Caribbean & Central America - May 2024

Costa Rican export industry associations have called on the central bank (BCCR) to take action over the continued appreciation of the colón against the US dollar, blaming exchange rates for the recent shuttering of companies and associated job losses.

On 24 April the Cámara de Exportadores de Costa Rica (Cadexco) export association was widely cited by the local media as expressing concern over what it called a “critical situation” due to the weakening of the dollar in the past two years. US$1 was worth ₡696 on 20 June 2022, falling to ₡518 on 31 January this year, according to figures cited by multi-platform business news brand Bloomberg Línea, and the colón has continued to appreciate since then. A stronger colón is an issue for businesses that are paid in dollars but have to spend on inputs and salaries in colónes, because each dollar is worth less than before. This includes most exporters as well as service sectors such as tourism. On the other hand, importers and those who have loans in dollars benefit from a stronger colón.

Cadexco blamed currency movements for the recent closure of agroexport company MyM Productores and the export division of Aquafoods, a Costa Rican seafood firm, with the loss of almost 800 jobs. This follows the shutdown of two banana farms by Standard Fruit Company, the Costa Rican subsidiary of US firm Dole, in February, with the reported loss of 111 jobs. And on 18 April, the Cámara Nacional de Turismo (Canatur) tourism body was widely reported as saying that its affiliates had fired 544 workers due to increased costs associated with the exchange rate, and it forecast that another 918 jobs would be lost in the next year if action is not taken.

Exporters blame the BCCR’s efforts to reduce inflation by sharply increasing interest rates from 0.75% in December 2021 to 9% by the end of October 2022. The bank started to cut rates from mid-March 2023 but industry bodies say it hasn’t done so fast or hard enough, given the fact that the country recorded a -1.77% inflation rate in 2023. However, the exchange rate has also been influenced by the US Federal Reserve, whose policies have meant that the dollar has depreciated against a varied basket of currencies in that time, as well as Costa Rica’s efforts at fiscal consolidation as part of a financing agreement with the International Monetary Fund (IMF), which has reduced country risk.

On 25 April the BBCR announced its latest rate cut, from 5.25% to 4.75%, which may go some way to assuaging the concerns of exporters. Despite criticism from certain quarters, there have been positive recent economic developments, including new figures from the national statistics institute (Inec), published 4 April, which show that the national unemployment rate was 7.8% in the December 2023 to February 2024 rolling quarter, a drop of 3.2 percentage points on the same quarter the previous year.

Then on 12 April the IMF announced it would release another US$270m tranche of financing under the Extended Fund Facility (EFF). In a statement, the IMF said that last year’s fiscal targets were met by “a comfortable margin,” the primary balance is expected to increase this year and debt is forecast to fall to less than 60% of GDP by the end of 2025. It also forecast “robust” growth of 4% of GDP this year. Six days later President Rodrigo Chaves announced the signing of a comprehensive economic partnership agreement (CEPA) with the United Arab Emirates (UAE). These developments may encourage BCCR officials to believe that they have been justified in keeping interest rates higher for longer although pressure is set to continue from business groups if job losses in the export sector persist.

CEPA with UAE

On 19 April President Rodrigo Chaves announced the signing of a comprehensive economic partnership agreement (CEPA) with the United Arab Emirates, which will “significantly enhance bilateral trade and mutual investments between the two countries by eliminating tariffs, reducing trade barriers, promoting the exchange of goods, capital, and ideas, and encouraging cooperation in the private sector”.  According to a report by the state Emirates News Agency (WAM) in English, bilateral non-oil trade reached US$65m in 2023. It adds that the CEPA with Costa Rica would give the UAE “significant market access, with 98% of tariff lines duty-free or with reduced tariffs, including aluminium, polyethylene, heavy machinery, ceramics, glass, copper, and related products, iron and steel and related products, and cement”.