With reference to Figure 2 and Extract A, explain one likely reason for the change in the Colombian peso exchange rate between 2014 and 2016.
| Year | Price (US dollars per 1,000 Colombian pesos) |
|---|---|
| 2010 (start) | 0.51 |
| 2010 (end) | 0.53 |
| 2011 (start) | 0.52 |
| 2011 (end) | 0.54 |
| 2012 (start) | 0.55 |
| 2012 (end) | 0.56 |
| 2013 (start) | 0.57 |
| 2013 (end) | 0.53 |
| 2014 (start) | 0.52 |
| 2014 (end) | 0.42 |
| 2015 (start) | 0.41 |
| 2015 (end) | 0.32 |
| 2016 (start) | 0.30 |
Colombia has faced significant headwinds following the sharp downturn in global commodity prices starting in mid-2014. Crude petroleum and petroleum products account for approximately 45% of Colombia's total merchandise export earnings and make up nearly 5% of its GDP. A surge in global shale production combined with a slowing rate of demand growth in major emerging markets, such as China, resulted in an oversupplied global market. Consequently, Brent crude oil prices collapsed from over 100abarrelinmid−2014tounder100 a barrel in mid-2014 to under 100abarrelinmid−2014tounder40 a barrel by early 2016. This sharp drop drastically curtailed foreign direct investment (FDI) into Colombia's energy sector and severely reduced government tax revenues from state-owned oil firm Ecopetrol.
To cushion the shock, the Central Bank of Colombia allowed the peso to float freely. This weaker currency has begun to stimulate non-traditional export sectors, including agricultural goods like coffee and fresh-cut flowers, alongside a burgeoning international tourism industry. However, the currency's depreciation has imported inflation, forcing the central bank to raise interest rates to keep inflation expectations anchored within its target boundary.
