The Central Bank of Costa Rica has suggested creating a benchmark rate for dollars, similar to passive base rate applied to the local currency, the Colón.
With the proposal, the Central Bank aims to "reflect the cost faced by financial intermediaries in the country of having funds in dollars," taking into account references for interest rates where entities are funded abroad and other external factors.
A bill aims to facilitate access by companies to the capital market allowing operations in more than one stock market.
The bill to be submitted to the Legislature for review includes, among other changes, the creation of a market for trading of fixed income titles and improving business access to the market as a financing alternative.
Nacion.com states: "The project aims to further integrate the local market with international ones and allow cooperatives to issue securities."
The decision by the Central Bank seeks to ease inflationary pressure on exchange rate rises and may increase interest rates in the short term.
Bankers and analysts agree that interest rates in the financial system will tend to rise in the coming months, as inflation is being pushed upward by the recent movements in the exchange rate.
The Central Bank of Costa Rica (BCCR) , in an attempt to keep inflation within the target range, has raised the policy rate from 3.75 % to 4.75%. This indicator is a benchmark for financial institutions who pay this rate on on overnight funding in the liquidity market.
The exchange rate in the wholesale market reached 558 colones per dollar, while at bank counters one dollar was being sold (on Wednesday March 5th) at 565 colones.
The price of the dollar in Costa Rica has not found an upper limit, trading at 565 colones per dollar at some bank counters, which is sixty colons more than earlier this year.
Although the Central Bank (BCCR) has intervened in the foreign exchange market to prevent the exchange rate from rising more and has publicly insisted that the devaluation of the colon will slow down, its behavior over the last few days seems to indicate otherwise.
The volatility that the dollar has shown brings back to table the discussion on whether or not to dollarize the Costa Rican economy.
In his opinion piece in Elfinancierocr.com, Juan Carlos Hidalgo details the implications of the recent behavior of the exchange rate for the economy and suggests dollarization as a way of solving many of the problems that could soon occur if the dollar continues to rise.
The discretionality of interventions made by the central bank in the foreign exchange market could open the gate for unjust enrichment of those who have inside information.
EDITORIAL
In the best of democratic worlds, the intervention of public employees in the economy generates income transfers between the sectors within the economy, according to state policies that are largely accepted by the population.
Credit growth in dollars is causing concern about possible risks of devaluation and a rise in interest rates.
Nacion.com reports that: "Guillermo Quesada, President of the Chamber for Banking and Financial Institutions said that banks have been proactive and have already taken steps to address the risks."
"The president of the Central Bank is concerned about the further widening of the gap between total external liabilities of banks (debt that banks have bought in from outside) and assets (its holdings in the currency)."
Financial institutions in Costa Rica will have a maximum of 48 months to implement the new measures which restrict lending.
The information was confirmed by the National System for Financial Supervision (Conassif), which approved "11 new regulations, with a phased implementation period of up to 48 months, when the original version stipulated 36. Most of the grace periods start from 1 January 2014 ", reported Nacion.com.
The Costa Rican Central Bank has decided to remove the limits on credit growth both in dollars and in colones, due to the weak economic growth facing the country.
The announcement came during the presentation of a review of the Macroeconomic Program 2013-14, where it was revealed that growth projections for that period are 4%, while inflation will be 5%.
Former Presidents of the Central Bank of Costa Rica have criticized the bill which sets two equal objectives for the institution: inflation control and boosting production.
They agree that the Central Bank has shown that it does, but remain unconvinced that an expansionary monetary policy can be implemented to boost production indefinitely. Also, the experts believe that although both goals have similar weight, priority is always given to one over the other.
The purchase of dollars by the central bank in order to prevent appreciation of the local currency is considered a form of subsidy for exporters.
From an interview in Nacion.com made by Patricia Leitón with the President of Banco Central Rodrigo Bolaños:
"I think it's very important that we continue with the gradual process of removing excess colones, we have already made a significant achievement, but of course these latest purchases of dollars have slightly increased the surplus".
Representatives of business associations have proposed ten measures to prevent the entry of speculative capital into the country and to provide flexibility to the exchange rate without local currency appreciating.
Elfinancierocr.com reports that "Business representatives this afternoon delivered a plan with 10 steps to curb the heavy influx of foreign capital", among which was "a tax on speculative capital inflows, in addition to promoting a specific tax on remittances sent abroad, of 5% for national banks and 5% for ‘suitcase’ banks".
The latest announcements in Costa Rica about greater exchange rate flexibility to appreciate the colon are worrying exporters.
An article on Crhoy.com reported that "Late last year, the president of Costa Rica’s Central Bank (BCCR) Rodrigo Bolaños announced that the monetary authority will continue the transition announced in 2006 seeking to lead the country towards greater exchange rate flexibility consistent with the full adoption of inflation targeting."
The Central Bank of Costa Rica said that the new formula for calculating the base rate means that it will be a more stable indicator.
Rodrigo Bolaños, president of the institution, explained that this will help over 400,000 borrowers who have credit obligations linked to this indicator.
The new methodology was presented yesterday and today will be published in the official gazette, meaning that it will become effective within 10 days, if there are no comments.
The idea that the Central Bank of Costa Rica be a fund manager for the Development Bank has been rejected by its President Rodrigo Bolaños.
An article in Nacion.com notes that the strange idea originated in the office of the second vice president of Costa Rica, Luis Liberman, where it probably passed by the Economy Minister Mayi Antillon, who most likely presented it at the Development Bank Commission of the Legislature.
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