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August 12th, 2007
For many years I suggested here in this blog, in The REAL Costa Rica and elsewhere that the smart person living in Costa Rica (or for that matter anyone who keeps money here), should always pay using colones, but keep their money in a dollars account. There was a good reason for this. The colon was, for many years, on a system of scheduled devaluation that made holding colones a losing proposition.
I am now doing a 100% change in that position. If this subject interests you, read on…
When I first arrived in Costa Rica, the colon was valued at about 372 colones to the dollar. I watched it devalue every day until last October, 2006 when the Central Bank changed its policy and allowed the colon to float against the dollar, thus allowing the market to determine the exchange rate. I blogged about this here. The Central Bank permitted both the state and private banks to set their own exchange rate.
At the time, I had no idea exactly what would prevail, but after ten months, I am amazed that that the colon has maintained total stability against the dollar. If you look at the exchange rate chart in that October post, you will see the exchange rate today is within 1-2 colones set by the banks in October 2006! Incredible…
So why the change in position?
It is becoming more and more clear that the correct exchange rate against the dollar should be (depending on your source) somewhere around 464-468 colones to the dollar. The Central Bank has been making noises about this for some time now as have the World Bank and others. This makes perfect sense if you think about it as the dollar here in Costa Rica has not seen any devaluation even though all other major currencies (The Euro for example) have reflected this devaluation. Why would the dollar be worth the same here when it is worth less in nearly every other country?
It is now my opinion that sometime within the time period of from 4 to 8 months from now, the Central Bank may very likely set the exchange rate to somewhere in that range (high 460′s). See why below. This will devalue the dollar against the colon and THAT will have a profound effect on those of you with dollar accounts or CD’s here in Costa Rica.
Just some of the effects will be:
- You will be able to buy dollars with fewer colones.
- You will receive fewer colones when you exchange dollars. Not good.
- Anyone receiving a salary or other income in colones will receive a windfall increase in pay or income.
- The cost of tourism will increase accordingly as the dollar will buy less as it does now in numerous other countries. The Euro is a great example.
- Money kept in a dollar account will be worth about ten percent (10%) less overnight.
- Those who have their social security benefits sent to Costa Rica will find they will have less buying power.
The Central Bank has for some years been very concerned about dolarization (see other Post) and this change would not only resolve that issue completely, it will have a profound effect on the national debt.
The national debt is currently running to about $10 billion, and has become a huge problem for Costa Rica. To retire this debt would require a payment of almost $3.000 per person, a staggering number given that that is about the average yearly income for a family in this country. In fact, the servicing of this debt is so expensive that only a small portion of the country’s income is actually being spent on maintaining Costa Rica. This helps explain the poor roads condition, insufficient policing (crime), and numerous other issues with the country’s infrastructure. Thus it is easy to see why it is truly is a possibility that the the Central Bank may take this action. This in turn, would likely allow the country to borrow at lower interest rates.
So what if the Central Bank does not do this? Well before October 2006, if you held colones, you watched as your money devalued daily. Not a happy condition! But since October 2006, this is no longer an issue! The currency is stable.
So as you now have a choice, why take the chance? You have nothing to lose and a lot to gain.
Therefore, it is my opinion that the smart person now hold colones and not dollars. If the Central Bank does revalue the colon, you stand to make a windfall of about 10% if your money is in colones! If they do not revalue, who cares? You really lose nothing as the colon is now stable against the dollar.
Follow-up and related posts have been made.
To see them please click http://blog.therealcostarica.com/category/banking-in-costa-rica/
Filed under Banking & Finance, Banking in Costa Rica, Cost of Living, Cost Of Living Costa Rica, Costa Rica, Life in Costa Rica, Living in Costa Rica, Retire in Costa Rica | Comments (30)