Never before in history has Costa Rica had so many dollars stored in its international reserves. The Central Bank reports a total of $14.836 billion, an unprecedented figure that places the country at an unprecedented moment, so much so that economic analyst Daniel Suchar notes that the country “is swimming in dollars.”
“International reserves, once again, have broken records and have reached historic highs. Costa Rica is swimming in dollars,” said Suchar. In April 2020, amid the global impact of the pandemic, international reserves were barely around $6.791 billion; while in just five years, these reserves have doubled.
However, behind this bonanza there are no barrels or drilling, but a monetary strategy: “There has been manipulation of the monetary policy rate, the reference rate, which has been very high, and which of course has brought a large amount of dollars into the Costa Rican market to park here for a while,” said Suchar. The result: a kind of “vault” à la Scrooge McDuck, where dollars are well stored, but not necessarily generating productive wealth.
Holding up
“The exchange rate remains stable, between ¢506 and ¢510, without moving much. Many thought it would take off or tremble due to geopolitical issues, but the reserves are holding it up,” says the analyst.
On April 10, while much of the country was packing up for Easter, the Central Bank decided to keep the monetary policy rate at 4%. Although stable, it remains high compared to other countries in the region, which keeps Costa Rica attractive to short-term foreign capital.
A warning
However, Suchar issues a warning: “Many of these dollars are not productive; they have arrived due to interest rates, not exports or foreign direct investment. And just as they came in, they can go out.”
International reserves are the “savings” in foreign currency held by the Central Bank of Costa Rica, primarily in dollars. Their main function is to support exchange rate stability, allowing the bank to intervene when there are sudden fluctuations in the demand or supply of foreign currency.
They also generate confidence in the national economy. A country with high reserves is viewed as more solid and reliable by investors and international organizations, as it has the means to respond to emergencies, pay foreign debt, or import essential products in difficult times.
Finally, they serve as a shield against external crises and as a tool to support monetary policy. In short, they are a financial cushion that gives the country stability and credibility in the eyes of the world.
