Economic Recovery Measures Are Not Enough

The effects of the reduction in the Monetary Policy Rate and the lowering to 12% of the minimum legal reserve for banks will take months to be perceived, and without other parallel actions that impact the business sector more quickly and effectively, the economic reactivation of Costa Rica will not be possible in the short term.

Thursday, June 6, 2019

According to the latest report of the Central Bank of Costa Rica (BCCR), when comparing the level of economic activity recorded in March this year with the same month of 2018, it is observed that most economic activities slow down their growth, which was reflected in the slowdown of the general indicator. See full report.

In this context of slowdown in production, the business sector has requested that the government's actions be expedited to resume the path of economic growth. In this regard, in early May the Costa Rican Union of Chambers and Associations of the Business Sector (UCCAEP), said in a statement that "... For the business sector is urgent that the government of President Carlos Alvarado begin to set deadlines on the agenda of economic recovery, because today more than ever it is necessary to start generating employment in the country and improve the living conditions of the inhabitants."

See “Businessmen Call for a Fast Economic Recovery

In addition to demanding deadlines for implementing a reactivation agenda, the private sector proposed a road map that includes specific actions in matters of credit and simplification of procedures, as well as addressing the situation of informality, among other aspects. See roadmap proposed by UCCAEP.

In this scenario, the BCCR has taken decisions in recent weeks on monetary policy. The first was notified on May 23, when it was reported that for the second time so far this year, the Central Bank agreed to reduce the Monetary Policy Rate (MPR) by 25 basis points, to place it at 4.75% annually.

The other decision taken by the BCCR was announced on June 3, which consists of reducing the minimum legal reserve rate from 15% to 12% for deposits and obligations in national currency that financial intermediaries must maintain in the Central Bank. The new rate will come into effect on June 16 of this year, the entity said.

As expected, the effects of these measures will not be immediate, and their impact could be very marginal.

Economist Alberto Franco, explained to that "... The materialization of the potential stimulus would not necessarily be immediate as there are gaps between the announcement of monetary measures of this type and the results."

The article adds that "... The transmission process is not immediate, nor will it be seen in the short term but the message sent by the Central Bank about the intention to reactivate the economy is welcomed by the market. In addition, with respect to the extent of the adjustment, this may be small."

On the other hand, the economist Luis Mesalles, specified that "... I think that the effect can be marginal, it is still a reserve of 12%. There is no guarantee that the reduction in costs will translate into lower lending rates for consumer credit."

More on this topic

Essential Structural Changes

May 2020

Costa Rican businessmen propose that given the economic crisis and the new normality that the country will face, the government should promote key strategies such as the sale of state assets, the transformation of public employment and the elimination of privileges in terms of pensions and salaries.

The Union of Chambers and Associations of the Private Business Sector (UCCAEP) presented to President Carlos Alvarado a document called "Pandemic Shock and Economic and Social Policies to Mitigate its Effects", which seeks to provide a way out of the health and economic crisis resulting from the outbreak of covid-19.

Expectation for Changes in Monetary Policy

September 2019

Although the downward adjustments made months ago in the bank reserve and monetary policy rate do not yet appear to have had an effect on the loan portfolio in Costa Rica, banks expect credit to be reactivated soon.

At the beginning of June, the Central Bank reduced from 15% to 12% the minimum legal reserve rate that banks must maintain as a reserve, arguing that the objective was to make credit more dynamic.

Interest Rates and the Economic Recovery

May 2019

After the Central Bank of Costa Rica reduced the Monetary Policy Rate for the second time this year, it is estimated that the effects on the economy will be delayed.

On May 22, the Central Bank of Costa Rica (BCCR) decided to reduce the Monetary Policy Rate from 5% to 4.75%, arguing that the increase in international commodity prices and the redefinition of the basic tax basket could put upward pressure on inflation.

Positive, but Insufficient Projections

January 2019

The Central Bank estimates that Costa Rica's economy will increase by 3.2%, mainly because of private consumption and a rebound in public investment.

According to the Central Bank's 2019-2020 Macroeconomic Program, the Costa Rican economy will increase by 3.2% in 2019 and by 3% in 2020.