The President of the BCCR, Rodrigo Cubero, presented the issue of international reserves and stressed that this means that they are external assets of immediate availability, which implies that it is not possible to invest in government bonds, as some have proposed.
“If the Central Bank did not have these reserves in instruments that can be easily convertible to cash in international markets, then it would not be able to count on the dollars that are needed to be able to intervene in the foreign exchange market,” added Cubero.
“The fiscal problem must be fixed at its root, which is the imbalance between government income and expenditures. In other words, we must find a way to increase revenues and lower government expenditures permanently, ”he said.
“What would happen if we, in this situation, used the Central Bank’s reserves to finance the Government? What could we generate? If we start to play with those reserves and use them for what they are not made for, what we can gain is an absolute loss of confidence in the government’s ability to pay, to meet its payments, and in the Central Bank’s ability to intervene in the foreign exchange market when you really need to. And that generates those losses of confidence. They can generate speculative attacks or self-fulfilling prophecies via expectation, ”he explained.
Lowering reserves significantly increases the likelihood of stress in the exchange market and materializes the dilapidation and possibly the depletion of international monetary reserves.
“This idea of using the international monetary reserves of the Central Bank to finance the Government is not only illegal because it is expressly prohibited by the Organic Law of the Central Bank, but it is absolutely dangerous, inappropriate and counterproductive, especially at this time,” he explained.
The Bank’s president pointed out that currently the reserves are invested in fixed income instruments, such as bonds or deposits that are safe and very liquid, with a low exposure to risk.
Previously, to the presentation on international reserves, Cubero detailed some of the entity’s actions in the context of the pandemic, including a policy of reducing interest rates to achieve an economic reactivation.
“Never before has Costa Rica had such a low monetary policy rate. And the idea is precisely to help, as far as possible, to mitigate the impact on the cash flow of households and companies that this situation is having, “he said.
Also, the Central Bank has been injecting liquidity into the markets when it has been necessary to alleviate situations of systemic attention to liquidity. For this, a line of credit was introduced to finance companies for up to 700,000 million colones to help reduce interest rates and increase the terms with which debtors take credit in the private sector.
“At this moment, what many debtors are needing is a payment arrangement, extensions or adjustments of their credits to give them an aid, to have more oxygen in the service of their debts. And that is what many financial intermediaries have already been doing. But with these resources it will be possible to transmit much better conditions in those payment arrangements to the debtors. And in the coming year that is going to be fundamental for the economic recovery ”, he emphasized.
He also explained that the General Superintendency of Financial Entities (SUGEF) and the National Council for the Supervision of the Financial System (Conassif) have made a series of regulatory adjustments to open up the regulatory space so that banks can give all these extensions and credit adjustments .
“This is what we have been doing with responsibility and commitment, since the Central Bank has a fundamental responsibility to support economic reactivation at times like the present and to strengthen macroeconomic stability, which we all know is a necessary condition for economic growth. ”, He specified.
Finally, Cubero explained that the tension in the exchange market that we are experiencing is due to seasonal factors -such as the payment of payroll, bonuses and crops such as coffee and sugar-, the uncertainty in the fiscal issue and the consequences of the COVID-19 in the tourism sector and in exports.