The Costa Rican government is facing a complex scenario, since by not achieving consensus to access international loans, it will be forced to seek domestic funding sources, which would put pressure on the exchange rate and interest rates to rise.
The economic crisis that the country is going through due to the outbreak of covid-19 ended up sharpening the country's fiscal situation.
In Costa Rica, it is expected that the downward trend that has been showing the exchange rate since February will intensify in the coming months, when the $3.580 million begins to enter as a result of the issuance of Eurobonds and loans granted by external entities.
According to data from the Central Bank of Costa Rica (BCCR), between the beginning of February and July 30 of this year, there has been a fall of up to 44 colones per dollar, reporting a drop in the average rate in the wholesale market Monex from ¢613.87 to ¢570.13.
In a competitive scenario for lower costs and higher productivity, devaluation against the Lempira Dollar in Honduras and the Cordoba Dollar in Nicaragua is a factor that could help these economies stay competitive.
In the last five years, the exchange rate in Honduras increased by 17%, from 21.06 Lempiras per U.S. dollar in June 2014 to 24.67 in the same month in 2019.
Following the Constitutional Chamber's judgment on the tax reform, the exchange rate in Costa Rica temporarily stopped rising, but it is expected to restart upward trend in the coming months.
According to figures from the Central Bank of Costa Rica (BCCR), from mid-August to the first week of November, the Colon depreciated rapidly. However, after Fourth Chamber prepared the tax reform in Congress a few days ago, the dollar's price against the local currency stopped rising.
It is expected that under current economic conditions, the local currency will depreciate on average 3.6% against the US dollar in 2018.
The monthly survey on expectations of exchange rate variations up to December 2017 made by the Central Bank, foresees that during the next 12 months the Colón will depreciate by 3.6%, which would mean an increase of ₡20.52 according to the average price on the Monex Wholesale Market of ₡570.20 at the close of last year.
In Costa Rica the Central Bank has raised the monetary policy rate, this time to 4.5%, and announced that it will hold auctions in the Monex wholesale market, in addition to reinstating electronic deposits made by the public through its platform Central Directo.
In order to encourage public deposits on its Central Direct platform, the monetary authority has raised interest rates.For example, for a 180-day deposits, the gross rate went from 3.67% to 5.70%.Through this system anyone can make deposits starting from a minimum amount of 100 thousand colones (US $175).
Raising interest rates and more and more intervention in the foreign exchange market are two of the measures that the Central Bank of Costa Rica plans to take to prevent further sharp increases in the price of the dollar against the Costa Rican colon.
Following a sharp increase in the price of the dollar against the colon a few days ago, the Central Bank announced a series of measures that it could take as part of its "commitment to price stability."At 11 am on Tuesday, May 23, the reference exchange rate of the BCCR stood at 590.57 colones per dollar.
For the third time in less than 60 days, the Central Bank of Costa Rica has again raised the monetary policy rate, this time from 2.50% to 3%.
April 6 was the first time in the year that the Central Bank decided to raise the monetary policy rate (MPR), which had stood at 1.75% since January 2016.On April 27, again arguing short-term inflationary pressures, the entity raised the MPR from 2.25% to 2.50%.It has now been set at 3%, starting from May 19.
So far in May the average price of the dollar in the wholesale Monex market has increased by 2%, going from ₡566/US$ on May 1st to ₡578/US$ on the 17th.
On May 17, in the Monex wholesale market, the average price of a dollar was quoted at ₡578 per dollar, while at bank windows the selling price reached ₡582. [GRAFICA caption="Clic para interactuar con la gráfica"]
In the first four months of the year the price of the dollar in the Monex wholesale market increased by almost 2%.
At the beginning of the year the price of the US currency was 556.06 colones to the dollar, but on Tuesday May 2 it closed the day at 566.97 colones to the dollar, which is an increase of 10 colones in only four months.[GRAFICA caption = "Click to interact with graphics"]
In one day the Central Bank sold $30 million on the wholesale foreign exchange market in order to moderate the upward trend that had been seen in the price of the dollar against the Colon.
The transaction was made in order to prevent sharp fluctuations in the exchange rate, which since the beginning of the year has shown an upward trend in the wholesale Monex market.On Thursday, March 23, alone the Central bank sold $30.9 million, the highest figure of the year.
The exchange rate resumed the upward trend that has been seen since mid last year, rising in the wholesale market from ₡555 per dollar on Jan. 25 to ₡561 on 7 February.
The upward trend in recent days is mainly seen in the wholesale market, where the Central Bank has been selling dollars to prevent further increases."...In stabilization operations the company sold $32 million in that period and the public sector sold almost $70 million. "[GRAFICA caption = "Click to interact with graphics"]
Although the export sector continues to denounce the loss of competitiveness because of appreciation of the quetzal against the dollar, the Central Bank insists that the exchange rate will remain dependent on market factors.
A year ago the complaint was the same.Exporters asked the Central Bank for a review of the exchange scheme to induce a devaluation that would allow them to recover some of the competitiveness lost abroad because of the exchange rate.The situation today has not changed, and exporting companies have asked for the Ministry of Agriculture to intervene in this matter.
With the disappearance of the differential between the interest generated on the two currencies, the choice between one or the other for using for savings is being defined by the risk of devaluation of the colon against the dollar.
An article in Elfinancierocr.com reports how the fall of the passive base rate during 2016 decreased the gap between interest rates paid on deposits in both currencies, concluding that "...If the trend continues, for savers it will be the same keeping their money in colones or in dollars and they may prefer the currency in light of the possibility of rates rising overseas."
Despite constant complaints from the export sector, the Central Bank has been clear that devaluing the Colon against the dollar would mean a reversal of the exchange rate policy.
The insistence with which exporters and tourism entrepreneurs have raised theneed to depreciate the Costa Rican currencyto recover some of the lost competitiveness in the external field was not enough to change the opinion of the monetary authority.