QCOSTARICA — From June 2022 to today, people and businesses earning in dollars have experienced a decrease of around 27% in their income, an unsustainable situation for many, especially for small and medium-sized businesses that depend on the foreign market, to the point that closures and layoffs are an increasingly closer possibility.
Faced with this situation, the export and tourism sectors and others are urging for the protection of foreign investment, jobs, and economic growth. They are calling for action from the Central Bank of Costa Rica (BCCR) to intervene in the exchange market to strengthen the value of the dollar locally, with the goal of raising it from its current range of ¢500 to ¢510.
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Another idea on the table is to dollarize the economy, just as other Latin American countries such as El Salvador, Ecuador, and Panama did in the past.
Dollarization could give more confidence and stability to the productive sector, especially in tourism and exports. Plus, it could attract more foreign investment, essential for the country and the generation of jobs.
“The fall in the (dollar) exchange rate and inflation so low for more than eleven months make it more urgent every day to move towards dollarization. In this way, the productive sector would have more confidence and stability, especially those associated with tourism and exports,” said Otto Guevara, consultant and former legislator, and perennial presidential candidate.
Another point in favor of dollarization is that it would facilitate the attraction of foreign investment, which is essential for the country and the generation of jobs.
Ad for people earning in dollars, their income won’t be up and down each month anymore, experiencing more stability in their financial situation as their earnings will be consistent each month. This will provide them with greater peace of mind when it comes to taking out loans or covering their expenses.
Related: [OP-ED] ADOPT THE DOLLAR OR HAS IT ADOPTED COSTA RICA?
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As the local currency would be the dollar, inflation would also depend on the impact of goods and services in that currency.
However, all that glitters is not gold. Some economic specialists point out several drawbacks to dollarizing, such as the country would no longer have control over certain monetary policy tools, such as the ability to impact interest rates.
Furthermore, it must adapt to the policies implemented by the United States Federal Reserve, which may prioritize the interests of its own region over others.
“The decision to dollarize the economy should not be limited to the value of the exchange rate, but rather more structural aspects must be taken into account, such as, for example: what would the country gain if it were willing to lose its monetary and exchange independence? Is it really worth it? As well as evaluate the cases of other countries that have already gone through this process and determine if dollarization has really driven their economies towards higher sustainable growth rates over time,” said Grettel Vásquez, Economic Studies analyst at Scotiabank, to La Republica.
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The topic has resurfaced for discussion because of the rise in the value of the colon, which is expected to persist this year. Projections suggest that the U.S. dollar will be end the year between ¢510 and ¢530.
Pros and cons
These are the points for and against dollarizing the economy.
For:
- Stability: All economic actors, including employees, would forget about exchange rate instability.
- Foreign investment: With a dollarized economy it would be easier to do business and attract foreign investment by reducing the exchange rate differential
- Reduction of exchange risk: This contributes to a decrease in the risk premium (interest rate) that the country incurs for borrowing money from foreign sources.
Against:
- Seigniorage: The country, through its Central Bank, would lose the possibility of issuing its own currency, eliminating the profits received from the monopolistic right of issuance. of the currency
- Economic policy: The possibility of intervening in the economy through changes in interest rates is renounced
- Competitiveness: Many economies benefit or gain advantages from the devaluation of their currencies, as it can decrease the cost of their goods and services in comparison to others.
Differing opinions
There is a consensus among the experts on the subject of dollarization, that its implementation should not be done immediately, the economy must have room for a smooth transition, allowing individuals and businesses to choose the appropriate coverage and make necessary adjustments to cash flows and other variables related to international operations.
“If the adjustment is made immediately and the market is not properly prepared, speculative attacks, increased uncertainty and other behaviors associated with a decrease in confidence in the local economy could occur,” is the opinion of Juan Pablo Arias, tock market economic analyst, at the Bolsa Nacional de Valores (National Stock Exchange).
However, not all agree on the matter of dollarizing Costa Rica’s economy.
For example, Gerardo Corrales, an economist from Economía Hoy, believes that the Government cannot effectively implement economic policy using fiscal tools due to an unbalanced fiscal policy and high levels of debt. “If we choose to adopt the US dollar as our currency now, we will be relinquishing authority over monetary policy to the Federal Reserve,” is the opinion of Corrales.
Grettel Vasquez, Economic Studies Analyst at Scotiabank, says while one of the advantages of adopting the US dollar as the official currency is the decrease in exchange rate risk, dollarization would result in a loss of autonomy in terms of monetary and exchange rate policies.
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