The Depreciation of the U.S. Dollar in Costa Rica

For nearly twenty years, Costa Rica’s colon depreciated against the dollar in a slow and steady process carefully controlled and monitored by the Central Bank.  In 2006, the decision was taken to replace this regime of mini-devaluation with a fixed band system.  This new method of defining the rate of currency exchange is still controlled by the Central Bank, who set a maximum and minimum amount for the value of bought and sold dollars against the colon.  Individual financial institutions then have the freedom to set their own rate of exchange for the two currencies within those boundaries.
Over the last 12 months, the colon has seen an appreciation against the dollar which has had various dramatic knock-on effects in the Costa Rican economy.  The sectors which have felt negative consequences from the changed system have been very vocal in expressing their concern at its effects on their businesses and on the economy as a whole.

The tourism industry has been one of the hardest hit by the devaluation of the dollar.  The Costa Rican tourist industry is still feeling the pinch caused by the reduced tourist numbers in 2008 in response to the world recession and now is faced with prices within the country seemingly higher for the visitor, obviously not an appealing prospect for any holidaymaker.  In addition to the reduced attraction of the country as a tourist destination, the tourist industry faces higher costs for its operations, further threatening its profits.  Hotels, tour companies and other tourist related businesses receive their income in dollars but must change their capital to local currency in order to complete financial commitments incurred in offering their services.  These commitments come at greater and greater cost to the service provider as the dollar continues to depreciate.

Foreign companies operating out of Costa Rica and export companies face the same difficulties.  Well-known fruit exporters, Dole, reported job losses in the Limon location of their company in October of this year due directly to the recent depreciation of the dollar.  Other international fruit exporters have expressed concern over increased operating costs that they are facing as a result of the unfavorable dollar exchange rate.  The Costa Rican government hopes that the country’s political stability, low corruption levels and qualified workforce will continue to make it an attractive investment choice for outside companies.

Costa Rica has long been a desirable retirement location for North Americans, hoping to live out their golden years in a warm climate and in relative comfort.  However, the pension paid in dollars is no longer providing retirees with such a comfortable lifestyle.  Those reaching retirement age in the United States may be tempted to look for a retirement destination where their money has more value.

The Central Bank remains firm against those clambering for regression to the previous system, or at least relief from the volatile nature of the exchange rate and the dollar’s depreciation.  The reason for the change to the band system was the reduction of Costa Rica’s two figure inflation rate and there is an obvious reluctance to see inflation rising abruptly once again, as a high inflation rate hits the poorest members of the population hardest.

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