Although the gradual process of credit dedollarization continues, the Central Bank has warned that a preference remains on the part of savers for instruments denominated in foreign currency.
From a statement issued by the Central Bank of Costa Rica:
Excess liquidity in the financial system, soaring loans in dollars, a rising fiscal deficit and a less favorable global environment will complicate the path in the rest of the year and in 2017.
The document"Macroeconomic Review Program 2016-2017"by the Central Bank of Costa Rica says that these four elements are the main factors that could adversely affect overall economic performance.
If the measures which the Central Bank plans to implement come to fruition, banks will have to seek authorization from the entity in order to borrow abroad in dollars.
This measure would be in addition to the latest implemented by the Central Bank, raising reserve requirements to 15% on new business loans from abroad.In June this year the increase in the loan portfolio in dollars compared to the same month of 2015 was 14%.
The IMF points to a greater vulnerability in the financial sector because of credit expansion in dollars and on the macroeconomic level because of the inability to reduce the fiscal deficit.
The Libertarian Movement Party has again presented an initiative to establish the dollar as the only currency, in order to avoid, among other problems, the negative effects of exchange rate fluctuations.
The bill to be submitted for discussion in the Legislature provides, among other things, that "... the legal tender will also be the dollar and that 'acts, contracts and obligations under any other legal currency, abroad, will be valid, effective and enforceable in the contracted currency, even if payment must be done through the courts. '"
The idea of de-dollarization of the Nicaraguan economy was short-lived, after having set off various alarms in academic and business environments.
After several days of national discussion on the issue, the Central Bank has ruled out the possibility.
An article in Elnuevodiario.com.ni reports that "the President of the Central Bank of Nicaragua, BCN, Ovidio Reyes said on Wednesday that the current system of coexistence between the dollar and the Cordoba has worked in the country, therefore they have ruled out the dedollarization of the Nicaraguan economy. "
In light of the alarm generated by the proposal for the de-dollarization of the economy, the President of the Central Bank announced that there will be no change in the system of free convertibility of currencies.
An article in Elnuevodiario.com.ni reports that Ovidio Reyes, president of the Central Bank of Nicaragua, said that "... many people are concerned because they believe the government will start to add controls to the buying and selling of dollars. 'That will not happen, a key attraction of foreign investment has been the system of free convertibility of our currency and the dollar that exists in the country'. "
Some companies can become richer than others overnight, depending on decisions made by a few public officials.
Editorial
An article in Elfinancierocr.com reports on the positive effects of the devaluation of the national currency of Costa Rica, the-Colón, agains the dollar, for exporters in the country.
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.
A study of the evolution of interest rates in El Salvador over 37 years concludes that dollarization confirms the theory of parity between domestic and international interest rates .
From the concluding remarks of the study entitled "El Salvador: Determinants of interest rates" by Alirio Alfonso Fernandez:
The main advantage of dollarization is to isolate the currency from political problems.
An article in Elfinancioerocr.com reviews the opinion of former Ecuadorian Minister of Economy, Carlos Julio Emanuel, in the context of the current discussion about possible dollarization in Costa Rica.
The Salvadoran economist Manuel Hinds discussed in Costa Rica the pros and cons of dollarization, using the example of El Salvador and Panama.
The Elsalvador.com reported that "many government economists advocate keeping their local currency because they believe that inflation will remain low, but Hinds explained that the opposite happens. In the region, El Salvador, and Panama, which are dollarized, have the lowest inflation rates while countries like Argentina and Venezuela have an inflation rate of more than two digits (25 and 10% respectively) while last year, inflation in El Salvador was only 0.8%. "
A bill to discourage influxes of speculative capital in Costa Rica, gives the Central Bank power to change the tax.
In savings certificates at a state bank income tax could reach 38%, when the 30% is added to the current 8%. For returns of mutual funds, which incur 5%, the amount to tax could be set at up to 35%.
A bill is being prepared to impose taxes on money which enters the country seeking to exploit the gap between interest rates in local currency and in dollars.
Furthermore President Chinchilla has issued a directive to state banks to stop competing with each other to attract investments from large institutions, such as the Instituto Costarricense de Electricidad, the Social Security Department, or the National Insurance Institute. It also requires public institutions to make new investments exclusively in state banks.
When the monetary cauldron reaches boiling point, it is time to recognize that the best solution is to take the fuel away from the fire.
The solutions being employed as a remedy for the distortions caused by the flood of speculative capital in the Costa Rican economy, each have a common factor: they fix one end of the problem and exacerbate another.
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