In recent years, Costa Rica has witnessed significant changes in its economy, particularly in the exchange rate dynamics between the Costa Rican colón and the US dollar. Traditionally, fluctuations in the exchange rate have raised concerns across both economic and everyday life spheres for Costa Ricans; however, the recent trend of colón appreciation has sparked an even deeper debate about the country’s monetary and exchange policies.
Causes of the Colón's Appreciation
The Central Bank of Costa Rica has played a pivotal role in this change of policy. In June 2022, it implemented significant measures to mitigate the effects of a devaluation that was alarming approximately 800,000 debtors who have loans in U.S. dollars but earn their income in Costa Rica colóns. These actions, initially designed to stabilize the currency market, resulted in a surprising appreciation of the colón, returning it to levels not seen in nearly 14 years.
This appreciation can be attributed to several factors. First, the monetary and exchange policy of the Central Bank, which, according to its organizational goals, has the primary objective of maintaining the internal stability of the currency. This implies keeping inflation low and stable, but also ensuring the external stability of the colón. The interventions of the Central Bank in the exchange market have generated a strong appreciation of the colón against the dollar, which has had significant repercussions on various economic sectors.
Another factor which does not seem to be addressed often is the impact of money laundering in Costa Rica. Money laundering has posed significant challenges to Costa Rica’s financial system and has impacted its currency dynamics as well. When illicit funds flow into the country, they often lead to an oversupply of dollars which is then used to purchase goods in the local economy.
Impacts on the Local Economy
The appreciation of the colón has had a considerable impact on the productive sectors of the country. Production costs have increased by approximately 30%, and wages have risen by 51%, according to data from the Costa Rican Social Security Fund. This situation has made Costa Rica perceived as a more expensive country, affecting the competitiveness of local businesses in the global market.
The most affected sectors include exporters, tourism, and free trade zones, who have seen a decrease in their competitiveness due to imported products now having lower prices compared to local products. This has led to a chain reaction where local products are being displaced from supermarket shelves by more economical imported alternatives
Outlook and Recommendations
According to local Economist Gerardo Corrales, it is crucial for the Central Bank to consider adjustments in its exchange policy to avoid further damage to the economy. A more neutral exchange rate, possibly around 600 colóns per dollar, with a moderate annual depreciation that reflects both global and local economic dynamics, is necessary.
The Costa Rica Chamber of Tourism (CANATUR) has also manifested that companies in the tourism sector are operating at a loss and that this is not sustainable which puts thousands of jobs in the tourism sector at risk.
The strengthening of the colón is a sign of the deep interplay between monetary policy, the global economy, and Costa Rica’s internal conditions.
While on one hand, it may be seen as an indicator of stability, it also rings an alarm bell for the export sector of the economy and for the country’s competitiveness in the international arena.
Conclusion
In conclusion, while the stability of the colón is important, it is just as important that the Central Bank promote a balance that not only contemplates internal stability but also considers the implications of on the export sector and tourism of the economy. The decisions made today monetary policy officials will be crucial in shaping Costa Rica’s economic future.
