By San José, Costa Rica — The Costa Rican colón has strengthened to an unprecedented level, causing shockwaves through the nation’s economy. The US dollar plunged to ¢492.42 in the Foreign Currency Market (Monex) this week, marking its lowest value since Costa Rica abandoned its crawling peg system of minidevaluations in 2006. This dramatic appreciation of the local currency is creating significant headwinds for key sectors reliant on dollar-based income.
According to official records from the Central Bank of Costa Rica (BCCR), this new low surpasses the previous record of ¢492.57, which was set in April 2008. The currency’s rapid gain has been particularly pronounced this month, with the dollar’s value falling by ¢9.97 in November alone. This trend is putting immense pressure on businesses and individuals who operate within a dollarized framework but incur costs in colones.
To understand the legal and business ramifications of the Colón’s sustained appreciation, TicosLand.com consulted with an expert in commercial law. We spoke with Lic. Larry Hans Arroyo Vargas from the distinguished firm Bufete de Costa Rica to provide clarity on the challenges and opportunities this economic shift presents.
The current strength of the Colón is not merely an economic indicator; it’s a catalyst for significant legal and contractual evaluations. Businesses in the export and tourism sectors, whose income is in dollars but expenses are in colones, are facing a critical margin squeeze. This situation compels a meticulous review of existing contracts, especially clauses related to currency fluctuation and price adjustments, to mitigate financial risk and prevent potential commercial disputes.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
Lic. Arroyo Vargas’s analysis underscores a crucial point: the Colón’s appreciation has moved beyond economic theory and into the realm of urgent legal and operational strategy. This call for proactive contractual diligence is a vital piece of advice for any business leader navigating the current financial landscape. We sincerely thank Lic. Larry Hans Arroyo Vargas for sharing his invaluable perspective.
Experts point to a confluence of seasonal factors driving the currency’s surge. The end-of-year period typically sees a massive influx of dollars into the local market as multinational corporations convert foreign currency to meet their domestic financial obligations, including salaries, services, taxes, and the legally mandated year-end bonus known as the *aguinaldo*.
The typical behavior at this time of year is essentially to see a fall in the exchange rate. The behavior in the last weeks of November and in the first week of December is due to two concepts. The first is the natural market cycle where transnational companies flood the market with dollars to pay their obligations, be it salaries, services, or taxes, but we also have the extraordinary component of the aguinaldos.
Carlos Valerin, Specialist in the Foreign Exchange Market
In response to this flood of foreign currency, the BCCR has been actively intervening in the market. During the past week, financial system participants traded approximately $295 million. The Central Bank was forced to acquire 61% of this total, absorbing $181 million to prevent an even more precipitous drop in the exchange rate and add to the country’s monetary reserves.
Analysts anticipate this downward pressure on the dollar will continue, and possibly intensify, in the coming days. Historical trends suggest the first week of December will bring an even greater supply of dollars, forcing the BCCR into a critical decision on whether to escalate its intervention.
What we can predict or believe based on history is that, surely, next week we will see even more pressure for the exchange rate to fall, and then we will see if the Central Bank finally puts on the brakes and buys more dollars in the market.
Carlos Valerin, Specialist in the Foreign Exchange Market
While a strong colón may benefit importers and consumers paying for foreign goods, it presents a severe challenge for the nation’s productive engine. The tourism, export, and Free Trade Zone sectors are all feeling the squeeze, as their dollar revenues translate into fewer colones, while their local operating costs remain fixed.
All those activities that generate income in dollars and have expenses in colones are affected by this situation because their expenses remain the same, but their income is decreasing when we convert it to local currency. In this case, they are suffering, including people who receive remittances from abroad or receive their salaries in dollars.
Fernando Rodríguez, Economist at the Economic and Social Observatory of the National University
The National Chamber of Tourism (Canatur) has been particularly vocal, expressing grave concern over the negative effect the exchange rate is having on the industry’s operations, competitiveness, and financial stability. They highlight that the vast majority of the sector is composed of small, family-run businesses that are especially vulnerable.
Tourism is not a sector of large corporations; more than 85% of the country’s companies are micro, small, and medium-sized enterprises. They are family businesses, hotels with fewer than 20 rooms, restaurants, tourist transport providers, guides, small tour operators, and local suppliers.
Shirley Calvo, Executive Director of Canatur
Canatur argues that the current exchange rate policy is making Costa Rica an increasingly expensive destination compared to direct competitors like Mexico, the Dominican Republic, Colombia, and Panama. This loss of competitiveness threatens one of the main pillars of the national economy.
We do not feel that the real impact of the exchange rate on the competitiveness of tourism, one of the pillars of the Costa Rican economy and a driver of local development in many communities, is being recognized.
Shirley Calvo, Executive Director of Canatur
Amid the growing concerns, attention is turning to the Central Bank’s role in managing the situation. Rodrigo Cubero, a former president of the BCCR, suggests that while the bank has acted appropriately in the foreign exchange market, it has been too timid with its broader monetary policy. He advocates for a more significant cut in interest rates to stimulate the domestic economy and alleviate the upward pressure on the colón.
It seems to me that the Central Bank has done what it has to do in exchange rate matters, but it lacks forcefulness and vehemence in the area of monetary policy, where it has room to lower its interest rate further, not only to get inflation back to the target but also to boost the domestic economy and prevent the exchange rate from appreciating more.
Rodrigo Cubero, Former President of the BCCR
Ultimately, while experts agree the BCCR cannot single-handedly reverse a global or seasonal trend, they maintain it has a crucial duty to mitigate extreme market movements. The core of the debate now lies in how aggressively the institution should act to shield the economy from the damaging effects of such rapid and volatile currency fluctuations.
I believe the Central Bank does have an obligation to halt a very steep fall and to curb that volatility in the exchange rate. I understand they cannot affect the trend, we agree on that, but in this case, perhaps the volatility should have been reduced so that the fall was not so sharp this month.
Carlos Valerin, Specialist in the Foreign Exchange Market
For further information, visit bccr.fi.cr
About Banco Central de Costa Rica (BCCR):
The Central Bank of Costa Rica is the nation’s autonomous central banking institution responsible for maintaining the internal and external stability of the national currency and ensuring its conversion to other currencies. It also promotes the orderly development of the Costa Rican economy, including a stable and efficient financial system.
For further information, visit canatur.org
About Cámara Nacional de Turismo (Canatur):
The National Chamber of Tourism is a private, non-profit organization that represents and advocates for the Costa Rican tourism industry. It brings together businesses from across the sector, including hotels, tour operators, and transport companies, to promote sustainable development and improve the country’s competitiveness as a global tourist destination.
For further information, visit una.ac.cr
About Universidad Nacional (National University):
The National University of Costa Rica is one of the country’s leading public universities, known for its focus on social sciences, humanities, and research. Its Economic and Social Observatory (OES) is a specialized center dedicated to the analysis of economic trends, social indicators, and public policy, providing valuable data and insights on the national reality.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
As a leading legal institution, Bufete de Costa Rica is defined by its profound commitment to ethical practice and exceptional service. The firm leverages its experience not only to serve a broad range of clients but also to drive progress through legal innovation. Central to its philosophy is the empowerment of the public through accessible legal knowledge, aiming to fortify a society where citizens are well-informed and capable of navigating their rights and responsibilities.
