QCOSTARICA — In political circles, there is a suggestion that the recent strengthening of the colon against the U.S. dollar could potentially allow the Central Government to relax the strict constraints of the fiscal rule, with or without any malicious intent. This statement is deemed logical, albeit with some nuances.
The most stringent restrictions on public spending outlined in the fiscal rule, which aims to solidify public finances, ensure the sustainability of public debt, prioritize investment promotion, and national production growth, are enforced when the accumulated public debt exceeds 60% of the Gross Domestic Product (GDP). This debt calculation decreases when the U.S. dollar exchange rate declines.
The leaders of the Central Bank of Costa Rica (BCCR) and the Ministry of Finance deny any deliberate strategy to achieve this effect. However, economists and politicians caution that this may be occurring. The reduction in the debt-GDP ratio is attributed to converting the debt amount from dollars to the local currency using the current exchange rate for each calculation.
The correlation between the exchange rate and compliance with the fiscal rule is analyzed, along with the potential impact if the dollar price had not changed in 2023.
The link between the exchange rate and the accumulated public debt, expressed as a percentage of GDP, is deemed straightforward by former Central Bank president Rodrigo Cubero.
The debt-GDP ratio is based on nominal GDP estimated in colones. Hence, when the exchange rate rises, the debt value in dollars converted to colones decreases.
At the conclusion of 2022, the Ministry of Finance reported an external debt of US$12.06 billion, which increased to US$14.39 billion by the end of 2023, indicating a 19.3% rise in nominal terms.
However, if these amounts are converted to colones using the year-end exchange rate, the increase appears smaller. The external debt in colones went from ¢7.2 billion to ¢7.5 billion (a 4.6% increase) as the exchange rate dropped by up to 14% during that period.
This phenomenon is not limited to external debt alone, as a portion of the country’s domestic obligations are also in foreign currency.
Over 33% of the Central Government’s total debt is in US dollars. According to estimates from financial advisors, Consejeros Económicos y Financieros (Cefsa), as mentioned by Rodrigo Cubero, head of the Central Bank from 2018 to 2022, this is why the public debt closed at 61.1% of GDP in 2023, which would have been over 3 percentage points higher if the exchange rate had remained close to January 2023 levels.