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Costa Rica’s stash of international reserves is off the charts!

by |Published

QCOSTARICA — A cheap dollar exchange rate guaranteed to stay that way, the contraction of several sectors in terms of investment and employment, and the reduction of the Monetary Policy Rate – which directly affects the interest on loans – are some of the consequences of the country having a record figure of almost US$14 billion in international reserves.

This is an amount of money that the Banco Central de Costa Rica (BCCR) – Central Bank had never had before and in the words of economic analyst Danel Suchar, who post on TikTok, is as if the country finally had vaults full of money like Scrooge McDuck, known as Rico McPato or Tio Rico in Latin America.

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“With this amount of dollars, we are clear that the dollar is not going to move up for a long time; However, this has the problem that it will impact sectors that have their income in dollars such as tourism, the export sector, and free zones, who would lose competitiveness and promote less employment,” explained Suchar in his video posted on X (formerly Twitter).

On the other hand, with a cheap dollar, a high Monetary Policy Rate (MPR) is not justified, so it is expected that the Central Bank will reduce this reference rate, which is used to establish interest rates for financial institutions.

Read more: Dollar exchange hits lowest figure in the past decade

“In principle, there must be a new adjustment in loan interest rates, which will benefit debtors and investment. It is historic for Costa Rica to reach a figure of US$14 billion for international reserves and this marks a milestone for the Central Bank and the country, in such a way that it is a thermometer to know that dollars continue to enter everywhere,” concluded Suchar.

In November, José Luis Arce, director of FCS Capital, mentioned that an excess of Reserves, which at that time stood at a record US$12.87 billion could cause problems for the BCCR.

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“The problem with having that many reserves is that sometimes they are financed with a lot of issuance of colones and it has to be sterilized so that it does not generate inflation, then the Central Bank ends up obtaining many reserves with many liabilities such as Monetary Stabilization Bonds. It’s a problem there because you have to pay interest on it, it has a cost. We are not there yet, but at the rate we will be in twelve months, I believe that the Central Bank could already say that it has a very comfortable cushion of reserves and that it may already be excessive,” Arce explained.

One of the more visible and impacting effects is already being felt, the drop of the dollar exchange rate to ts lowest point in 10 years.

Since February 2014, the Central Bank of Costa Rica (BCCR) has not reported an exchange rate as low as the one shown this Wednesday, ¢512.54 for the buy and ¢519. 39 for the sell.

Economist and former Deputy Minister of Finance, Fernando Rodríguez, explained that typical seasonal situations no longer justify this drop in the exchange rate.

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According to Rodríguez, at this point, it is normal that, to the contrary, the colon begins to depreciate, contrary to what is happening.

“It seems that there are elements that are still escaping the general understanding of what is happening with the exchange rate. This does not allow us to have absolute clarity, because it is not a merely seasonal phenomenon, nor is it a structural effect. Other factors could be at work. I don’t think it’s due to a single factor either. It is clear that there has been a good tourism season, although this is becoming a beacon for the same sector because the income of so many dollars is causing the exchange rate to fall and there has been relative success in terms of exports,” explained Rodríguez.

Now you know.

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