In order to mitigate the effects of this monetary emission, the bank has been busy issuing domestic bonds. The problem with this policy is that the bonds pay interest, which in turn inflates the money supply. In the first half of the year, the bank paid out C$50bn (US$125m) more than it received. This was C$9bn more than it did in the same period of 2002.
The central bank has been monetising this deficit as well, causing itself more problems. One way out would be for the bank to raise the encaje legal (reserve requirement) for commercial banks. The problem with this is that it would raise costs on loans and lower yields on deposits. Currently the encaje is at 10% of deposits. Some economists argue that it could go to 15% without causing the economy major problems.
The central bank's problems mean that the pressure on policymakers to change the mix is growing. Yet the mix delivered strong growth (6.3%) in the first half of the year. Already some well-placed economists reckon that unless the government increases taxes to cover the central bank's deficit, inflation will jump back over 10% a year. These economists seem to have missed the improvement in the government's fiscal position. Tax revenues in the first seven months of the year were 16% up on the same period of 2002, at C$513bn. Expenditure was up by 11%, slightly ahead of inflation. The fiscal deficit for the first six months was C$118.6bn, or 6% less than for the same period of 2002.
In the first half of the year, the economy was the fastest growing in the region. This is largely due to the surge in output from Intel, the computer chip maker. Intel's contribution helped exports to rise by 23%, to US$3.2bn, in the first half of the year compared with the year before. Imports increased by 5.7%, to US$3.84bn. This means that the trade deficit fell from US$924m in the first half of 2002 to US$665m in the comparable period this year.
The central bank reckons that GDP will grow by 5.3% this year, two percentage points higher than its earlier predictions. Inflation is expected to hold at 10% for the year.
Agricultural production increased by only 2%, though agricultural exports increased 24% over the first half of 2002. Rodolfo Coto, minister of agriculture and livestock, said that the country's two key cash crops, coffee and bananas, had performed well.
The decent economic figures are a relief for President Abel Pacheco who is beset by political problems. The latest involve investigations into the way his election campaign was financed. Already there are revelations of secret bank accounts and a parallel election campaign organisation. Pacheco accused unnamed political forces of trying to besmirch his reputation. He has dismissed his critics as people who are playing politics. The latest twist in the scandal is that Pacheco drew on money from Taiwan for his successful campaign in 2002.
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