Currency Wars: Costa Rica’s Drastic Measures to Defend Currency
Adding to the global rhetoric over the dangers of a world currency war, President Laura Chinchilla of Costa Rica said that she was ready to take additional measures to defend her country’s currency in an interview on Thursday.
The central bank of Costa Rica has already spent $1.5 billion in six months buying USDs in an effort to prevent the colon from appreciating beyond 500/$1, but substantial inflows of capital into the country at the end of 2012 hae prompted the government to take additional action. A bill sent to congress recetly proposes a huge hike in the country’s tax rate for foreign investments; currency running at 8% the bill introduces proposals to raise the tax by as much as 30 percent. It also includes measures requiring foreign investors to hold a deposit at the central bank worth as much as 25% of any investment amount, on which they would not receive any interest.
The bill has not yet been approved by congress, however, and in an interview with Reuters on Thursday President Chinchilla said that she was worried that it could stall, opening the country’s currency up to renewed risks from speculative investors.
Costa Rica is heavily reliant on Tourism, which could be hit hard by a strengthening of the currency against the US dollar. Coffee exporters, another big contributor to the economy, could also be hit hard as they often receive payments in dollars.
“(The plan) has given us great peace of mind, but it’s a temporary one because we know quite well that unless the project passes it’ll be very difficult to maintain these conditions,” said Chinchilla.
“If we were to see a similar flow before the project is approved by Congress, we would, of course, turn to other mechanisms. Investors should have no doubt about this, we are totally willing to protect our economy”, she added.
Last month President Chinchilla described the inflows of capital which drive up the value of the currency as “weapons of mass destruction”.
Country’s across Latin America have been hit hard by inflation and currency appreciation in recent months, suggesting that they may be amongst the hardest hit if the anticipated ‘world currency war’ kicks up a gear. In Costa Rica a high interest rate of 7.8% has drawn substantial US dollar investments into the country, but Finance Minister Edgar Ayales has said that it would be impossible to bring this down to even 5% without a root and branch overhaul of fiscal policy.