by Rod Hughes

Time was when folk wisdom urged savings in dollars as a hedge against high colon inflation rates. But that dollar popularity is on the decline during the past three years, according to the daily La Nacion.

In 2004, 51% of savings was in dollars. By last August, it had dropped to 43%. These figures include bank accounts, deposits by the Central Government and Banco Central. This figure includes only movement inside the country, not foreign banks or other investments.

Dollar credit is also declining. In 2004, it represented 56.5% of all credit granted here. Last August, the figure was 51%. According to Central Bank chief Francisco de Paula Gutierrez, the main reason is the change from mini devaluations of the colon to a fluctuating exchange rate.

De Paula Gutierrez explained that in the old system it was easy to predict what the exchange rate would be at any given time in the future. But, shortly after the system change on Oct. 17, 2006, the colon rapidly rose in value before dropping again as it stabilized, from more than 500 colones vs. the dollar to the high 400s.

Another factor in making the dollar less attractive, especially for companies paying back loans, is that the internal inflation rate has dropped from 14% in August, 2005, to 8.56% last August. That means that to pay back a dollar loan, one is not paying in cheaper colones as much as before.

Finally, executive director of the Costa Rican Banking Association Maria Isabel Cortes notes that the dollar itself is weaker against other foreign currencies. Although this reduction in dollar credit and savings may bode ill for some people, there is a bright side for the economy. The International Monetary Fund has warned Costa Rica repeatedly against high dollarization, especially for those paying back dollar loans with colon earnings.

With lmore dependency on the national currency, Banco Central gains more clout in controlling the number of colones in circulation—the more colones on the street, the higher the inflation.