Costa Rica Call Center Blog

Most often is hard to read between lines but there was a signal sent by the Central Bank.

The Central Bank decided on January 21, to increase the daily devaluation of the exchange rate upper side of the band from ¢0.06 to ¢0.20 colones per day.

This sets the ceiling of the exchange rate at year end from ¢578 to ¢610 from the current ¢559.

On the resolution they stated “with the behavior seen and foreseen on the midterm in the international environment and its effects for Costa Rica, the Central Bank of Costa Rica considers that is a good time and practice to increase the depth of an adjustment of the exchange rate to allow for a better response of the exchange rate to the fundamentals of the economy and foreign exchange market.”

Given that:

1. On one hand, the exchange rate has been pegged for the most part to the ceiling of the band.
2. The current account deficit (value of imports of goods and services that the country buys exceeds the value of exports) in 2007 was 9% and is expected to be 6% in 2008.
3. The deficit has been covered by FDI, tourism and services revenues, but next year there is greater uncertainty on inflows of FDI due to the external crisis.
4. Foreign currency reserves falled $400M last year.
   
5. The number of tourist dropped by 22,000 or 2.4% between July and December of this year

   

6. On the other hand, a drop on imports because of lower commodity prices -oil- and a general slowdown in imports will help lower the deficit.

The President of the Central Bank added that “the Central Bank has two instruments to reduce the deficit, monetary policy and exchange rate. The bank raised interest rates from 5.25% to 6.75% and yesterdays decision to raise the ceiling of the exchange rate aims to help further reduce the deficit”

However not everyone agree on this view. Some economists believe the reduction of the oil bill of $2.2B, a reduction of imports for $1.2B and new credits of the government at around $0.5B, along with a growth of 6% in the service sector and increased FDI chasing opportunities for the opening up telecommunications sector, would compensate and the Colon would remain stable or even strengthen.

So reading between lines may provide a hint that the balance may be reached by devaluatin the Colon against the Dollar, but its hard to be certain on the direction of the move.

Permalink: http://www.nacion.com/ln_ee/2009/enero/23/economia1849600.html
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