Costa Rica’s government and central bank are divided over measures to rein in Latin America’s best-performing currency this year as growth slows in the $41 billion economy.
President Laura Chinchilla last night called on the central bank to reconsider credit limits imposed on banks to cap lending in both dollars and colones. The central bank has said it won’t do so until Congress approves legislation raising reserve requirements on inflows and boosting taxes on interest sent abroad.
The colon has gained 2.1 percent against the dollar this year, the most of 17 Latin American and Caribbean currencies tracked by Bloomberg. The central bank has bought $701 million since January to stabilize the currency, while the government has said economic growth in the Central American nation will fall below its 4 percent forecast for 2013.
“Growth levels in the national and international economy have fallen and the capital inflows that affected us have reduced substantially,” Chinchilla said. “For those reasons, I believe that there is room to revise and modify the adopted policies at this time.”
Central bank reserves surged to a record $8 billion in April from $4.8 billion a year earlier as policy makers led by bank President Rodrigo Bolanos boosted dollar purchases. The bank bought about $1.3 billion in 2012 as investors attracted to deposit rates as high as 11 percent invested in the country.
Under the credit restrictions put in place in February, banks that had increases in dollar loans of less than 20 percent in 2012 were allowed to increase credit in greenbacks by 6 percent and in colones by 9 percent through Oct. 31, when the measures are due to expire.
Removing credit limits without other restrictions in place would be risky and leave the country vulnerable to speculative inflows, Bolanos said.
“The central bank president has publicly said that credit limits in dollars can be substituted for by other measures that seek to ensure that the costs of these credits reflect the systemic risk that they pose to the national economy,” Bolanos said in a July 10 statement posted on the central bank’s website.
Chinchilla, who earlier this year called capital inflows from developed markets in search of higher yields “weapons of mass destruction,” also urged Congress to approve the bill as soon as possible.
The Costa Rican Bank Association sent a letter to Chinchilla last month asking the government to lift the credit limits to boost economic growth. The restrictions have resulted in a 7.6 percent decline in manufacturing activity and the loss of more than 9,700 jobs in the construction sector, Construction Chamber President Gonzalo Delgado said July 10.
“We are watching with concern the decline in housing permit requests,” Delgado said, according to a statement posted on the chamber’s website. “The credit restrictions have had their first impact on the construction sector.”