Costa Rica´s Choice: Low Dollar or High Inflation

The loss of competitiveness in exports and tourism generates unemployment, but intervening in the exchange rate will generate inflation.

Thursday, November 4, 2010

There seems no good solution to the problem Costa Rica has with the appreciation of its currency, which has meant a loss of competitiveness of its exports, especially agricultural, by about 5% annually over the past 4 years.

The construction sector, whose contracts are mostly in U.S. dollars, has lost 15% of its revenue in the last year because of Colon appreciation. The picture is similar in the tourism sector, which fails to recover from the effects of the financial crisis of 2008.

All of this has direct impact on employment, which since March 2010, after implying recovery, has averaged 1,100 lost jobs per month in the private sector.

Central Bank insists on not intervening in the exchange rate, explaining that buying dollars in the foreign exchange market leads to higher inflation, which ultimately affects the lower income sectors.



More on this topic

Dollar Price Keeps Down

May 2019

In Costa Rica, the exchange rate of the Colon against the Dollar began 2019 upwards, but from February 6 to mid-May, a fall of up to 26 colones per dollar has been reported.

After the average exchange rate against the Dollar in the Monex wholesale market increased from ¢609.05 to ¢613.87 between January 1 and February 6 of this year, there have been continuous declines in recent months, with one of the lowest levels of the year being recorded on May 16, ¢587.97.

Exchange Rate Resumes Upward Trend

January 2019

In Costa Rica, in the first half of the month, the exchange rate of the dollar with respect to the colon recorded a downward trend, however, from January 16 to 24 it increased almost 9 colones per dollar.

After the average exchange rate against the dollar in the wholesale market fell from ¢610.7 to ¢600.3 between January 8 and January 16, Monex has registered continuous increases in the last few days, rising to ¢609 on January 24.

Dollar price exceeds ¢600

October 2018

The Costa Rican currency continues to depreciate, and the exchange rate in some Banks was already 600 Colones and more per dollar.

The upward trend of the exchange rate in Costa Rica has been observed in recent days. The Central Bank estimates that between September 27 and October 11, the exchange rate in the wholesale market Monex reported a clear upward trend, which is reflected in the increase from ¢570.75 to ¢597.43 per dollar, equivalent to a depreciation of 4.67%. [GRAFICA caption="Click to interact with graphic"]

Costa Rica: Competitiveness and the Exchange Rate

September 2016

Research backed by the export sector concludes that in order to reach the breakeven point, the colon needs to devalue by 20% against the dollar within three years.

Analysis by the economist and former bank manager Gerardo Corrales suggests that the exchange rate needs to depreciate by 20% in order to reach its "real" value and balance. To avoid the effect of a sudden devaluation it has been proposed that the increase be done gradually by the Central Bank.