Costa Rica’s Currency Tumbles as Capital Controls Bill Filed

Costa Rica’s currency tumbled a day after the government announced measures to slow capital inflows that President Laura Chinchilla called “weapons of mass destruction” against the nation’s economy.

The colon depreciated 0.7 percent to 500.83 per dollar at 12:01 p.m. local time. The currency has gained 2.2 percent this month through yesterday, the most among 19 Latin American and Caribbean economies tracked by Bloomberg.

The government said yesterday it would seek congressional approval to raise levies to as much as 38 percent from 8 percent on foreign investors who transfer out of the country profits from capital inflows. Foreigners may also have to deposit as much as 25 percent of their investments at the central bank, Finance Minister Edgar Ayales said.

“These are temporary measures aimed to discourage the entrance of foreign capital that is damaging to the national economy,” according to the legislation sent to Congress.

In the past 10 months, Costa Rica’s central bank has purchased more than $1.5 billion to stabilize the colon, according to the bill.

The central bank lets the colon’s value fluctuate daily within a “crawling band” system that allows for movement between a fixed ceiling and floor. The band ranged on Jan. 15 from 495 colones to 506 colones.

“Capital inflows enter Costa Rica because we have an exchange-rate system where the currency is basically guaranteed to be stable,” Ayales said Jan. 17. “If Costa Rica pays interest rates of 10 percent, as we did in December, and rates abroad are around 2 percent, there is an enormous return that investors can take advantage of.”

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