Saturday, April 30, 2005

Colombia Central Banker Says Peso Rally May Boost Coca Output

Bloomberg.com

April 29 (Bloomberg) -- Colombian central banker Carlos Gustavo Cano said he's concerned the two-year rally in the peso against the dollar may push some farmers into planting illegal crops such as coca and opium poppy.

The peso's 27 percent surge against the dollar since January 2003 is making Colombian crops such as coffee, bananas and corn more expensive in dollar-terms, hurting farmers' ability to compete against imports and to sell in export markets.

``An acute and prolonged appreciation hurts the production of legal crops and strengthens the production of illegal crops,'' Cano, 58, said in an interview in Paipa, a town about 200 kilometers (125 miles) north of Bogota, on April 24.

Cano, who left his agriculture minister post in February to become one of the central bank's seven directors, said halting the peso's appreciation would help the government's battle against rebel insurgents who control much of the drug trade in Colombia, the world's biggest producer of cocaine.

``Combating by all measures the farming of illegal crops is a matter of national security because that's where terrorist groups get their financing,'' Cano said. ``And when I say by all means I am including the economic front -- creating the right environment so that the legal agricultural industry flourishes.''

Julian Cardenas, an economist at Corporacion Financiera del Valle in Bogota, said he doubts the rally in the peso will lead more farmers to plant illegal crops.

Coca, Opium

``I don't see the exchange rate being a decisive factor that leads small farmers to start planting illegal crops,'' Cardenas said in a telephone interview in Bogota. ``Deciding what type of crop to farm is a long-term decision. The peso's appreciation is expected to reverse at some point and therefore it doesn't make sense for farmers to go into illegal crops based on this.''

Drug figures from 2004 show no signs of an increase in the farming of coca, the plant used to make cocaine, or opium poppy, which is used to make heroin. Colombia's coca farmers had 114,000 hectares under cultivation in 2004, unchanged from a year earlier, according to the U.S. Office of National Drug Control Policy. Opium poppy cultivation fell to 2,100 hectares in 2004 from 4,400 hectares.

The peso is little changed today, falling 0.02 percent to 2,348.55 to the dollar at 11:45 a.m. New York time. It's up 0.3 percent this year and 13 percent in the past 12 months, driven higher by a surge in foreign investment amid the South American country's fastest economic expansion in a decade.

The central bank has taken several steps to slow the currency's rally over the past two years, including selling pesos for dollars and forcing investors to keep their money in the country for at least a year in a bid to discourage foreign investment in the stock and bond markets.

Cano declined to comment on whether the central bank will take more measures to try to weaken the peso.

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