Categories: Banking Law and Financing
The Central Bank of Costa Rica (Banco Central de Costa Rica – BCCR) decided to migrate to a managed floating exchange scheme, just over eight years (October 17, 2006) after the exchange rate bandbegun operating to control the price of the dollar in Costa Rica (floor and ceiling).
With the new managed floating model, the price of the dollar will be set accordingly to the laws of supply and demand.
Under this new system, said the bank, the BCCR will allow the exchange rate to be determined by the supply and demand of the foreign currency, but it’ll have the possibility to participate in the exchange market to avoid violent fluctuations (abrupt variations) in the exchange rate.
Olivier Castro, president of the Central Bank, told to La Nación newspaper that the change has been made at a time when the country enjoys financial stability, this, added to the fall in oil prices worldwide: the macroeconomic conditions of the country are appropriate for the migration to the managed floating system.
The Bank, in turn, said that it has U.S. $7.322 million in reserves (14% of the Gross Domestic Product – GDP) that will serve to face any kind of speculative pressure; also between February 2015 and December 2016 it will launch, as a precaution, a program for acquiring U.S. $800 million more in reserves.
Businessmen see as appropriate the new managed floating system
The fact that the BCCR watch over and act against possible violent fluctuations in the price for the buying and selling of dollars, is seen with good eyes by experts and Costa Rican businessmen.
The Central Bank tells us that it will try to avoid large fluctuations and this gives peace to the business sector, because it gives more security when planning future investments, explained the economist Luis Mesalles (also a member of the Costa Rican Union of Chambers and Associations of the Private Business Sector – UCCAEP in Spanish) to the magazine Strategy and Business.
Will the country and citizens be affected by the managed floating model?
The economist Melvin Garita, quoted by the weekly El Financiero, said that Costa Rica gives a good image worldwide with the implementation of the new exchange system.
In macro conditions we can feel some repercussion, as a very strong sign is send towards international organisms: Costa Rica is walking in the right direction, because the country has been asked to do structural reforms in the last months, Garita said.
Juan Muñoz, one of the experts consulted by the weekly, added that, in case of an excess of dollars in the Costa Rican market, the exchange rate will be pushed downward, so the Bank would have to stabilize it and a message could be sent to encourage the placement of credit, increased consumer spending and thus, low interest rates too.
As for Costa Ricans and foreign citizens with loans or investments in Dollar in Costa Rica, Muñoz added that they may not be affected, because the banks establish the exchange rate they want, something that can’t be prohibited, however, I do not see the exchange rate moving unexpectedly, concluded the expert.
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Sources consulted:
http://www.bccr.fi.cr/noticias/Adopcion_esquema_flotacion_administrada.html
http://www.nacion.com/economia/banco-central/Banco-Central-decreta-flotacion-administrada_0_1466853367.html
http://www.estrategiaynegocios.net/lasclavesdeldia/790690-330/costa-rica-elimina-las-bandas-cambiarias-con-el-d%C3%B3lar
http://www.elfinancierocr.com/finanzas/Banco-Central-banda_cambiaria_0_674932538.html
http://www.elfinancierocr.com/finanzas/ABC-flotacion-administrada_0_675532441.html
