% annual growth rate

M3Nominal GDP

Sources: M3 from Banco de la República and nominal GDP from IMF database, as at November 2021.

The medium-term relationship between money and nominal GDP growth in Colombia, 1981-2018

Five-year moving averages of annual % changes, with 1983 being the start of the first five-year period

Comment on monetary trends in Colombia

For more than a century after gaining independence from Spain in 1819, Colombia’s economy was dominated by the production and export of coffee. From the 1980s onwards, the government took steps to diversify, in particular by developing the county’s substantial coal and oil reserves. More recently, high tech electronics companies have been established. Being a strongly export-dominated economy, the authorities were keen to maintain a competitive exchange rate, but in the 1980s the exchange rate became indexed to the rate of inflation and unfortunately a vicious circle developed whereby inflation fed into the exchange rate and vice versa. A recession in the late 1990s, the first in the country for more than 60 years, led to a liberalisation of the economy with the peso being allowed to float freely. Although Colombia suffered a long-running insurrection by the Marxist FARC guerillas the country has been more stable politically than many of its neighbours and the economy is currently enjoying one of the fastest growth rates in the western world

Since 1837, Colombia’s currency has been the peso, technically divided into 100 centavos, but due to numerous bouts of high inflation, no coins of less value than one peso have been minted since 1984, and since 2009, the lowest denominated coin in use has been the 50 peso. Currency issuance is the monopoly of the central bank, Banco de la República, which dates from 1923, although there had been previous central banks in the country since 1880. In 1991, partly as a result of the inflation problem ,a new constitution was drawn up for the Bank, including an inflation targeting strategy. It took until the early 2000s to reduce inflation levels below 10%, but since 2010, apart from a spike in 2016-17, the Bank has managed to keep inflation fairly close to its 3% target. Indeed, as in many other countries, inflation fell sharply in 2020 as the country began to be affected by the coronavirus pandemic, which caused the worst recession in over 100 years. Although a programme of aid relief was brought in by the government to help the most vulnerable members of society, there was no large-scale so-called “fiscal stimulus”. The Central Bank responded by reducing interest rates by over 2% in total, cutting banks’ reserve ratio requirements by 3% and introducing a programme of asset purchases worth 0.8% of GDP. However, since September 2021, interest rates have been raised to counter rising inflation.