Central Bank Announces 2006 Monetary Policy

January 27, 2006

Aside from the drop in the colón’s devaluation rate against the dollar from ¢0.15 to ¢0.13 per day, the monetary policy presented this week by the Central Bank stuck to familiar themes.

 

As he did last January, Central Bank President Francisco de Paula Gutiérrez said inflation – 14.07% last year, according to the National Statistics and Census Institute (INEC) – remains the major concern for the bank; that controlling the country’s debt will not be possible without tax reform; and that significant growth will not be possible without the approval of the Central American Free-Trade Agreement with the United States (CAFTA).

 

The bank’s target inflation rate is 11% this year, and 10% for 2007. Its stated goal was 10% last January (TT, Jan. 21, 2005), but factors including an international rise in gas prices made that target a distant memory by year’s end.

 

In December, Gutiérrez said it is time to “rethink” the country’s exchange system and consider a more flexible one (TT, Dec. 23, 2005). However, he said Wednesday that significant changes will not take place in the near future, though they are under consideration. For now, the bank will stick with mini-devaluation system, though “we are changing the rhythm… based on (our) inflation goal and not on past inflation,” he said. The colón, selling at ¢498.31 yesterday, will devalue 6.6% this year, he added.

 

The bank also enacted a ¢0.02 change in the devaluation rate a year ago, when it dropped to ¢0.15 from ¢0.17.

 

The announcement came days after Markus Rodlauer, the top advisor in the Western Hemisphere Department of the International Monetary Fund (IMF), told the daily La Nación during his visit to Costa Rica that he urges the country’s fiscal authorities to postpone significant changes to the monetary policy until after the government addresses its debt through tax reform.

 

The Finance Ministry announced at year’s end that the national deficit dropped from 2.5% of the gross domestic product (GDP) in 2004 to 1.3% in 2005, thanks in part to improved tax collection and controlled spending (TT, Dec. 23, 2005).

 

However, Gutiérrez said it “would be very difficult for the Finance Ministry to repeat these results” unless the Permanent Fiscal Reform Package, which would increase taxes and improve tax collection, is approved. The tax plan is still under consideration in the Legislative Assembly after more than four years of debate.

 

Resolving the 150 pending motions on the plan and bringing it to a vote will top the agenda when legislators return to work Feb. 7, following the national elections.

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