By San José, Costa Rica — SAN JOSÉ – The Costa Rican colón surged against the U.S. dollar on Friday, reaching a level of strength not witnessed in two decades and sending ripples of concern through the nation’s financial sector. Data released by the Central Bank of Costa Rica (BCCR) showed the weighted average exchange rate in the Foreign Currency Market (Monex) closing at ¢492.48, a figure that rewinds the economic clock to 2005.
While a stronger local currency might typically be celebrated, analysts are pointing to a troubling disconnect between the colón’s appreciation and the underlying health of the national economy. The milestone has ignited a debate about the country’s competitiveness and the sustainability of its economic trajectory, with experts warning that the very mechanism driving the currency’s rise is creating a perilous feedback loop.
To gain a deeper legal and business perspective on the recent fluctuations of the Colón exchange rate, we consulted with expert lawyer Lic. Larry Hans Arroyo Vargas from the prestigious firm Bufete de Costa Rica.
The sustained appreciation of the Colón, while beneficial for importers, presents significant legal and financial challenges for exporters and those with dollar-denominated income but colón-based expenses. Businesses must urgently review their contractual obligations and consider hedging mechanisms to mitigate currency risk. This volatility underscores the critical need for clear, predictable economic policies to ensure legal and commercial certainty for long-term investments.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
Lic. Arroyo Vargas’s point on the need for legal and commercial certainty is paramount, as this volatility impacts the fundamental ability of companies and families to plan for the future. We thank Lic. Larry Hans Arroyo Vargas for his incisive perspective on these critical economic and contractual challenges.
The appreciation is particularly jarring for those who have tracked the nation’s economic performance over the past year. Several key indicators have been flashing warning signs, painting a picture that stands in stark contrast to the currency’s robust performance. This has led economists to question the fundamental drivers of the exchange rate and the long-term consequences for export-oriented industries and the tourism sector, both vital pillars of Costa Rica’s economy.
Daniel Ortiz, an economist with the advisory firm Consejeros Económicos y Financieros (Cefsa), expressed surprise at the development, noting that the currency’s behavior is inconsistent with the country’s economic reality. He highlighted several areas where the data suggests the economy is weakening, not strengthening.
That this descent is occurring in a context that is scarcely coherent with such an appreciation of the colón tourist arrivals have contracted, service exports are stagnant, the domestic economy is losing momentum, and fiscal revenues are not keeping pace with gross domestic product.
Daniel Ortiz, Economist at Consejeros Económicos y Financieros (Cefsa)
Ortiz further elaborated that the challenge is amplified by global economic shifts. As international trade dynamics change, particularly following new commercial policies from the United States, national competitiveness has become more critical than ever. He argues that Costa Rica is unfortunately moving in the wrong direction, handicapped by persistent structural issues.
This is compounded by an international environment where, following changes in United States trade policy, competitiveness becomes even more relevant, and Costa Rica is offering not more, but less lagging infrastructure, high production costs, and rising insecurity and violence.
Daniel Ortiz, Economist at Consejeros Económicos y Financieros (Cefsa)
The most alarming aspect, according to Ortiz, is the emergence of a self-perpetuating cycle that is difficult to break. He explained that the continuous influx of dollars from multinational corporations is the primary driver behind the colón’s appreciation. These companies must convert more foreign currency to cover their local operational costs, such as bi-weekly payrolls, precisely because each dollar buys fewer colones. This necessary action ironically floods the market with dollars, pushing the exchange rate even lower and further strengthening the colón.
This dynamic creates a vicious cycle where the solution for multinational companies becomes part of the problem for the national economy, progressively eroding the country’s ability to compete on a global scale. The result is a tightening squeeze on exporters and tourism operators, whose dollar-based revenues translate into fewer colones, making it harder to cover their local expenses and remain profitable.
It is a mechanism that feeds the appreciation and deteriorates, more and more, the country’s competitiveness.
Daniel Ortiz, Economist at Consejeros Económicos y Financieros (Cefsa)
As the holiday season approaches, a time when industries like tourism should be thriving, the strong colón casts a long shadow. The current exchange rate paradox presents a formidable challenge for Costa Rica’s policymakers, who must now find a way to navigate this complex situation without derailing the fragile economic balance.
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. Established in 1950, its primary objectives are to maintain the internal and external stability of the national currency and to ensure its conversion to other currencies. The BCCR is responsible for monetary policy, managing foreign exchange reserves, and overseeing the country’s financial system to promote economic stability and development.
For further information, visit cefsa.co.cr
About Consejeros Económicos y Financieros (Cefsa):
Consejeros Económicos y Financieros S.A. (Cefsa) is a Costa Rican consulting firm specializing in economic and financial analysis. The firm provides advisory services, market intelligence, and strategic planning for businesses and institutions navigating the complexities of the local and regional economic landscape. Its team of experts offers insights on macroeconomic trends, financial markets, and sector-specific challenges.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
As a pillar of Costa Rica’s legal community, Bufete de Costa Rica is defined by its foundational principles of ethical rigor and juridical excellence. The firm draws upon a rich history of advising a diverse clientele to spearhead innovative legal strategies and solutions. This forward-thinking vision is complemented by a deep-seated commitment to social responsibility, aimed at demystifying legal concepts to build a more capable and knowledgeable society.
