challenge is even greater because the exchange rate appreciation coincides with an increase in labor costs and new obstacles to foreign trade, such as the recent tariffs announced by the United States on some Colombian products. This combination, the think tank warns, reduces the maneuvering room of exporting companies and could end up affecting formal employment and investment.
Concern about a prolonged revaluation of the peso has also been raised by the co-director of the Board of Directors of the Bank of the Republic, César Giraldo. In a recent interview with EL TIEMPO, the economist stated that today the main risk for the Colombian economy is precisely the strength of the currency, considering that it is reducing competitiveness for exporters, manufacturers, and services, while making imports that compete with domestic production cheaper.
Giraldo also warned that behind the abundance of dollars there are various factors that must be analyzed together. Among them, he mentioned capital flows, but he also drew attention to the need to better understand the origin of part of the foreign currency entering the country, an aspect that connects with the discussion raised by Ferrari about the importance of strengthening the traceability of resources circulating in the economy.