In Costa Rica, a strong U.S. dollar traditionally supports key economic sectors, such as tourism and exports, by making the country more competitive internationally. However, from June 2022 to March 2024, the local economy faced a challenging scenario as the Costa Rican colón appreciated significantly against the U.S. dollar. This 24% decrease in dollar value has led to reduced profits for those earning in U.S. dollars and presents complex economic challenges that require urgent attention.
While lower repayments on U.S. dollar-denominated debts might seem advantageous, the overall impact of a stronger colón is detrimental to the broader economy. It has negatively affected job numbers, the competitiveness of the nation, the sustainability of tourism enterprises, economic growth, tax revenues, and local manufacturers.
Experts in finance and industry leaders warn that as the colón strengthens, the cost of living and doing business in Costa Rica increases in the medium term. A strong local currency means that more dollars are required to purchase goods and services, deterring foreign investment and slowing economic development. “The discrepancy between earning in dollars and spending in colónes results in notable financial losses,” explains Daniel Suchar, an economic analyst.
Moreover, the appreciation of the colón leads to cheaper imports, which undermines the competitiveness of domestic producers. According to Suchar, businesses, particularly in tourism, might increase their prices to adjust to the lower exchange rate, but there is a risk that these rates won’t be reduced subsequently.
Currently, the dollar purchase rate is under 500 colónes. The Central Bank of Costa Rica’s reference rates for early April 2024 stood at 497.74 colónes for buying and 505.73 colónes for selling. Banks offered buying rates ranging from 491 to 494 colónes and selling rates from 506 to 513 colónes.
Achieving a balanced exchange rate is crucial for minimizing repayment burdens for dollar debtors and for maintaining Costa Rica’s attractiveness for foreign investments and job creation. A universally acceptable exchange rate is difficult to pinpoint, but as economist Gerardo Corrales suggests, an ideal rate would be around 620 colónes, which previously did not provoke concerns among economic stakeholders.
The economic sector is particularly concerned about an exchange rate below 500 colónes, as it suggests a decrease in competitiveness and potential job losses. Proposed interventions include Central Bank actions to moderate the appreciation of the colón, reducing the monetary policy rate, enhancing the coverage market, adjusting the minimum legal reserve, and addressing delays in decision-making, such as the late payment of the Latin American Reserve Fund loan.
To capitalize on a weaker dollar, individuals and businesses can take several strategic actions: accelerating payments on dollar loans if incomes are in colónes, purchasing goods and inventory while the dollar is low, investing in dollar-denominated financial instruments following thorough risk-return analysis, saving in dollars for future gains when the exchange rate increases, and taking advantage of cheaper international travel costs.
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