World Economy

FARC peace deal seen boosting Colombia’s economy—but not yet

The 52-year war between the Colombian government and FARC insurgents officially ended on Monday with the start of a ceasefire and the peace deal is seen as boosting tourism and investment, but neither by as much nor as quickly as some would like.

Capital Economics said the peace deal would boost the Colombian economy in the medium-term, but not the short-term.

"While there is little doubt the deal is a net positive for the economy, the more optimistic estimates of its impact on the economy in the near-term are unlikely to be borne out," Adam Collins, Latin America economist at Capital Economics, said in a report last week.

Colombians in Bogota celebrate the conclusion of peace talks on August 24, 2016.
Guillermo Legaria | AFP | Getty Images

The FARC the (Revolutionary Armed Forces of Colombia) was set up as an armed wing of the Colombian Communist Party in 1964 and has been in violent conflict with the government since then. At the height of its power, it controlled up to one-third of the country, typically remote, rural parts.

The conflict between FARC and far-right government paramilitaries has reportedly killed more than 220,000 people over the years.

The formal peace accord started at midnight local time on Monday. The FARC is supposed to hand over its weapons to United Nations monitors within six months and become a legal political party once that process has concluded.

U.S. President Barack Obama has pledged $450 million in aid to Colombia in 2017 to help it carry out its peace plan.

However, any hopes of a quick boost to the country's economy look set to be dashed, according to analysts.

Colombia's economy has steadily de-accelerated since 2013, in part due to low commodity prices and the slowdown in the Chinese economy. It is highly dependent on commodity exports, including oil, coal, coffee and gold, although attempts are underway to diversify the economy.

Employees speak on a balcony at the Refineria de Cartagena in Colombia on May 20, 2016.
Mariana Grief | Bloomberg | Getty Images

Gross domestic product (GDP) grew at 2.0 percent year-on-year between April and June, official statistics showed on Monday. This was down from 2.5 percent in the first quarter and was the slowest growth rate for years.

The country is also struggling with inflation that reached 9.0 percent in July year-on-year and a ballooning fiscal deficit. Implementing the peace deal may delay efforts to combat this.

"The economic peace dividend is … expected to materialize gradually, through higher tourism and domestic and foreign investment, particularly in less safe, remote areas of the country and the rotation of budgetary resources from the military apparatus into other more productive areas, such as physical and social investment in neglected rural areas plagued with armed conflict," Alberto Ramos, head of Latin American Economics at Goldman Sachs, said in a report last week.

Peace talks between the government and the FARC began in Havana, Cuba in 2012 and an unofficial truce started some months ago. The deal is subject to a plebiscite on October 2, which is broadly expected to approve the deal," although there are concerns as to how rebels who have committed atrocities will be dealt with.

Colombia's chief delegate for peace talks, Humberto de la Calle, and FARC member, Ivan Marquez, shake hands in Havana on August 12, 2016.
Adalberto Roque | AFP | Getty Images

"The security situation in Colombia has been steadily improving for more than a decade. As such, most of the economic benefits of peace in terms of increased investment and tourism have already been felt. Accordingly, we will expect the economy to continue slowing this year as it adjusts to lower oil prices," Collins said.

"Over time, the economic peace dividend is expected to more than offset the initial costs associated with the disarmament and integration of the rebel forces into civil society," Ramos said.

"Finally, we expect the government to unveil soon a tax-reform proposal (likely in October) to shore up the public finances and help the budget adjust to the loss of commodity-driven revenue and the peace agreement implementation initial outlays," he added.

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