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Costa Rica Currency Continues Rise vs Dollar

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Published on: 2013/01/22


January 2013

The Costa Rican Economy is experiencing an unprecedented entry of US Dollars as world wide investors seek productive returns.  The influx of dollars has become a problem for Costa Rica’s long standing monetary policy, which is to “loosely peg” with the dollar, so that the exchange rate stays near 540 Colones per USD — the Colón is currently trading at the “established floor” of 500.

¿Dólares ó Colones?

Dollars flood the Costa Rican economy for two major reasons:

  1. Foreign investment into the Costa Rican economy — Walmart, IBM and many other firms have invested hundreds of millions in the past two years
  2. Foreign Exchange (FOREX) traders — speculators will purchase Colones,  currently yielding near 9%, and give up dollars which are currently yielding near 0.5%.

The question of the increasing value of the Colón vs the continually decreasing value of the dollar has many groups in Costa Rica in a fierce debate.  The continual increase affects business, mostly the tourism and the export trades.

Exporters receive payment in foreign coin, but then must pay for services in local currency.  Tourism suffers because tourists can purchase less vacation for their money.  However, the increasing value of the currency leads to a more stable environment and an increase in worldwide investment and which eventually means more wealth for the citizens of the country.

Costa Rica can leave this situation alone, causing their exports and tourism to suffer, slowing the economy.  An alternative is to artificially lower interest rates to better match the USD, further accelerating the economy and possibly causing large inflation.  They can also print more Colones which causes inflation and modestly accelerates the economy.   Another choice is to release the Colón from the US Dollar, allowing the Colón to float in the international currency market.  There are even cries to abandon the local currency and simply accept the dollar as the new currency.

Any decision will need to be done quickly, since Costa Rica is a relatively small nation with a small economy.

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