(Bloomberg) — Gains in Costa Rica’s currency this year are hitting the Central American country’s export-driven economy. That isn’t convincing President Luis Guillermo Solis to push the central bank to devalue the colon, one of the few currencies in emerging markets to strengthen this year.
The colon is up 0.5% versus the dollar this year, compared to declines of 23% and 1.6% for Colombia and Guatemala, respectively. Falling prices for oil imports and heavy rains that filled reservoirs reduced demand for dollars and aided the currency’s stability, Solis said. Still, the trade deficit widened to $540 million in August from $480 million a year earlier.
“There are sectors in Costa Rica calling for an artificial devaluation,” Solis said in an interview Wednesday at Bloomberg’s headquarters in New York. “I’m not touching it because I want the central bank to keep that autonomy.”
Solis, a 57-year-old former history professor who took office last year, has struggled to win legislative support for tax changes he says are critical to boosting revenue and narrowing a budget deficit that could reach 8.5 percent of gross domestic product by 2018. An effort to fund that gap with a $1 billion bond sale to China may not happen.
Tax Plan
The bond sale proposal“is not moving too fast,” Solis said. “It’s not the fundamental way to deal with the deficit.”
Instead, Solis said he’s betting on passage of fiscal legislation that includes an expanded value-added tax. Similar efforts have failed in previous governments. The slow consideration of the tax package was cited by Moody’s Investors Service a year ago when it cut the country’s credit rating to Ba1, below investment grade. That put the country in the same category as Portugal and Russia.
In the wake of decisions last year by companies including Intel Corp. to reduce some operations in Costa Rica, unemployment climbed to 10.2 percent under Solis before declining to 9.5 percent in the second quarter. The economy expanded 2.1 percent in July, the fastest pace in six months.
Now, as he travels the U.S. promoting foreign investment in the $50 billion economy, which exports medical devices, bananas and pineapples, Solis said his biggest competition often comes from Eastern European nations and their educated, under-utilized workforce.
“We have a talented workforce,” he said, adding that the country’s assets include “a democracy that functions, a state of affairs that gives us confidence in the future and a full respect for the rule of law.”
Source: Washpost.bloomberg.com
It would be interesting to have explained in layman’s terms, how the Central Bank is able to refrain from devaluing the Colon as against the U.S. Dollar over the past year. It appears that every other country in the world has had to do just that, including Canada, which has devalued the Canadian Dollar by one-third as against the U.S. Dollar over the past year. Costa Rica imports almost everything and exports almost nothing, especially in comparison with the other countries who have devalued their local currency and have much larger and stronger economies than Costa Rica, based on their GDP. In my opinion, Costa Rica is a “ticking time-bomb”, when it comes to the prospect of the devaluation of the Colon. Otherwise, why wouldn’t these other countries who have devalued their local currency against the U.S. Dollar, not take the same approach as does the Central Bank in Costa Rica?