Central Bank Wraps Up
Rough Year with Optimism
By Leland Baxter-Neal
Tico Times Staff
lbaxter@ticotimes.net

Central Bank President Francisco de Paula Gutiérrez said yesterday that, despite higher-than-expected inflation, oil prices and consumer costs, the country's economy did not fare as badly as some claim. It would have been much worse if the Central Bank and the government had not made certain “adjustments,” such as reducing social spending, he added.

As evidence of a better-than-they-say year, Gutiérrez pointed to an estimated growth of 4.1% in Costa Rica 's economy in 2005, 123,000 new jobs created, and a “manageable” deficit that is lower than previous years.

As of November, inflation for the year had reached 12.94%, already higher than both the original goal of 10% announced in January and the revised goal of 12.7% announced in July. Gutiérrez blamed the inflation rate on “external blows” to the economy, principally oil prices that surged beyond expectations. While in January the Central Bank expected a price of about $50 a barrel, at the end of the year, prices are approximately $62 a barrel, and in October they were as high as $72 a barrel.

This rising cost has had multiple impacts on the economy. Most directly, the government has spent more than $1 billion in oil imports, which is $200,000 more than the previous year and equals 5% of the country's gross domestic product (GDP). Gutiérrez warned that the current rise in oil prices should not be seen as a temporary effect, but a permanent condition caused by a steady growth in demand to which Costa Rica must adapt.

But with the appropriate adjustments, the bank president said, the government has managed the crisis.

“You have two options,” he said. “One is to go further into debt, which is not responsible.”

The other, is to “make adjustments” to the economy in order to responsibly cope with the crisis. These adjustments meant continuing both a restrictive monetary policy in the Central Bank, and restrictive spending by the central government. With these adjustments, and the help of $650 million in foreign direct investment, the government was able to maintain the deficit at manageable levels, Gutiérrez said.

As part of the Central Bank's restrictive monetary policy, it attempted to limit the amount of currency circulating in the Costa Rican economy by limiting inflation. The bank accomplished this by multiple means, such as selling monetary stabilization bonds, which allowed the bank to absorb ¢665 billion ($1.34 billion).

However, because of the steady ¢0.15-a-day mini-devaluation of the colon's exchange rate, Costa Rica is an attractive market for the short-term investment of dollars, which works against the restrictive policies, the bank president explained. As more dollars enter the Costa Rican economy, a flow the Central Bank does not have control over, the bank must then release more colones into circulation, putting an upward pressure on the inflation rate.

Gutiérrez said that it is time to “rethink” the bank's mini-devaluation policy, and said that the bank has been studying the cases of several other countries with similar economic situations that have left behind the system. While declining to advance any details on alternatives before the bank announces its 2006 monetary policy in January, he said that he would like to see more “flexibility” with the colon's exchange rate.