After 52 years of conflict, Colombia’s government and the left-wing rebels of the Revolutionary Armed Forces of Colombia (FARC) signed a ceasefire deal earlier this year, bringing to a close one of the world’s longest-running wars.
But while the FARC rebels have agreed to lay down their arms, keeping that peace deal alive economically has gotten more difficult.
“I would say … the whole peace process has become substantially more complicated because of the economic environment that Colombia finds itself in,” Anna Szterenfeld, the Economist Intelligence Unit’s senior analyst for Colombia, told Business Insider.
In 2012, when current Colombian President Juan Manuel Santos entered office and began trying to set up negotiations with FARC rebels, “it looked as if there was a lot more resources that could be put behind an eventual peace agreement,” Szterenfeld said.
“And what you have now is that you’ve got the good news about the near conclusion of the peace talks … but this is happening against the backdrop of all kinds of other economic constraints.”
Colombia’s recent economic struggles have been largely driven by the enduring slump in oil prices.
Oil exports financed about one-fifth of government expenditures prior to the protracted price decline that started in early 2014.
In February of this year, Santos announced a 3% cut to the federal budget in response to the prolonged slump — a cut he said was part of “intelligent austerity” measures that were already included in the budget.
That was followed in June by an announcement that the country’s fiscal deficit for 2016 would be 3.9% of gross domestic product, rather than the 3.6% previously reported.
The oil slump has also negatively affected the value of the Colombian peso and driven up inflation (and food prices), which in turn has prompted interest-rate increases for 11 consecutive months, with the latest increase pushing the key lending rate up to 7.75% in July.
Economic weakness has also affected Colombia’s credit. In July, Fitch and Moody’s lowered the country’s outlook, with the latter saying the move from a stable to negative outlook “reflects the expectation of deceleration of business volumes and an increase in asset risks while the low prices of oil continue affecting the economy.”
“So you have this circle of … economic conditions that are reinforcing a slowdown in the economy just at a time when the government’s going to need to cough up quite a bit of financial resources to put behind the peace accords,” Szterenfeld told Business Insider.
In light of these economic doldrums and the quickly approaching implementation of the peace deal, Colombian officials have been underscoring the need for international assistance.
“We’ll need to mobilise resources, domestically and internationally. We need grants, we need donor countries to help Colombia succeed in ending the conflict,” Finance Minister Mauricio Cárdenas told the Financial Times earlier this year.
Rebuilding a country
The priciest parts of ending that conflict are likely to be the most important. A half-century of conflict has left much of the country — particularly the rural regions where the FARC has been the most active — underdeveloped and without modern infrastructure, especially in the farming sector.
“The peace will permit many places in the country that have been abandoned or that have been difficult to access because of the war to receive investment, but it will depend on a very clear and really effective policy from the government, since for that to be effective there must be investments in” a number of sectors, such as health and transportation, Camilo Silva, a founding partner of Colombian financial-advisory firm Valora Inversiones, told Business Insider.
Those investments will also have to flow to people. There must be “funding to the population so they can change those illegal businesses into ones permitted by the law,” Silva said.
Production of coca, the base ingredient in cocaine, has risen over the last two years, causing concern that the Santos’ administration’s push for peace has created opportunities for drug traffickers. The Colombian government will have to work to keep people in rural areas — civilians and former FARC members alike — from entering the drug industry after a peace accord goes into effect.
Another demand on the government’s finances will be the costs of demobilization. As part of its deal with the government, the FARC has agreed to house its roughly 7,000 remaining soldiers in 23 protected zones and eight camps stationed around the country. The rebels in those zones will be disarmed, meaning it will be on the Santos government to protect them from the violence that other demobilized rebels have suffered.
“There is going to be a cost associated with providing security for the demobilized guerrillas,” Szterenfeld told Business Insider, and not just the costs of their subsistence and ultimate reintegration into society.
Those FARC members with political aspirations likely carry memories of the Patriotic Union, the political party formed by FARC members in the 1980s, many members of which were killed by right-wing paramilitary groups.
“If they’re being asked to give up their arms, the government is going to have to ensure that they’re safe, because there are paramilitaries, or demobilized paramilitary groups … that would go after them,” Szterenfeld told Business Insider.
Former rebels are not going to be the only people with security needs in a post-peace Colombia.
The South American country is home to the largest number of displaced people in the world — some 7 million — many of whom will need to return to their homes in rural areas if Colombia is expected to reap all of the hoped-for benefits of a peace deal.
“People are not going to return to their homes without guarantees that … the threat of violence has gone away and they can begin to rebuild their lives,” James Bosworth, CEO of regional advisory firm Southern Pulse, told Business Insider in May 2015.
Demobilizing rebels is one part of reducing that threat, but keeping the peace and ensuring development will come with a price.
Cárdenas, the finance minister, said Colombia is spending some $4 billion on implementing the peace deal, including reparations to victims. Over 10 years, the costs of post-conflict programs is expected to reach $16.8 billion, or about 1% of Colombia’s gross domestic product.
Paying for everything
Colombia is also angling for $450 million in aid from the US to support post-conflict programs. But, in light of recent events, aid from the US is likely to come with strings attached.
Many in the US Congress will say “OK, but if we’re going to give Colombia more money, we want to see some more efforts on their part to combat this increase in coca crops,” Szterenfeld said.
Colombia will have to approach stipulations like this diplomatically, as efforts to arrest coca production may push many FARC rebels who are wary of the peace process back into their criminal activities.
The Colombian government has touted the benefits of peace, with Santos saying that an end to the conflict will add a full percentage point to GDP growth. “The ceasefire agreement frees up a potential that has been repressed by war,” Santos said earlier this year. “This will allow the private sector to reach the markets and areas they never were able to reach.”
But getting the programs needed to implement that peace deal off the ground will require upfront investment. Wall Street analysts have said the government will need to pursue tax reform later this year, a point that Silva echoed.
“Peace must also have an economic effort on the part of Colombians, as we will have to finance it” with new taxes, possibly brought about by tax reforms later this year, said Silva, who is also a columnist for Portafolio and La Republica.
“It’s important to clear the way for tax reform, whether or not the peace agreement is approved,” Silva added, saying it was an issue that credit-ratings agencies were paying attention to. Bank of America said earlier this year that tax revenues would need to increase by 1% to 1.5% of GDP to stave off a credit downgrade.
Peace is undoubtedly a positive step for Colombia, economically, politically, and socially. But getting there will require more work, and the benefits aren’t likely to be apparent in the near future.
“There’s going to be a productive boost to the economy in the medium to long-term,” Szterenfeld told Business Insider, “but in the very early stage there’s not going to be a dramatic difference in the economy.”
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.