‘Forced investments must be agreed upon, not obligated’: more criticism of the proposal

A broad debate is currently taking place in the country regarding the reactivation proposals that the National Government is seeking to implement to stop the slowdown and recover the sectors that have been in the red for several months, especially on the subject of forced investments, which has not gone down well with the unions, who claim that these impositions are not good for the market.

In this regard, an analysis by the Anif Center for Economic Studies on this initiative was recently published, in which it is made clear that the reactivation must be a concerted and not forced process if it is to be successful, since one of the points to improve is the image of the country before investors and the confidence it generates.

For these experts, the implementation of a plan to reverse the slowdown cannot wait, especially if one takes into account that the activity figures for April suggest an acceleration in the pace of growth, despite the fact that the economy will still have a low and insufficient growth this year, since it would be far from the 3% that it needs to guarantee development in the future.

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Zooming into the details of the forced investment proposal that the Government has in mind and that has been defended by the Ministry of Finance and the Casa de Nariño, Anif recalled that this mechanism was frequently used in Colombia until the 1990s, especially during the period of high financial repression following the financial reform of 19511.

“At the beginning of the 1990s, they still represented 14% of liabilities subject to reserve requirements. The evidence is clear in showing that forced investments not only failed to achieve their objective in terms of credit deepening, but also contributed to the increase in the cost of loans and to an increase in the margin of intermediation,” they indicated.

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Anif experts added that the data that is They have made it clear after the implementation of this plan that forced investments negatively affect the cost of financing, since they function as an implicit tax on intermediation activity that does not benefit the market.

“In a perhaps imperfect but simple analogy, a forced investment into the financial system is equivalent to a stranger forcing a wage earner to spend part of his income on a low-profit asset, under the pretext that such investment will be convenient for the entire economy. This tax impacts both savers and businesses and households that demand credit, to the extent that it reduces the resources available for financial institutions to allocate their loans,” they added.

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In this regard, they highlighted that although there are some exceptions in the agricultural sector, since the 1990s forced investments have been gradually eliminated, due to the dynamics of the market itself, which is why reimplementing them could be seen as an unwanted step backwards.

“Businessmen lose out with forced investments, as they would have fewer resources available to demand credit and would therefore have to pay higher interest rates. Savers also lose out because banks will probably have to reduce deposit rates to compensate for the low profitability associated with forced investments,” they said.

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For these analysts, if these investments return, the banks will be the other losers, “given that their profitability could decrease in a context where profitability of financial assets is already at two-decade lows and similar to the pandemic period.”

“Additionally, there are efficiency losses because credit expansion, which in this case falls on the public sector, can lead to significant losses if the allocation is not adequate. It is worth remembering that it was precisely the collapse of the country’s public banking system due to poor credit allocation that led to the dismantling of the strong intervention in financial activity,” they concluded.

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In light of this, Anif called for this warning not to be taken lightly and for dialogue to be maintained between the Government and the productive sectors, in order to reach consensus that will allow the economy to be reactivated without putting stability at risk. the image of security and trust that has been built over the years.