In its most recent report, the Cenantillas economic
research center of the Pontificia Universidad Catolica Madre y Maestra (PUCMM)
indicates that the present economic difficulties are primarily due to the
inappropriate domestic financial and monetary policies implemented by the Mejia
government. Cenantillas says that unbridled fiscal expansion caused real public
investment to grow 35% in 2001 and 36.6% in 2002. At the same time, however, the
private sector scrimped, with private investment falling 2.5% and 1.8% during
the same years. "This crowding out of the private sector as a consequence of the
increase in taxation eroded macroeconomic stability and created extremely
adverse conditions for the foreign exchange market and the banking sector,"
Cenantillas says in its analysis, as reported by Hoy newspaper. According to
Cenantillas, fiscal pressures, monetary policy and erratic exchange market
intervention created the conditions for a confidence and credibility crisis that
degenerated into an exchange and banking calamity. The government then resorted
to the standby arrangement with the IMF to restore faith, but shortly after, new
bank failures were made known, the government took on additional debt with the
renationalization of the power distributors, and the political crisis
intensified, prompting disputes within the ruling party itself. Cenantillas
feels that the worst is yet to come, however, despite the marked drop in
economic growth, high levels of inflation, unprecedented devaluation and
increase in unemployment.