QCOSTARICA — In political circles, there is a suggestion that the recent strengthening of the colon against the U.S. dollar could potentially allow the Central Government to relax the strict constraints of the fiscal rule, with or without any malicious intent. This statement is deemed logical, albeit with some nuances.
The most stringent restrictions on public spending outlined in the fiscal rule, which aims to solidify public finances, ensure the sustainability of public debt, prioritize investment promotion, and national production growth, are enforced when the accumulated public debt exceeds 60% of the Gross Domestic Product (GDP). This debt calculation decreases when the U.S. dollar exchange rate declines.
The leaders of the Central Bank of Costa Rica (BCCR) and the Ministry of Finance deny any deliberate strategy to achieve this effect. However, economists and politicians caution that this may be occurring. The reduction in the debt-GDP ratio is attributed to converting the debt amount from dollars to the local currency using the current exchange rate for each calculation.
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The correlation between the exchange rate and compliance with the fiscal rule is analyzed, along with the potential impact if the dollar price had not changed in 2023.
The link between the exchange rate and the accumulated public debt, expressed as a percentage of GDP, is deemed straightforward by former Central Bank president Rodrigo Cubero.
The debt-GDP ratio is based on nominal GDP estimated in colones. Hence, when the exchange rate rises, the debt value in dollars converted to colones decreases.
At the conclusion of 2022, the Ministry of Finance reported an external debt of US$12.06 billion, which increased to US$14.39 billion by the end of 2023, indicating a 19.3% rise in nominal terms.
However, if these amounts are converted to colones using the year-end exchange rate, the increase appears smaller. The external debt in colones went from ¢7.2 billion to ¢7.5 billion (a 4.6% increase) as the exchange rate dropped by up to 14% during that period.
This phenomenon is not limited to external debt alone, as a portion of the country’s domestic obligations are also in foreign currency.
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Over 33% of the Central Government’s total debt is in US dollars. According to estimates from financial advisors, Consejeros Económicos y Financieros (Cefsa), as mentioned by Rodrigo Cubero, head of the Central Bank from 2018 to 2022, this is why the public debt closed at 61.1% of GDP in 2023, which would have been over 3 percentage points higher if the exchange rate had remained close to January 2023 levels.
The former head of the Central Bank noted that if the exchange rate had remained stable, the dollar debt would have been valued higher. Additionally, recent Treasury calculations show that the public debt is now below 60% of GDP as of January 2024.
The exchange rate in Costa Rica is primarily determined by supply and demand in the Foreign Currency Market (Monex), with the Central Bank having both direct and indirect influence.
Direct interference occurs when the Central Bank buys or sells currencies to prevent drastic fluctuations in the dollar price. The Central Bank can also issue intervention rules for Monex.
Indirect influence is exerted through monetary policy decisions, such as maintaining high Monetary Policy Rates (MPR) to control inflation and promote savings in colones over dollars.
There is a relationship between MPR and the exchange rate, as noted by economist Édgar Robles. “The Central Bank’s MPR is very high,” said Robles, “and that encourages the arrival of speculative capital and the conversion of savings from dollars to colones.”
The Government does not directly control the exchange rate but does have authority over loan terms, including currency negotiations.
The Central Bank operates with a level of autonomy, although it is not completely free from the Government, with the current president, Róger Madrigal, denying any interference by the Government in monetary policy decisions.
”Definitely not,” Madrigal responded to the question by legislator Andrea Álvarez, of Partido Liberación Nacional (PLN), in a legislative hearing that took place last March 11, 2024, of any interference by the Central Government in the monetary policy decisions of the Central Bank.
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