July 14th, 2014 (InsideCostaRica.com) Libertarian Movement Party (ML) lawmakers of the Legislative Assembly are renewing calls to ditch the country’s national currency and dollarize Costa Rica’s economy.
ML Party lawmakers, who have presented such bills in previous administrations, say that replacing the country’s currency with the U.S. dollar would eliminate the drawbacks of a fluctuating exchange rate.
Those opposed to the measure say that dollarizing the economy would weaken the country’s competitiveness and eliminate an important tool of monetary policy.
Deputy lawmaker Otto Guevara, one of the supporters of the measure, said he supports dollarization due to the “secret” nature of the Central Bank’s interventions in the foreign exchange market.
“In Costa Rica there are no clear rules that allow citizens to know, in advance, how the Central Bank will intervene under different circumstances, and, therefore, interventions and non-interventions [in the foreign exchange market] have the ability to thwart individual efforts,” Guevara said.
Guevara said the current system makes the Central Bank a law unto itself, providing a “blank check” to the seven members of the Board of the Central Bank, to intervene in the currency market “without following any rules set in advance or being forced to be formally accountable to anyone for their actions or ommissions.”
“We understand that this is a controversial issue but at this time it is a must,” Guevara added.
Some analysts are also supporting dollarization, pointing to inflation this year that is likely to be well above the government’s target.
Economist Luis Loria also called for dollarization last year, saying that if dollarization were to occur, people would have better access to loans in dollars, whose interest rates are almost half of those in colones.
Not everyone believes dollarization to be a good idea. Lawmaker and economist, Otton Solis is warning against support for the measure, saying that an important tool of monetary policy would be lost and the country would be forced to pay interest on dollars printed by the United States.
Economist Francisco Sancho is also opposed to such a measure. “[Through dollarization], an instrument to promote exports and imports is lost. We should analyze the experiences of other countries [who chose to dollarize], but in general, it would not be a good idea right now,” Sancho said.
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