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Central Bank president warns political campaigns to stay away from the exchange rate

The president of Costa Rica’s Central Bank warned Johnny Araya’s economic team Tuesday after the National Liberation Party (PLN) blamed the rival Citizen Action Party’s (PAC) possible victory at the polls on April 6 for recent volatility in the Costa Rican currency, the colón.

“I beg all groups in Costa Rican society not to involve the exchange rate where it has no place,” Central Bank President Rodrigo Bolaños said Tuesday during a press conference.

Waving a copy of the daily La Nación on Monday, incoming PLN lawmaker Ronaldo González said, “The risk of casting the wrong vote on April 6 would have devastating implications for unemployment, the exchange rate, debt and economic depression.”

He cited a front-page article on the rising costs of basic goods, such as gasoline, automobiles and Internet service, as a result of the sudden depreciation of the colón against the dollar during that last month.

“It’s clear that since the results of the Feb. 2 election the possibility of a PAC presidency [would lead] to the possibility of a repeat of the 1970s,” González said, referencing the soaring inflation Costa Rica experienced during President Rodrigo Carazo’s administration from 1978 to 1982. Inflation exceeded 80 percent by the end of Carazo’s troubled presidency, which saw real wages fall 40 percent and unemployment increase by 10 percent, according to the business newspaper El Financiero.

“We want to tell the Costa Rican people to remain calm, that the experienced and well-known National Liberation [economic] team will guide the country down a calm path of economic stability, fiscal certainty and social peace,” he added.

Alberto Font/The Tico Times
Alberto Font/The Tico Times

“It’s not PAC’s fault, it’s the perception by the business community,” said PLN economic adviser Leiner Vargas during the same press conference, suggesting that domestic and foreign capital were fleeing the country out of fear that a PAC presidency would harm business conditions here, contributing to the currency volatility. The ruling party adviser added that President Laura Chinchilla’s administration had seen economic stability up until the Feb. 2 election.

The colón started its climb at the end of January, when Broad Front Party candidate José María Villalta seemed like a more likely runoff contender than Luis Guillermo Solís. Since then, the Costa Rican currency has risen roughly 10 percent against the dollar. As of Tuesday, the Central Bank had purchased more than $121 million worth of dollars colones since Jan. 29 to slow the trend.

Bolaños said Tuesday that the trend would increase prices for some items, especially imports, but that the bank would work to stem the effect on the greater economy. The bank president added he believed the exchange rate is in a period of adjustment and would likely stabilize in coming weeks, if not months.

The bank president also noted that the sudden rise in the colón coincided with the second announcement by the U.S. Federal Reserve that it would pull back economic stimulus from the U.S. economy. Bolaños speculated that the Chinchilla administration’s decision to finance spending by borrowing from foreign lenders, namely the European Union, had artificially maintained the currency exchange at a lower rate until now.

“People are concerned about the exchange rate, but [PLN] should not blame PAC for this,” Olivier Castro, a financial adviser to Solís told The Tico Times.

Castro added that the PLN’s statements constituted a fear campaign and was a “desperate act” by the ruling party to hold onto power. Solís’ press representative, Stephanie González, called the PLN accusation “absurd.”

“The Central Bank has all the tools at its disposal to establish a stable exchange rate,” Castro said, adding that a PAC administration would continue with the Central Bank’s band system – in which the currency floats within a ceiling and floor price – but would considering tightening it.

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