QCOSTARICA — A new boost to foreign investment and employment, the elimination of uncertainty over the dollar exchange rate, thus favoring businesses and debtors, and the certainty that the State would not manipulate interest rates to keep down the inflation, would be some of the advantages for the Costa Rican economy if the country decides to dollarize.
The debate about this measure is once again on the table at a time when Javier Milei, elected president of Argentina, is preparing to change currency in his country, according to Otto Guevara, consultant and former presidential candidate and former legislator.
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Talking to LaRepublica, Costa Rica business oriented newspaper, “It seems to me that it is a topic that has been discussed for many years in Costa Rica. The discussion in the past was because inflation was very high, while now the issue is about monetary policy and the great appreciation of the colon, affecting the export sector and tourism, while generating uncertainty with the exchange rate. In that sense, dollarization would help a lot to give peace of mind to economic agents.”
In recent months, the export and tourism sectors have expressed concern about the dollar exchange rate, mainly because of a marked appreciation of the colon has caused the U.S. dollar to lose its value and with it, the profits of these two sectors have been considerably reduced.
Likewise, debtors of dollars remember the hard times they experienced last year with the dollar exchange rate, which reached ¢700 per colon.
Last Thursday (Friday being a holiday) the last day the Central Bank set the official dollar exchange reference rate: the buy ¢530.32 and the sell ¢537.44.
“We are managing a violent process of appreciation of the colon that is undoubtedly affecting us, but we do have to recognize that foreign currency income (…) When it comes to taking those dollars and converting them into colones to pay our operating expenses, there is a difference of 20% or 22% that has us in a very complicated situation, where companies are losing profitability, but we are also losing competitiveness,” said Rubén Acón, president of the Cámara Nacional de Turismo (Canatur) – National Chamber of Tourism – about the exchange rate situation.
Opposing dollarization
However, forgetting about the colon and switching to a stronger currency like the dollar, as Ecuador, El Salvador and Panama have done, would be a controversial measure.
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Several economic specialists consulted consider that this measure may not be appropriate for Costa Rica, especially because the country’s finances are improving and because inflation is controlled, unlike Argentina, where a 140% increase in the cost in the prices of the main consumer goods is reported.
In that sense, the resignation of the Banco Central (Central Bank) to intervene in the economy through changes in interest rates, the subordination and influence of the decisions of the FED (the central banking system of the United Statess) in the Costa Rican economy and the loss of competitiveness, because many economies benefit from the depreciations of their currencies, are some of the reasons for not dollarizing.
“The alternative of dollarization is always attractive, but Costa Rica does not have the symptoms that Argentina is facing at the moment, with a very high devaluation and different exchange rates, in addition to inflation higher than 140%, which is a reflection of that its economy is destabilized. In the case of Costa Rica, the numbers are very far from that,” said Daniel Suchar, independent economic analyst.
Luis Alvarado, economic and stock market analyst, at Acobo Stock Market, says: “In the case of Costa Rica, dollarization is not a scheme that should be adopted, since the country would renounce seigniorage and the possibility of maintaining its own monetary policy. It is not a scheme that automatically solves the fiscal and economic problems of a nation.”
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On the flipside, Gerardo Corrales, economist at Economía Hoy, said: “One of the great advantages of dollarizing the economy is that it allows inflation to be controlled, while giving greater exchange stability to the country, and these two elements allow the business sector and families to reduce uncertainty in the economic calculation to promote consumption and investment. That, in turn, promotes growth and the generation of businesses and jobs.”
Corrales noted that, in the case of dollarization, Costa Rica’s monetary sovereignty is lost and transferred to the FED, which could have a conflict of interest or interests other than the needs of Costa Rica.
The pros and cons to dollarization
In Latin America, Panama has had full or official dollarization since 1904 (i.e., since a few years after it gained its independence from Colombia). Ecuador fully dollarized in 2000, and El Salvador and Guatemala in 2001.
Dollarizing in Costa Rica is an issue that could have advantages for the country, but also disadvantages, according to economists.
The advantages:
- Reduction of transaction costs for companies and people
- Certainty that there will be no manipulation of the country’s monetary policy, issuing colones inorganically that are not related to production, which has been a historical temptation for those in power
- The economy is already quite dollarized and, therefore, this measure would facilitate transactions and investment. The dollar is accepted throughout the country. Many privileged people in foreign and multinational companies receive their salaries in that currency
The disadvantages:
- Loss of seigniorage. The country, through the Central Bank, loses the possibility of issuing its own currency, eliminating the profits received from the monopoly right of issuing the currency.
- The possibility of intervening in the economy through changes in interest rates is renounced.
- Loss of competitiveness because many economies benefit from the depreciations of their currencies, which can make their goods and services cheaper in relative terms. By adopting the dollarization scheme, this possible advantage is lost
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