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(Reuters) – Costa Rica scrapped limits on dollar loans on Wednesday as external headwinds and weaker harvests pushed the Banco Central de Costa Rica (Central Bank) to cut the country’s growth outlook sharply.

Central Bank President Rodrigo Bolaños cut the forecast for economic growth  in 2013 to just 3%, which would be the weakest expansion since a 2009 recession. The forecast was 4% earlier this year.

Growth is seen at 3.7% in 2014.

The Ministerio de Hacienda (Finance Ministry) also revised its forecast for this year’s fiscal deficit to 5 percent of gross domestic product, from 4.8 percent earlier.

“Economic growth has been slower than expected and than last year, one, because we’ve had less external demand and two, because we’ve had some internal supply shocks that have hit exports, with things like the coffee rust affecting production and pineapple production growth being affected by limited land,” Bolaños told a news conference.

Limits on dollar loans, which had been due to run out in October, would be lifted immediately, he said. The move could potentially help to lift weak growth, although Bolaños said lending restrictions could be introduced again if needed.

Caps on lending were announced earlier this year in a bid to curb a credit boom driven partly by the gap between local and U.S. interest rates, along with capital controls on foreign investment, which are still before Congress.

Interest rates on loans in dollars are currently around 10.67 percent, while loans in colons are given with an interest rate of 16.72%. A similar boom in foreign currency lending in Eastern Europe left households struggling when local currencies depreciated and pushed up loan payments.

Costa Rica, a country of 4.5 million known for its beaches and high-quality coffee exports, plans a fiscal reform that seeks to scrap sales tax and replace it with a higher-rate value-added tax, in an attempt to trim the country’s fiscal deficit to a 2% target by 2018.

Source: By Isabella Cota, Reuters


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