International reserves consist of the external assets under the control of Banco de la República. These assets are of immediate availability and can be used to finance payments abroad such as, for example, payments of imports. International reserves can also be used by Banco de la República in order to intervene in the foreign exchange market and defend the exchange rate when necessary.

The accumulation of international reserves is the result of the transactions that a country carries out abroad. Transactions that produce foreign income include exports, loans from foreign banks, money transfers carried out by Colombians living abroad and foreign investment in the country. Those which generate expenditure of foreign exchange include, amongst others, imports, the payment of interests on loans incurred abroad and money transfers by Colombians within the country to residents abroad. When income is greater than expenditure international reserves are accumulated.

Banco de la República manages the country's international reserves in such a way that they become available when they are necessary. Although the aim is for these reserves to be profitable, the main criteria for their management are the security of these investments and their liquidity.

The main component of the reserves corresponds to short-term financial investments, which are represented by deposits and securities abroad. Of these investments, 88.9% are made up of freely convertible currencies, of which 80% are dollars, 15% are Euros and 5% are yens. The 8.1% which is deposited in the International Monetary Fund, corresponds to Special Drawing Rights (payment means issued by the International Monetary Fund) and to the country's reserve position in the IMF. 2.7% is invested in the Latin-American Reserve Fund and a small percentage (1.1%) in gold.

OMOs (Open Market Operations) are the Bank de la República’s main instrument for increasing or diminishing the amount of money in the economy. When it becomes necessary to increase liquidity, Banco de la República buys securities or financial bonds in the market, thus injecting money into the economy. On the contrary, when the Bank wants to diminish the liquidity, it sells securities and collects money from the market.

OMOs are known as expansion OMOs when the transaction is carried out to increase the amount of money. In these cases the Banco de la República intervenes, buying securities to inject the amount of money needed. There are two ways of carrying out this intervention:

So-called REPO transactions are financial bonds that are bought temporarily.

This purchase is valid during a fixed period of time (one day, seven days, etc.). They are referred to as temporary purchases with resale agreements because after the established period Banco de la República must sell the bonds again to the same entities from which they were purchased.

These transactions can be made in one of two ways: when the amount of money required by the Banco de la Repúblic for buying securities is limited, an auction takes place in which the available capacity is distributed among the entities that offer the best rates. When there is no limit to the amount the Bank wants to offer, it decides the rate for lending its resources.

Permanent OMOs

In these transactions the purchase of public debt securities is definitive and liquidity remains in the power of the public permanently.

So-called when transactions are made to decrease the amount of money in circulation. In these cases Banco de la República intervenes by selling securities to reduce the amount of money needed. There are two ways to carry out this intervention::

So called Reverse REPO transactions are transactions of temporary sale of financial bonds.

This sale is valid during a fixed period of time. They are referred to as temporary sales with re-purchase agreement, because after the established period of time, Banco de la República must re-purchase the securities from the entities to which they were sold.

Permanent OMOs

These are transactions in which the sale of public debt securities is permanent.

The interest rate is the price of money in the financial markets. As with the price of any other good, when there is more money the rate goes down and when there is a shortage the rate goes up.

When the interest rate goes up, buyers will want to make fewer purchases, and therefore they request fewer resources on loan from financial intermediaries, whilst sellers seek to invest more resources (in savings accounts, fixed term deposits, etc.) The opposite occurs when the rate goes down, with buyers in the financial markets requesting more loans and sellers withdrawing their savings.

There are two types of interest rates: the passive or captive rate is the rate paid by financial intermediaries to those offering resources for the money captured and the active or placement rate is the rate which financial intermediaries receive from borrowers for loans granted. The latter is always greater because the difference with the passive rate is what allows the financial intermediary to cover its administrative costs, additionally allowing for a certain profit rate. The difference between the active and passive rate is called net interest income.

In Colombia there are several reference interest rates that are used frequently:

Fixed Term Deposits

This is the weighted average of passive real interest rates for 90 days (the rates for a 90 day Fixed Term Deposit Certificate) paid by banking establishments, financial corporations, trade financing companies and savings and building societies. Banco de la República calculates this rate on a weekly basis.

Monetary Correction

This is the rate used to update the value of the Unit of Constant Purchasing Power  (UCPP). The value of debts or savings based on UCCP units are redefined according to this rate. This is calculated as a percentage of the Fixed Term Deposit rate.

Financial Superintendence Base Rate (FSBR)

It is the average rate of fixed term savings deposits and fixed term deposits for different terms negotiated between financial intermediaries. This rate is calculated and certified by the Financial Superintendence.

Inter-Bank Rate (ITB) 

This is the average passive rate at which financial intermediaries negotiate amongst themselves in the very short-term liquidity market.

The exchange rate measures the amount in pesos that must be paid per unit of foreign currency. In our case the dollar is used as the base rate because it is the most frequently used currency in Colombia for transactions abroad. As with the price of any product, the exchange rate goes up or down depending on offer and demand. When the offer is greater than the demand, that is, when there is an abundance of dollars in the market and few purchasers, the exchange rate drops, and when there is less offer than demand (when there is a shortage of dollars and many purchasers), the exchange rate rises.

There are several types of exchange rate regimes:

Fixed Exchange Rate Regime

In this regime, the Central Bank commits itself to maintaining a predetermined value for the exchange rate. Thus, when there is an excess demand for foreign currency, the Bank provides the market with the necessary amount of foreign currency to maintain the exchange rate at its predetermined value.

Flexible Exchange Rate Regime

In this regime the Central Bank abstains from intervening and the exchange rate is determined entirely by the offer and demand of foreign currency in the market.

The movements of the exchange rate downwards or upwards are called:

Devaluation

This is the name of any upward movement of the exchange rate, that is, when more pesos must be paid for every dollar negotiated.

Revaluation

This is the name of any downward movement of the exchange rate, that is, when fewer pesos must be paid fewer for every dollar negotiated.

It is important to know the difference between the nominal and real exchange rates. The nominal rate is the rate at which foreign currency is bought and sold. The real exchange rate reflects the real purchasing power of the national currency against one or several foreign currencies. This rate, besides considering the nominal rate of exchange, takes into account internal inflation and inflation in countries with which Colombia trades. The real exchange rate reflects the competitiveness of Colombian goods against those of other countries.

Since 1994 an exchange rate band regime was defined for Colombia, representing an intermediate scheme between a fixed rate of exchange regime and a freely floating regime. On 29th September of 1999 the exchange rate band system was eliminated and free floatation system of nominal exchange was adopted.

The exchange rate band is defined by the limits within which the rate of exchange can fluctuate.

Structure of the exchange rate band

Maximum rate (ceiling rate)

This is the maximum rate that the Banco de la República is willing to permit in the interbanking dollar market. When the market takes the rate to this level, the Bank will sell as many dollars as are required in order to maintain the rate of exchange at that level. This rate changes every day according to the slope of the exchange rate band.

Minimum rate (ground rate)

This is the minimum rate that the Banco de la República is willing to permit in the interbanking dollar market. When the rate reaches this level, the Bank buys foreign currency so that the exchange rate remains at that level. This rate changes every day according to the slope of the exchange rate band.

Slope of the exchange rate band

This is the annual percentage of devaluation that is applied to the floor ground rates.

Width of the exchange rate band

This is the distance that exists between the ceiling and ground rates. It is defined as a percentage, measured from a middle point.

At a meeting, the Board of Directors of Banco de la República set the inflation target range for 2008 at 3.5% to 4.5%, with 4% as the specific target for legal effects. This decision is consistent with the announcement in November 2006.

It also decided the midpoint for target inflation in 2009 will be between 3% and 3.5%, which is within the long-term range for inflation (2% - 4%).

Foreign exchange balance is an instrument for the description of the external sector used in Colombia, especially for short-term analysis, due to the frequency and promptness of its publication, and because of the close relationship between its records and monetary accounts. Therefore, the foreign exchange balance can be defined as the register of the Banco de la República's transactions using foreign reserves, and other short and medium term external assets and liabilities.
 
In economic systems with a certain degree of centralisation in the management of the foreign exchange operations, it is possible to issue foreign exchange balances in a timely manner. This enables the permanent availability of indicators that describe the global situation of country's foreign sector, in an approximate manner.

Until 1990, the foreign exchange regime in Colombia was characterised by the centralisation and control of all foreign exchange operations by Banco de la República. In 1991, as part of the modernisation and internationalisation of the economy, the regime was provided with ample flexibility. One of the important elements in the new exchange regime has been the decentralisation of foreign currency transactions. This responsibility has been passed to authorised intermediaries: banks and financial corporations. These institutions must promptly provide Banco de la República with the corresponding information in order to issue the foreign exchange balance.

Within the new decentralised framework, Colombian citizens are now permitted to open a current account abroad. These accounts can be used for transactions relating to the foreign exchange market, in which case they must be registered with Banco de la República under the form of compensation current accounts. Every month a report is issued which records the transactions of these accounts. This allows for follow up of the flow of foreign currency related to external transactions that do not enter the country.

Although the foreign exchange balance has lost coverage due to the deregulation of the exchange system, it continues to be an important record of the flow of currencies entering and leaving the country. In this manner, the exchange balance and the compensation accounts are sources of complementary information regarding the external sector, and are useful for the compilation of the balance of payments.

The balance of payments is a accountancy record of all the economical transactions of the country's residents with the rest of the world during a given period of time, generally a year. In other words, it shows total payments made abroad, and the total amount received from abroad. It records both the flow of real resources (goods and services) and the flow of financial resources (the movement of capital).

The balance of payments is made up of two main items: the current account and the capital account.

The current account summarises all transactions for the exportation and importation of good and services, that is, all visible and invisible trade. The capital account collects all those transactions not included in the current account, the most important being the transfer of capital and the sale and purchase of gold and foreign currency.

Given that the balance of payment is subject to the double entry system as is the case for all accountancy registers, it must always be in equilibrium, or with a balance of zero. Nevertheless, this does not mean that the capital or current account must necessarily be in equilibrium.

There is no reason why the current account should always be automatically balanced, however any deficit or surplus in the current account must be compensated with a surplus or deficit in the capital account. For example, if imports exceed exports, the difference in value must be financed with overseas loans, international reserves or by selling gold, and these operations will be reflected in the capital account.

Distinction must be made between the movement of autonomous capitals and the movement of compensatory capitals. The former correspond to capital movements that take place in response to commercial or financial incentives, or to political considerations that are independent of the balance of payments. In other words, movements to cover the difference between autonomous debits and credits, representing the "adjustment" and "delivery" of the balance of payments, which reflect their global balance but with opposing tendencies. Therefore, when mentioning a deficit or surplus in the balance of payments, no reference is made to an accountancy balance but rather to the balance of a particular account. This is the compensatory capital account, and which just represents the difference between the balance in the current account and the balance in the movement of autonomous capitals adjusted to allow for certain errors and omissions. Therefore, the fact that there is a deficit in the balance of payments indicates that the country's international reserves have diminished by an amount exactly equal to the corresponding deficit, whereas the existence of a surplus indicates that reserves have increased by the same amount as this surplus.

These are fixed term deposit certificates that represent obligations for the institutions that issue them. Commercial banks and financial corporations are authorised to receive this type of deposits.

The depositor transfers them by means of endorsement and a transfer letter. They can be nominative or issued to order.

This is the opposing situation to a fiscal surplus, which expresses a negative difference between public income and expenditure, according to the budget usually managed by the government.

The phenomenon of unemployment occurs, amongst other reasons, when the amount of equipment and financial and technical resources available to a country are insufficient to provide employment for the entire available work force. It is important to bear in mind that in certain regions there are production factors that are not available in others, and that in each region these factors are used in different proportions. Furthermore, the conditions of growth vary between one region and another as do the evolution of the economic machinery, and the structure of the population's preferences. As a result, the characteristics of the phenomenon of unemployment in a certain economy are not necessarily the same as those of other economies.

Even in economies with great work force mobility, that is, where workers can easily move from one region to another or from one firm to another, the complete elimination of unemployment is not possible. Indeed, within the present complex economic system, there is no complete and clear information regarding work opportunities, nor about the existence of candidates to be contracted. For this reason, on many occasions a recess can occur as regards participation of individuals in the productive process, thereby generating temporary unemployment because the job seeker, or the employer, is going through the phase of selecting the most convenient option. This temporary unemployment can become structural or permanent. For example, this can occur if there are not enough qualified workers to carry out certain technical activities, or if there is no employment for certain professions or types of persons, either because of inadequate education and training, or because of social discrimination in terms of race, sex, age, etc.

Public debt is government expenditure in excess of income, or debt acquired by the state in the form of obligations.