Dollar Drops Against Colon in New Exchange System

December 5, 2007
San Jose, Costa Rica

If you’re spending U.S. dollars in Costa Rica, take heed: your money will no longer go quite as far as it used to. Last week, U.S. expats and visitors suddenly found that their dollars were worth less, after the country’s central bank changed its value system.

Since October 2006, the Costa Rica central bank has set a floor and ceiling for the U.S. dollar-to-Costa Rica-colon exchange rate, generally keeping the dollar’s worth between 515 and 520 colones. Since the change, the dollar's worth has dropped to between 495 and 505 colones. Luckily for most investors, however, most property in Costa is priced in dollars, and no realtors or developers we spoke with have plans to raise prices because of this development. We did learn of one hotel, however, that is taking this opportunity to raise its prices 10% (the Jaco Beach Best Western).

What the central bank is doing:

The central bank has decided to relax previous limits on dollar exchanges. The minimum allowable amount for the dollar dropped to 498.39 colones, and is decreasing at 0.06 colones per day. The maximum was upped to 562.83 colones, and this is increasing by 0.06 colones a day. The minimum-maximum range will continue to broaden indefinitely. The Central Bank says it changed the system to lower inflation and to allow the dollar to fluctuate more in accordance with market forces.

While the limits on the dollar have expanded, it is widely expected the dollar will continue to stick close to the lower end, as U.S. financial markets struggle and currencies such as the euro continue to gain against the dollar.

Who is taking losses:

Anyone earning dollars in Costa Rica or receiving pensions in dollars is taking losses with the new system. Businesses taking dollars from tourists and then paying salaries in colones have also been affected, as have many banks with reserves in dollars. State-run Banco de Costa Rica reported losses of around $4 million, according to Costa Rica daily La Nación, while Banco Nacional says it has already lost about $600,000.

Those earning in colones, especially if they have debt in dollars, stand to benefit with the new exchange system.

Your Latin America Insider,

Suzan Haskins