Home Costa Rica Legal TopicsBanking Laws and Regulations Is the Costa Rican Colon currency overvalued

Is the Costa Rican Colon currency overvalued

by rpetersen

The Costa Rica currency is the Colon and many people wonder how the Colon has maintained its valuation in relation to the dollar.   For many years the Colon was managed under a system called a crawling peg which meant that every month the Central Bank would gradually devaluate the currency.  The Central Bank then shifted to a managed system where a band of exchange rates was established as the goal and the Central Bank would enter the currency market to ensure that the Colon stayed within the established band rates.  In February of 2015 the Central Bank again revised its currency policy and adopted a floating exchange rate system where the Colon is allowed to float against the US dollar and the Central Bank only intervenes when the currency shows excessive fluctuations.

The negative effect of this is that it stimulated the use of the dollar in the local economy and a great number of the loans in Costa Rica are dollarized and the amount of dollar reserves in Costa Rica doubled from 2006 to 2014.  This in turned has increased inflation and made Costa Rican products more expensive to export.  The following graph is the fluctuation of the CUS_CostaRicaosta Rican Colon to the US Dollar   Now compare that with the curUS_Canadarency fluctuations between the US Dollar and the Canadian dollar that has lost about 30% if its value to the US Dollar.   If you look at the exchange rates of other countries such as Chile, Argentina and Brazil their currency is also losing value in relation to the US dollar.  What can Costa Rica expect in 2016 ?  Can it hold the current valuation levels ?  Many doubt that the Costa Rican Colon can remain at current levels.US_ArgentinaUS ChileUS_Brazil







Related Articles