The 297-page peace deal that has been signed between the government and the FARC guerrillas is probably not as inevitably destined for the dung heap as even some of the best observers of the Latin American scene would have it. There are undeniable risks, though, and anticipated economic benefits look quite exaggerated. While the Colombian economy can cope with the crash of international oil prices and will continue to make progress, its growth has slowed and will decelerate further. I do not anticipate a recession, however.
With some luck, August 24, 2016 will go into the annals of this country as a day to remember. It was the day on which negotiators representing the government of President Juan Manuel Santos and those bargaining for the Left-wing guerrillas of the FARC (Fuerzas Armadas Revolucionarias de Colombia) announced that they had reached final agreement on a peace deal after close to four years of on-again off-again talks. Following the news, though, it did not take long for doubters to emerge who insist that the agreement will not hold. This includes, understandably, former Colombian President Alvaro Uribe, whose government waged all-out war against the FARC and weakened it substantially. It also includes some highly respected newspaper columnists specializing in Latin American affairs, such as the Wall Street Journal’s Mary Anastasia O’Grady, who rightly warns that “it takes more than political gimmicks to quiet the ghosts of wartime atrocities.”
Comparisons are often made with El Salvador, where a settlement was reached in 1992 between the government and Marxist insurgents known as the FMLN. That deal is in trouble since the country’s constitutional court ruled on July 13 that the wartime amnesty granted to both sides denies victims their rights. Under the Colombian deal, local and foreign judges vetted by the supreme court, the UN and even Pope Francis will be able to award limited “restrictions on liberty” (not jail) and community service to guerrillas who confess. This does not sit well with the many Colombians who are painfully aware of the mass-murders, kidnappings and recruitment of child soldiers FARC committed. And the path to a final conclusion of the pact is still long.
Next, the estimated 6,800 combatants of FARC are to gather in 23 designated “normalization zones” and start surrendering their weapons to UN observers. Many will be extremely hesitant to do so. Then FARC is to begin a transformation into a political party which will have ten congressional seats guaranteed for eight years. The FARC is to wean itself off the lucrative drug trade, which is its main source of funding, and eradicate coca fields and clear up landmines. The government, in return, is committed to spending billions of dollars on development in areas that the FARC once controlled. Finally, Congress is to convoke a national plebiscite on October 2 in which the people will determine whether they are prepared to accept the agreement. Current opinion polls suggest that the vote could be close.
This is what the pessimists have in mind when they say the arrangement will never work. One of the biggest stumbling blocks is, indeed, the notion that those who committed atrocities should not be allowed to avoid long jail sentences. Besides, the FARC negotiated with the authorities on three previous occasions, only for the latter to find out that the guerrillas used the talks to rest, regroup and rearm. This time, though, it appears that FARC leaders such as Rodrigo Londono-Echeverry, better known locally by his nom de guerre Timochenko, recognize that their dream of taking power by force is over. Besides, horrific crimes against humanity were committed also by the Colombian army and by Right-wing paramilitary groups and there is more resistance to the agreement in the big cities than in the countryside, where the full impact of these brutalities was felt.
While many do not approve of full impunity or political eligibility for those responsible, a majority of Colombians want peace. A survey run by the polling firm Cifras y Conceptos in June showed 74% of those queried to be in favor of an accord such as the one now announced. Under the terms of the plebiscite, a simple majority of the votes cast for the agreement would be enough to pass it, so long as those voting “yes” constitute 13% of all registered voters. What the government has to accomplish is not only to try and keep the abstention rate low, but also to make sure that the vote does not turn into a referendum on President Santos, who, as an anglophile member of Bogota’s elite, is personally polling barely 20%.
If the pact is approved, the tough part begins with multiple challenges. Many of the rebels have spent their entire lives fighting in the jungle and have never studied anything beyond combat tactics and Leninist doctrine. They have no other skills and are as mistrustful of the Colombian society as this society struggles to accept them. Those who have a tough time finding jobs and a new life may bolt and join criminal gangs (already Colombia’s biggest security threat) and the drug trade (as many demobilized Right-wing paramilitaries have done). The ELN, a (smaller) group of Left-wing insurgents who have not been fully reintegrated into civilian life, is already taking over areas that the FARC is preparing to abandon, along with the coca and marijuana crops growing there.
There is also the risk that the government may not be able to hold up its end of the bargain and come up with the money needed to invest in infrastructure, health and education. It will need at least 3 million pesos, monthly, per person, for at least three years – on education and work training programs – helping rehabilitate combatants. In all, a congressional committee estimates, Colombia will have to spend USD 31 billion, and this has been made harder as the collapse of oil prices has slashed government revenues. Mr. Santos plans to raise taxes, but not until after the plebiscite.
Fortunately, Colombia, while an oil-producing nation, is not an oil nation. The economy is much more diversified than that of, say, Venezuela. With a production of only around a million barrels a day, Colombia ranks 19th among oil countries globally and the depreciation of the peso has gone some way in boosting traditional exports such as coffee, textiles, car parts and flowers. What Colombia has experienced so far has been a slow-down in growth, not a slide into recession. Consumption and investment have slackened, while the industrial sector, construction and financial services have held up relatively well. In all, the advance of real GDP slackened to 0.2% in this year’s first quarter from 0.8% in the final three months of 2015 and the expansion measured 2.5% year-on-year, compared to 3.4% in October-December 2015 and 3.1% in all of last year.
I suspect that forecasts of up to 2.5% growth in 2016 will turn out to have erred on the side of optimism. But it remains near-impossible to predict precisely what effect the peace deal with FARC will have on the economy, assuming that it is accepted in the referendum. On the one hand, there is no shortage of economists predicting that the “peace dividend” could add as much as 2 percentage points to economic growth. After all, in 2014 alone rebel attacks om pipelines cost Ecopetrol, the state oil company, USD 430 million in lost output. On the other hand, the prospects for an early and sustained rise in oil prices are bleak and there is also a question as to whether the government will have the financial means to fulfill its development pledges under the peace pact. Oil accounts for one-fifth of all government revenues and every one-dollar drop in the price slashes an estimated USD 200 million from state revenues. Bogota has already had to implement spending cuts and tax hikes.
A consumer price inflation rate that ticked up to 8.97% in July from an average of 6.77% in 2015, driven by a surge in food prices to 14.28% in June, leaves the Central Bank little choice but to keep interest rates high – even showing a tightening tendency. The CB also needs to keep a watchful eye on the external accounts, where it projects for 2016 a current-account BoP deficit of 5.3% of GDP. Carry trades have helped a great deal in bridging the red-ink spill. There will be a risk of their reversal when the US Fed starts hiking rates. Still, extra money will have to be spent to comply with the demands of the peace accord. Also, after years of planning a USD 50-billion infrastructure program got underway last year. On balance, it all leads me to believe that Colombia will be able to avoid a recession this year.
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