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Friday, January 29th, 2016  |  USD: Buy 531.29 / Sell 543.92
20 years

Costa Rica’s Central Bank considering devaluation of exchange rate

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(Archive)

September 17th, 2015 (ICR News) Costa Rica’s Central Bank is considering a devaluation of the colón and an adjustment to the Bank’s key interest rate, acting Minister of Finance, Jose Francisco Pacheco said Wednesday on the radio program Nuestra Voz.

 

The possible adjustments, which were not detailed, are intended to boost the national economy and would also be welcome news for those who earn or have savings in US dollars, which would purchase more colónes should the Bank devalue the currency.

 

A weaker colón would also be welcome by the country’s export sector, as it would make their goods cheaper for their overseas customers.  A weaker colón could also make the country more attractive for multinationals and foreign investment.

 

Pacheco said a decision on a possible devaluation and adjustment of the Bank’s key interest rate is urgent.  “In a week or two we will have an answer,” he said, adding that adjustments are becoming increasingly necessary.

 

However, Pacheco said that a rapid, “shock” devaluation of the colón should be viewed with caution, as it could lead to inflation.

 

Devaluation of the colon would also mean that the country would ultimately be paying more for its foreign debts, as the government collects tax revenue in colones but must pay its foreign debts in dollars, which would become more expensive versus the colon.

 

Pacheco did not elaborate how the Bank would act in order to devalue the currency if such a decision is made, for example through intervention on the MONEX market, or another method.

 

Pacheco said that an additional downward adjustment of the Bank’s key interest rate, which has stood at 6.55 percent since September 9th after having already been cut multiple times this year, is also under consideration.

 

Pacheco said that despite a series of rate cuts this year, the cuts haven’t necessarily been reflected in interest rates being paid by businesses and consumers on their loans.

 

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  • disgsted

    Mortgages, Cable TV, Internet, Rent of apartments or property most all are in agreement in dollars anyway. Usually, in the past during the “Christmas Bonus” the colon does not devalue. I feel for those who work here for low wages and now worried about how their income can be devalued 10-20% overnight. Is it true that many in government get their pay in DOLLARS in stead of colons, or floated ? Also we were told the national bank was not going to interfere with the value of the colon to the dollar and see how it fairs on the open market. I guess that was all propaganda .

    • Stacy Cruz

      Just heard, 2 minutes ago, the the USA is NOT changing the federal interest rates. Of course that can change…

  • Yeims

    If this is passed, it will have been a long time in coming. It is my understanding that the dollar should buy about 600 or more colones.

    • http://insidecostarica.com/ Timothy Williams

      Just FYI, there is no “passing” this in the legal/legislative sense (no bills, no ‘votes’ or anything of that nature). It will be decided behind closed doors (not open to the press or public) amongst the country’s bankers and finance chiefs.

      • prdatki

        Sneaky little Devils reminds, reminds me of the folk”s in Washington!

        • Stacy Cruz

          Lol please remember that you mean Washington DC…. not Washington State.

    • Stacy Cruz

      My ssi is around $1,130 usd. I get 679,000.00 colones give or take. I try to use the best, ongoing6, calculator that has correct exchanges… lol

      • disgsted

        Lets say argument sake you get 535 /540 colons to the dollar That puts you right at 600,000 +/-. You’re getting a hell of a deal. Where can I get this exchange?

  • prdatki

    The first thing the President needs to do is pass legislation that would cut all pay s and benefits by 50% , to all Government and Public Sector.Audit RECOPE, ICE and AYA. I would guess the top 100 or more officials should be doing Life at very hard labor.

  • winkdarren

    This article forgets to point out, that devaluation of the Colon helps the government meet its payroll obligations. Since employees are paid both salary and pension in colonies, they effectively have to pay less since they borrow in USD. This articular also fails to point out, that the cost of servicing the debt does go up, but a great deal of government revenue is in fact collected pegged to the USD. Overall this benefits the economy, helps the debt crisis, helps the deficit – and hurts the poor.

    • http://insidecostarica.com/ Timothy Williams

      All very valid and good points to make. Thank you for the comment!

    • zzzzz

      “but a great deal of government revenue is in fact collected pegged to
      the USD. Overall this benefits the economy, helps the debt crisis, helps
      the deficit”
      That doesn’t make any sense
      If they devalue the colon and still keep it pegged to the U$ how does “collected pegged to the USD” work? to benefit the economy more?
      If they devalue, the cost of imported goods such as fuel goes up.
      Cost of servicing USD denominated debt goes up.

      Cost of government capital expenditures go up and expect minimum wage to go up.
      Unless salaries are indexed consider this a tax

      • winkdarren

        One of the biggest and most important examples is, Customs, its a % based on the value which happens to be a calculated in USD and a huge source of revenue for CR. I believe Inside Costa Rica had a thing on this a few years ago and customs made up something like 40% of total revenues.

        • zzzzz

          interesting but whatever denomination customs would base it’s duties it would still be the same since duty is a percentage of the value based on cost + transport + insurance

          • winkdarren

            Yes, but my point is that regardless of the value of the Colon, customs is revenue in USD.

          • zzzzz

            What you are saying is that the revenue generated in duties is USD and therefore as the Colon depreciates in comparison it represents more revenue but in fact that is not the case since the duty imposed is a fixed rate based on the value independent of whether paid in Clolones, USD or porc chops. The revenue generated by customs is not foreign revenue and it is simply a tax.
            If the relative cost of the imported goods goes up (since it is priced in U$) because of currency depreciation, so does the net amount of tax and in that way maybe you can say revenue goes up but by the same token, there is a direct correlation to a diminution in spending if the price of goods go up.
            Exports such as from agriculture- which does not represent the most important part of the economy- sold in U$ does bring in more bucks but all those tax free trade zones would most likely not bring additional net benefit to the country other than make them marginally more competitive.

          • winkdarren

            Since the duty / revenue is generated in USD, and almost of government bills are paid in Colonies. This effectively allows the government to have considerable amount more colonies to pay the government employees.

          • zzzzz

            No it isn’t. Duty does not generate USD.
            Duty is a tax based the value of the goods, period.
            It is of no consequence how it is paid and it does not generate USD for the government.
            You pay in Colones and if they give you the option to pay it in Dollars, it changes nothing as it is equivalent to you going to the bank and making the exchange there and still paying the same amount.
            No one is changing their Colones to USD to go to customs to pay a fixed dollar amount, it is a % of the value and not USD income in any way.
            Only in cases where there is a fixed USD charge would the price differential come into play

          • SDPUS

            When a countries currency is de-valuated it could benefit from the lower cost of its export of goods, which become cheaper to buy by customers in countries whose currencies are stronger.

            Governments around the world are often tempted to lower, unnaturally, their currency rates in order to benefit from the lower value of the national currency.

            Lower currency value encourages exports and discourages imports, improving the country’s trade deficit and imbalances.

            However, the average citizen of a country with a recently devalued currency, could suffer from higher prices of imported goods and overseas holiday costs.

          • zzzzz

            completely agree

  • Ben

    Good luck to the poor and middle class. The rich exporter will live better but the poor that pick the pineapples and fruit will starve to death and expect more protest very soon if this happens.

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