Feb. 2 (Bloomberg) — Colombia’s central bank, pressured by President Alvaro Uribe over the past year to lower rates, will have a board composed almost entirely of his appointees when he fills two more seats by the end of this month.
The new board could be the first with five directors on the seven-member panel appointed by the same president. The unprecedented situation arises because Uribe is Colombia’s first president to serve two consecutive terms since Simon Bolivar, who took Colombia from the Spanish in 1819.
The prospect of a board loaded with Uribe’s choices raises concerns among economists and former board members that the bank’s independence could be seen as compromised. A politically packed body may ignore its mandate to contain inflation and focus instead on trying to stimulate growth, said Felipe Campos, an economist at Bogota-based brokerage Alianza Valores.
“The board hasn’t had to choose between stimulating the economy and controlling inflation under Uribe, but they may face that dilemma in 2010,” Campos said. “This opens a window for the central bank’s independence to be questioned.”
Uribe, who got congress to change the constitution in 2004 to allow presidents to serve back-to-back, four-year terms, said last year that monetary policy was too restrictive and a drag on the economy.
The bank’s seven policy makers, who set the overnight rate at which commercial banks can borrow, include the finance minister, five co-directors appointed by the president, and a general director elected by the other members every four years. In 2005, during his first term, Uribe named Carlos Gustavo Cano and Juan Mario Laserna to the board. He appointed Juan Jose Echavarria in 2003 to replace a member who quit.
Uribe will name a new board member to replace Leonardo Villar, who has served the maximum 12 years. He also will replace another board member of his choice by the end of February. Each president is permitted under the constitution to select two of the five independent board members during his term.
“My worry is that he appoints people who believe fighting inflation is a secondary concern,” said Alberto Ramos, a Latin America economist at Goldman Sachs Group Inc. in New York. “The central bank’s primary objective isn’t making the economy grow. Let’s hope he understands the market’s concern.”
Colombia’s peso has dropped 8 percent against the dollar this year, the worst-performer among the seven most-traded currencies in Latin America. It fell 0.3 percent today to 2442.95 per dollar at 1:48 p.m. in New York.
The central bank, founded in 1823, has been independent under the constitution since 1991, when it was given the mission of fighting inflation. Its separation from the president was ensured by granting the country’s leader power to appoint only three board members, including the finance minister, unless one leaves the council for some reason.
Salomon Kalmanovitz, a former central banker who stepped down in 2005 after serving out his 12-year term, said “the balance of powers was destroyed” when Uribe was able to win a consecutive second term. A constitutional amendment would be needed to modify the rules regarding the board’s term and election, he said.
The appointed board members’ reputation is on the line, said Kalmanovitz, who’s now dean of economics at Universidad Jorge Tadeo Lozano in Bogota.
“The acid test will be when the board is faced with an economic environment where it has to apply a tourniquet to the economy,” he said. “Then we’ll know if the new members are independent.”
Even so, economists such as Alberto Bernal, head of emerging-market research at Bulltick Capital Markets in Miami, say the quality of the appointees is more important than who makes the selection.
“I don’t care about the members’ political stance, but I do care about their flawless academic record and their strong personality,” Bernal said. “Being a central banker is an academic issue, it’s technical.”
The government says the bank has shown its independence in the past, even when Uribe made repeated, public calls for rate cuts.
“The nomination will be made in accordance with what the government thinks is the best,” Finance Minister Oscar Ivan Zuluaga said in an interview Jan. 26. “The central bank board has proved that it acts independently. The institution of the central bank is very strong.”
The central bank raised the benchmark lending rate 16 times from mid-2006 through July in a bid to stem inflation, which reached 7.7 percent in 2008, the highest end-of-year rate since 2000, and above the target range of 3.5 percent to 4.5 percent.
The bank’s policy of tightening rates discouraged borrowing and curbed consumer spending after two years of growth above 5 percent. Colombia also benefited from a reduction in violence related to drug-funded rebels since Uribe became president, helping push economic growth in 2007 to its fastest in three decades.
That growth has slowed as the global economic crisis crimps bank lending further. The government forecasts economic growth this year of 3 percent, down from 8 percent in 2007.
Zuluaga, President Uribe’s representative on the board, is now asking the bank to continue cutting the rate to stabilize economic growth after the president publicly said it should pay more attention to the public when deciding interest rates.
“Despite the independence the constitution gives it, the bank also has to listen to the people,” President Uribe said in July. In September he said “persistent” high interest rates would damage the economy.
Colombia’s central bank on Dec. 19 became the first Latin American bank to reduce its lending rate amid the global financial crisis, cutting it by half a point to 9.5 percent. On Jan. 30 the bank cut the rate another half point to 9 percent.