Colon Value Likely to Rise
by Rod Hughes
Residents here who earn in dollars or who have dollar accounts are waiting for the other shoe to drop, when the Central Bank lets the value of the dollar vs. the colon sink even lower. The bank lowered the dollar by 4% last Nov. 21, making exporters and dollar savers unhappy.
As explained by business writer Peter Krupa of The English-language weekly The Tico Times in the Feb. 1 edition, the situation carries the danger to this country of overheating the financial situation, leading to even more inflation than the 10+% suffered last year. The bank may lower the dollar value even further.
“As dollars brought by tourists and foreign investors flood into the Costa Rican economy,” wrote Krupa, “the value of the colon against the dollar continues to push up and nudge the exchange rate down, forcing the Central Bank to intervene and buy up the dollars.. By absorbing that foreign currency, the Central Bank keeps the colon’s exchange rate from dropping below the lower limit.”
In the first weeks of this year, the bank had to step in and buy dollars at a furious clip—$43 million in one week alone. “For every dollar the Central Bank buys,” added Krupa, “it has to emit colones and more currency in the market can mean higher inflation.” Add to that the danger of foreign speculators who buy colones as they grow more valuable, and the inflation is raised again.
Krupa writes that a solution would be a completely free-floating exchange rate and that is what a report late last year by Citigroup economist Jorge Pastrana predicted the bank would do the second half of 2008. It would “eliminate the need to emit colones and, by introducing a greater element of risk, make the colon a less attractive investment” for foreign spculators, notes Krupa.
Meanwhile, La Nacion reports that Costa Ricans are saving and investing more in their own currency. In the past 3 months individuals and companies are investing at a rate of 56% colones vs. 44% dollars. These almost an exact reversal, from before the crawling bands were implemented, when 55% of investments were in dollars. As for loans 50% are now in colones, whereas before 60% were in dollars according to the Central Bank of Costa Rica.