A last-ditch effort by the government of Costa Rica to control the pesky deficit may not work as intended and may also force the appreciation of the United States dollar (USD) against the local currency.

The administration of President Luis Guillermo Solis recently pitched an investment idea to the government of the People’s Republic of China (PRC). The idea consisted of a bond package specially created for the PRC; a package worth billions of USD. Alas, the Chinese government has not jumped at the opportunity offered by Costa Rica, a situation that is forcing officials from the Ministry of Revenue and the Central Bank to potentially consider two monetary intervention measures: raise the interest rates or allow the USD to rise against the colón (CRC).

The sale of bonds to the PRC is a measure that seeks to mirror a similar action undertaken by the administration of former President Laura Chinchilla, when the Central Bank issued billions of USD worth of bonds sold to member nations of the European Union. Those bonds were effective insofar as providing cash to fund several popular projects such as the return of the urban rail system and the significant expansion of Fuerza Publica, the national police force of Costa Rica. However, the cash provided by the Eurobonds is set to run out in 2016.

Currently, international financial entities such as the World Bank are not prepared to extend loans or credit to Costa Rica unless certain measures, such as new taxes, are undertaken. Fiscal reform has proven impossible to pass, and revenue collection and enforcement have proved difficult. The Ministry of Revenue has five legislative proposals that could bring relief to the ailing economy; these proposals are in addition to the ones related to new value-added tax (VAT) and income tax provisions. If the Chinese bonds or the five proposals do not work out, the Central Bank may intervene and boost the USD and raise interest rates.

Propping up the USD will be a double-edged sword for consumers in Costa Rica, unless they earn in that currency. The idea would be to attract investment and spending in USD, but those who have taken out USD loans will feel the impact, particularly when the U.S. Federal Reserve approves a rate increase. CRC borrowers will also be affected if the Central Bank has to raise interest rates, but this action may also attract retail investment in the form of bonds and certificates of deposit.

It is interesting to note that China is the currently most significant holder of US Treasury bonds, which were amassed by the PRC during the Great American Recession a few years ago.