While oil prices have dropped from the $145 per barrel levels of just a few months ago, to less than $36.00 per barrel, Costa Rica has been very slow adjusting gas prices here to reflect that decrease. Somebody is making some serious cash, and it is NOT me.  However, prices are due to come down this week.

Today, tomorrow, or perhaps on Wednesday, after publication in La Gaceta, the price of regular will drop to ¢408 per liter, super will run ¢416 and diesel will cost ¢427 per liter.  As many of my readers are metrically challenged (as am I) the formula is One US gallon = 3.79 liters.

So doing the math ( and someone comment please if I screw this up!)!  Using 550 colones/dollar…

• Regular:  ¢408  x 3.79 liters/gallon = ¢1,546 per gallon or $2.81 per gallon.
• Super:  ¢416  x 3.79 liters/gallon = ¢1,576 per gallon or $2.87 per gallon.
• Diesel:  ¢427  x 3.79 liters/gallon = ¢1,618 per gallon or $2.94 per gallon.

This is really incredible!

These prices are just ridiculous and while about half of what they were last July, clearly do not reflect the fact that oil is trading at less than $35.00 per barrel as of today!

$35.00 reflects  a drop of 76%, yet Costa Rica has  not passed this on to Ticos.  In fact,  it has already sent notice that they are considering an increase as soon as next month. Huh?

Sadly, this seems to not be of interest to anyone, and not even the local newspapers care to ask how can this be? I am amazed that La Nacion or Channel 7 news is not asking the government why these prices are so high…. more than double the cost in the USA.  Worse, this is just another nail in the tourism coffin as tourists are now more and more sensitive to travel expenses.

I will admit to not knowing what expenses Costa Rica must incur to bring the oil to this country.  However, as most oil comes from the middle east, I doubt there is a 100% difference in cost. Further, as Venezuela is just down the road (OK OK ocean), cost to import should be less! Finally, labor costs in Costa Rica are but a fraction of those in the USA.

OK… rant over. I still consider myself a guest in this country so I do try to control my complaining, but I would sure like to build a fire under some hotshot reporter who can ask and get some answers from the government.

Here is her email, and if the topic interests you (and you can deal with my rant)… read on!

My family plans to relocate to Costa Rica, and I would like to know what your thoughts are regarding the recent activity by the Costa Rican Congress ending it’s 84 year old insurance, and telecom monopoly (CAFTA). How do you think this is going to effect the citizens of Costa Rica that have enjoyed a universal health care system, and what do you think the implications are for Americans residig in Costa Rica, that have been able to partake in this system?.

From the tone of your comment, and I get a LOT of these emails/comments, you are one of those believing anything having to do with CAFTA and the big bad horrible USA must be bad for everyone else. If I am wrong, I apologize in advance.

But you got some words right.. just not the facts which are more obscure… so let me explain.

1. The telecom monopoly, like the vast majority of monopolies is a huge, cost wasting enterprise, employing tens of thousands of workers, and is roughly 7 years behind the rest of the world in providing the things over which they have responsibility (technology).

In addition, as with most monopolies it gives awful customer service at ridiculous prices (for Internet and power, not for cell service). The “high speed Internet”, when it DOES work, is painfully slow, and the vast majority of Costa Ricans have access only to dial-up modem service in their homes. It has held the country back economically. strategically, and educationally.

The cell rates ARE well priced, but of the two systems here, the only one that works at ALL is the old TDMA system popular in the USA back in the 1990s. It works great!!

The “new” GSM system is absolutely horrible, works at best only 90% of the time and does not work at all in many locations… yet the monopoly is telling many, many thousands of Ticos to turn in their old working cell phones and buy the new GSM phones. For many Tico families, this is a MAJOR expense. Gotta LOVE those monopolies! In 2009, they will discontinue the only system that works.

This telecom also controls the electric power. Last year we went days and weeks suffering brownouts and blackouts. This was the result of an astonishing lack of simple population planning, and numerous families and businesses suffered greatly. The president had to spend a TON of money buying emergency equipment just to keep the lights lit.

In the history of the world, there have been good monopolies I am sure, but the vast majority provided lousy customer service, a crummy product, at unfair prices… This is why monopolies were outlawed in the USA about 50 years ago.

This model fits here… because there is no competition, they do as they please while giving the customers the one finger salute.

Insurance

You wrote …”the recent activity by the Costa Rican Congress ending it’s 84 year old insurance… monopoly” and “How do you think this is going to effect the citizens of Costa Rica that have enjoyed a universal health care system”

You have things pretty mixed up. First, the congress had absolutely nothing to do with any of this.

The Central America Free Trade Agreement (CAFTA) was voted through by referendum…and was voted on by all Costa Ricans. The PEOPLE passed this treaty… not the congress. Hmmm. I wonder if the overwhelmingly super service provide by their telcom monopoly had anything to do with that vote!

After CAFTA passed, the congress had to alter existing laws to bring them into concordance with the terms of CAFTA that the PEOPLE OF COSTA RICA approved.

This is something that sorta grinds me in emails I receive… the perceived arrogance of those who think THEY know more than the Costa Rican people. I am not saying the writer said or implied this, but others have many times. The Costa Rican people are bright, intelligent, well educated people and right or wrong, they made their will known. Time will tell if it was a good decision, but I can assure you that never in my life have I EVER seen a more informed public on a topic up for referendum. Costa Rica could give civics lessons to any country in the world after the manner in which they handled the TLC (CAFTA).

So now there will be other insurance companies offering policies with wider coverages with larger groups and therefore possibly lower rates. There are dozens of huge international insurers who can now legally sell their products to those of us who live in Costa Rica. Now, perhaps a 50 year old women driver will not have to pay $1,400 per year for car insurance the same as her 19 year old son.

Oh… that’s right! There IS no compulsory insurance so only a very few people ever buy insurance because it can represent more than 10% of their annual income! Enjoy your next trip here! Drive defensively!

Your email implies that the “Universal Health Care” is going away. It is not. THE CCSS (CAJA) is alive and well. Good thing as my wife works for a CCSS hospital!

Oh… and to be clear… “Universal Health Care” is just socialized medicine… and just as in Sweden, Canada, England and other places, the system does not work for anyone except the very poor and seldom works well for them. Lines are huge. Several hours is common at my wife’s hospital. Generic medicine are prescribed to save money, but sadly they are purchased from a variety of countries and there is no quality control and therefore many medicines just do not work. I can vouch personally that that is true.

Waits for a doctors visit can take months and often DO. Waits for major surgery or even some minor surgeries can take years. The poor suffer with this crap as they have to… same as they will soon in the USA. Everyone else buys private insurance so they can see the doctor of their choice at the hospital of their choice a the time of their choice. For those of you who are “Universal Health Care” fans… I wish you well. It looks great on paper, but I have yet to see it work well. I can assure any middle class Gringo tht moves here that you will eventually get CAJA and buy private insurance in case you get sick.

So what do I think the implications are for Americans residing in Costa Rica, that have been able to partake in this system?. Not much… Nothing has changed, just more offerings and some of those are years away. If they use CAJA now, they will continue to use CAJA. If they buy private insurance now, they will soon have other options and perhaps better prices. If they are tired of paying car insurance as though they were an 18 year old male overdosed on testosterone… they will likely be happy with premiums that reflect their age, driving history and experience! Someone may come in and actually offer true hi speed Internet for less than $80 per month WITH reliable service and connections that actually do not die every day at 3 PM. Note I am referring here to TRUE high speed as you would find in most developed countries.

Costa Ricans will benefit I think by better services lower prices (or more for the money they do pay).

Even now, with the arrival of those big awful businesses from the bad ole USA, (like Walmart), customer service policies are changing country wide! Why imagine a Tico who can actually exchange a brand new and very costly TV (but one that was totally DOA right out of the box), instead of having to wait 3-4 months while it gets returned to the factory in Korea for repair!

Can you imagine?

And again… if I misread your email, I apologize… but that’s the problem with email… no visual or aural clues to clarify.  Also, enough others have written about how they hate the USA, big business, Bush, Obama, and God that I am just getting fed up with it.  As a famous bird once sang… Get Over It.

The price of super gasoline would go up to ¢801 per liter and diesel prices would fall by ¢97. Gasoline today is $5.10 per gallon for super, $4.97 for regular and $4.82 for diesel. One US gallon = 3.79 liters, so after this change, a gallon of super will be ¢3,036 or $5.88. With the regular monthly increase coming in July, $6.00 per gallon gas is pretty much assured.

Currently, the cost for a gallon of diesel is $4.82, so this will drop to about $4.11. Sounds like a nice windfall for those who chose to buy dieseled vehicles right? Nope… the government giveth and the government taketh away.

To further offset the loss of tax revenue from diesel, the government plans another little surprise to those who own non commercial diesel vehicles i.e. not your personal car or SUV. Marchamo for non commercial vehicles will double. So if you are currently donating $1,000 per year in Marchamo for your reasonably late model diesel SUV, plan on taking a $1,000 hit come December. About 66,000 private cars use diesel fuel. Last year, owners of diesel cars paid about ¢8,500 million in property tax. If approved, this will double to around ¢17,000 million.

Why is this happening? The idea here is that by reducing the cost of diesel fuel, almost exclusively used by transport semis and delivery vehicles, the resultant savings in transportation costs would be passed on down to the consumer resulting in lower prices at the cash register.

Call me skeptical, but I am way to olde to believe that what amounts to a windfall profit for owners of dieseled vehicles will pass on anything. I expect it to go into their pockets and not into the pockets of consumers. As enforcement would be difficulty or impossible, I am not expecting a reduction in food or other prices real soon.

Whether this will come to pass is unclear, but at least the government is trying to be inventive and try new strategies.

The system was/is simple enough. You were restricted from entering San Jose for about 2 hours each morning rush hour and two hours during the afternoon rush based on your license plate. For me it was rarely an issue, and when it was, I just drove the circunvalación, the road that runs around San Jose and locally known as “the rotundas” because of the numerous traffic circles in that route. Sometimes I’d drive the La Uruca route. No big deal.

Well this all changed this week as the government expanded enormously the restricted areas and the hours of restriction, and yesterday, over a thousand folks learned this the hard way and got a little $10 traffic citation for their ignorance.

The restrictions are based on the last digit of the license plate (placa). 1 & 2 on Mondays, 3 & 4 on Tuesdays, 5 & 6 on Wednesdays, 7 & 8 on Thursdays; and 9 & 0 on Fridays. As my plate ends in a “2″, Monday is my day.

As I said, the problem was never a biggie until the MOPT increased enormously the restrited area and also increased the hours per day. From the relatively small area in downtone San Jose, the restriction has now been widened in all directions to include all area between the circunvalación on the south side, the Hotel Radisson in La Uruca, Calle Blancos on the north, Pavas on the west and San Pedro Mall on the east.  See map at top – click to enlarge it.

The restricted hours were also changed to from 6am to 9am in the morning and 4pm to 7pm in the evening.

The change this week was less for traffic reduction (though it was certainly noticeably less!), than for attempting to force everyone to use public transportation. Gasoline today is priced at $5.10 per gallon for super, $4.97 for regular and $4.82 for diesel, and this new restriction along with the proposed changes should have some affect on drivers. It sure has for me!

One step I think could be important would be to change what happens if there is a traffic accident. Current law (rules?) state that if you have an accident, you must not move the vehicles no matter how minor the accident.

What is worse though, is that not only must you not move the vehicle(s), you must wait until both the police and the insurance investigator arrive! ANyone who lives here can tell of backups sometimes miles long behind some minor fender-bender. Not only is this hugely annoying, it kills me to see maybe 500 to 2,000 cars all waiting in the traffic jam, engines running and burning a ton of fuel. With gas prices soon to exceed $6.00 per gallon, I am sure a few, but not all, will turn off the engines.

The government is also making noises about expanding this to all of Costa Rica.  I suppose they would have to exempt rental cars to avoid hassling the tourists.  Now that would have an effect, especially if they had anywhere near the police to enforce it!

We shall see how all this sakes out, but for now, to those of you living here in Costa Rica but not in the San Jose area, be careful when you come here to visit your friendly local embassy!  This new rules affects access to the US Embassy in Rohrmoser just east of Pavas as well as the Canadian embassy in La Sabana plus numerous others.

Holidays and weekends are not included in these restrictions.

Caution! Rant coming!

As most expats, I watch the current political battle for the Presidency of the United States. I watch as Barrack Obama and others make their stupid claims that they will “do something” about the price of gasoline in the US, now over $4.00 per gallon in 23 states. They just don’t get it. To me, it as is stupid as their claims that they will stem the outflow of jobs from the USA to other countries. I have news for them. The first will not happen without strong leadership and new ideas (which neither candidate has even remotely shown) and it is years too late the do anything about the second.

People love to blame big oil. It is so very convenient to blame those big companies rather than accept responsibility for what is the real problem. We are pigs, and this is not limited to those in the USA. The same is true here.

The USA has about only 4-5% of the world’s population yet uses 25% of the world’s oil! Oil is a commodity and nothing more. All countries use oil and therefore all countries must buy oil on the world markets. Demand affects this price as does supply. The new big kid on the block is China, a country that is now flexing its economic and manufacturing muscle and their needs are huge. Demand! They buy a LOT of oil and that is not going to stop. In fact, it will be just the opposite. The oil companies in the US, as the government of Costa Rica buy oil on the world markets and they pay whatever is needed to meet their demand. There is no real negotiation as someone else WILL pay the asking price.

So who is to blame? George Bush? YES! Bush and every single President of the United States for the past 25 years of so. Also, every member of congress, Republican or Democrat. Not ONE of these clowns has evidenced a modicum of guts and taken a leadership position to wean us off oil, and that CAN be done. Look at Brazil, a great example. Any action we start today will take years to bear fruit, so our leaders bicker, blame each other, blame the other party, blame the oil companies… whatever! Can you imagine a politician standing up and saying that he or she accepts responsibility for the lack of leadership? Many members of congress have been there for years, decades even… and they do nothing! It is time to throw the rascals out!

So what is needed and needs to be done? To answer that, we need to look at both supply and demand. To drop oil prices, either supply must go up, demand go down, or (preferably) both.

Supply

Drill new wells. Simple huh? It is not. Why? We now run afoul of the environmentalists. Everyone wants to do something about the environment. Hell, it is our earth, but oil is in places we want to protect and the oil companies cannot drill there. Much easier to drill in someone else’s country right?

The result? We become subservient to that bonehead in Iran, the Saudis, Hugo Chavez. An entire cadre of world creeps. In fact, is there one major oil producing country that even likes the USA? Between them, they exert enormous control on the USA and its economy. This can not continue. We are at peril.

So the big decision needs to be made. If we are not going to use self control and use less gasoline and oil products (reduce demand), we need to increase supply, but only from our own country (USA). That means drilling new wells in places that will give the environmentalists heart failure.

Even here in Costa Rica, that decision may need be made as there is evidence of offshore oil deposits on the Pacific coast. So far, Costa Rica has not even permitted exploration. I wonder how they will think when gasoline hits $9.00 per gallon. I cannot see how we can have it both ways.

Then there is nuclear power! Oops, here come those pesky environmentalists again. Coal? There is enough coal to produce electric power for the entire USA for 90 years! It is also VERY cheap and there have been new techniques to clean up burning coal. Not as clean as nuclear, but much better than years before. Do you think that 90 years will be long enough to find some real leaders who will wean us, forcibly if necessary, from suckling the breast of big oil? Well certainly not in this election year if McCain and Obama don’t stop stroking us with platitudes and start addressing the real issues.

Besides, silly me! The environmentalists will never permit us to use coal. Heaven forbid!

It also probably does not help that there has not been a new oil refinery built in the USA in 30 years. Why?

Demand

Everyone complains about the high gas prices but that seems to be it. Of course some folks have switched to using public transportation, riding a bike to work, etc. Do you know a lot of them? I do not. I keep in touch with people in the US and no one has really made a lot of changes. Couple of canceled drive vacations.

Here in Costa Rica, they interviewed a bunch of people and asked about the gas prices and how it is affecting them. The poorer folks already use buses as they never had a car in the first place, but the others? They are buying fewer clothes! No kidding! Rather than cut back on driving, they are using discretionary spending to buy maybe one less pair of shoes. Go figure. And Costa Rica has a huge and extensive public transportation network. Get the impression that folks are resistant to the process? Someone needs to do a similar poll or survey in the USA.

But some places in the USA, Los Angeles comes to mind, were never designed around a public transportation system. So how do they cut back? CAN they cut back? If they could, would they? People love their cars and love their freedom to hop in and get away.

Alternatives

So all this us with the alternatives. Hybrid cars are cool, but it takes about two years for the increased cost of those cars to be offset by the decrease in fuel cost. Down here it takes 3-4 years to offet the higher price.

Work from Home. Telecommute?

Alternative fuels? Brazil uses a fuel made from sugar cane I think. Far cheaper. Efficient. Clean. They are far less dependent on oil than most any other developed country. Odd then that our US congress has placed HUGE tariffs on the import of alternative fuels. Yup! Cross my heart!

I can go on, but I am tiring of my own rant. We need leadership. Someone who will maybe place a tax of 100% on any vehicle that uses less then 35 miles per gallon. Imagine a world sans SUVs, gas guzzlers, etc.

Back to Costa Rica. Today’s increase is the sixth this year with another most assuredly coming in July. Gas prices here are government controlled and prices at all gas stations are fixed.

Gasoline today is $5.10 per gallon for super, $4.97 for regular and $4.82 for diesel.

In July, you can pretty much be assured of an $.11 per gallon increase across the board.

When I arrived in Costa Rica, I bought the car that I currently own. Still runs great. To fill up cost me about 7,000 colones (about 8,000 colones in today’s valuation or $15.23).

Today, it costs 30,000 colones or $57.47.

I was gonna go out and buy a new pair of shoes for my wife’s birthday this week.

Changed my mind.

Easy answer! I have not a freaking clue!

Todays exchange rate of about ¢511.41 / ¢518.71 makes absolutely no sense whatever and to me, smacks of some serious manipulation.

I am not the only one who is raising questions about changes that fly in the face of logic. Sadly, Central Bank manager, Roy Gonzalez, rather than reply directly to the many questions, has stated more or less that we must defer to the vast experience of other central banks. Say what?? News flash! The dollar is DOWN. Just which central banker are you listening to? Certainly not the Federal Reserve as they most assuredly know the dollar is down.

Economist and expresident of the Central Bank, Rodrigo Bolanos, thinks that this strong growth that has occurred within the past few days due mainly to a change in the expectations of people. More people having dollars accounts. Say What #2 ??? Let me get this straight! The people decide the value of currency here? Well maybe if the colon were traded internationally in the currency market, but the colon has not yet attained the status of the Euro. Another news flash! There has ALWAYS been far more investment in dollars than in colones. That is why the Central Bank was so worried about “dollarization” in the Costa Rican economy.

The dollar is horribly overvalued here and probably should be floating arount the ¢470 area. The fact that it is not and is in fact being set at levels not reflective of how the dollar is really faring world wide indicates to me some serious hanky panky. Que sorpresa!

One the other hand, this is great news for those who ignored my warnings to get out of dollars (last fall) and later took it in the shorts when the dollar fell. Of course now that the people who DID heed my words are taking it in the shorts… though as they made a nice windfall last December, they actually have made money as they presumably earned interest on their wind fall.

My advice? Pay no attention to me. Take your best guess.

As logic (and the world economy) are clearly not what is affecting the US dollar, there is no point in even trying to make any sense of a system clearly controlled and manipulated by forces that we know not.

Me? As the colon is not reacting normally, I’ll probably split my $$$ equally in colones, dollars and euros, and try to figure out who really is manipulating the currency in Costa Rica.

If you fall into either of the above categories, by all means read on!

Basically, the change is pretty simple. If you are calling any cell phone number, you must now dial 8 first. If you are dialing to any landline phone (home, office etc.) you must first dial 2.

How do you know if a number belongs to a cell phone or is a land line? Easy! All cell phones begin with 3, 8, or 9 (NOT 900 numbers though!)

Anything else is a land line.

Examples:

From Costa Rica dialing to a cell phone, you will dial: 8-xxx-xxxx where xxx-xxxx is the current cell phone number.

From Costa Rica dialing to a land line phone, you will dial: 2-xxx-xxxx where xxx-xxxx is the current land line phone number.

From outside Costa Rica, you will dial your international access code (in the US that would be 011) then the NEW dialing codes, then the number.

Example: From the USA calling a Costa Rica land Line, you will dial 011-506-2-xxx-xxxx and to a Costa Rica cell phone, you would dial 011-506-8-xxx-xxxx.

Now I am sure this is going to cause vast confusion, but if ICE does their job, and they appear to doing so, this should go smoothly.

800 numbers (free) and 900 number (the ones that cost YOU to dial) are unaffected.

The ICE three digit service numbers (113, 115, 199, 193 etc) likewise remain unchanged.

Want more info?

Check out these links (in English)

http://www.grupoice.com/esp/temas/camp/2_8_dig/index_eng.htm

and

http://www.grupoice.com/esp/temas/camp/2_8_dig/doc/preg_frecuentes_7_8_dig_eng.pdf

If you are doing business in Costa Rica, you need to get on the stick to get business cards, stationery, and web sites changed.

If you are from another country doing business here, or if you have family here and need make calls into Costa Rica, you should notify family and employees of these changes.

But, I have also received a lot of email about this topic, so here are some things I am noticing in my travels around San Jose in the past few days. I think they may be important.

First, thanks to all those who wrote to me. If you are one of the many who made a nice “profit” last week, I am happy for you. If you took a little hit, I am sorry, but it is not too late. See below!

Exchange Rates on the Street

You need to be careful out there! Ask about the exchange rate if it is not posted.

I will tell my tale of a visit to ICE, the friendly local communications and electric utility monopoly. For one of my businesses, I buy international calling cards in bulk, usually $200-$400 worth at a crack.

As I have long since learned to never trust someone else’s calculations in financial matters, I was not surprised to find a discrepancy in the amount of my bill. As ICE, in their wisdom, does not accept dollars in payment, I had to pay in colones. This was no big deal, but what WAS a big deal is that they had not changed their computers last week to reflect the new exchange rate. This resulted in them handing me an invoice for 7,000 colones ($14.00) too much. Why? Because calling cards are in dollar units ($10 and $20), but I had to pay in colones! They used 517 colones instead of 498 colones for their calculation!

After a 45 minute wait and much telephone calling, they adjusted their rate of exchange to the rate given by Banco de Costa Rica (who share all ICE facilities). The bank knew and had the correct rate posted, but ICE did not!

Thus here is my first warning to those with ANY financial dealings; be careful that you are getting the correct exchange rate! In the other 15-20 places I visited this week, a surprising number knew nothing of the Central Bank’s changes! At least half were using 520 colones /dollar. Now if we are talking a dollar or so, no big deal. But $400 DOES make a difference. On the other hand, I suppose if you are receiving change from a purchase, you should keep quiet.

Colones vs Dollars

Exchange rates are moving in VERY odd directions… all down. This is odd! On Monday, many banks were at 499-505 buy-sell or even higher.

By mid week, this started dropping! Today, at Banco Nacional, the rate was 495 – 500!

As I have written, the Central Bank had to act and this recent drop was far from unexpected. What IS unexpected is this continued downward movement past the limit set by the Central Bank.

As you know, I feel that the correct exchange rate should be around the 460 colon/dollar mark. As I wrote last week, I thought another 4-7% reduction would occur in early 2008. Maybe though, the Central Bank is going to permit the local banks to continue adjusting downwards similar to how they used scheduled raises for so many years!

If this is true, then I would again suggest getting your money out of dollars and into colones. It may be best not to wait until January. I would also suggest you watch carefully to see if this downward trend continues. If it does, this marks certainly a move by the central bank that will affect you! You would be very foolish to continue to hold dollars if you see this downward trend!

One week is not enough to spot a trend, but clearly, another (almost) one percent was lost this week if you continued to hold money in a dollars account.

Euros

Many folks wrote about putting money in Euros. Euros are at an all time high against the dollar, but that trend will likely not continue. The central banks will only allow it to float so far. It also means little to nothing against a non internationally traded currency like the colon.

However, if you do not wish to take my advice regarding colones, then the euro may be ok. You might not lose anything anyway. This is far more difficult to predict though as NOTHING is valued in euros in Costa Rica, and the only reason banks even have an exchange rate for them is because of the tourists coming from Europe. Me? I am very happy with the Central Bank’s actions, and I believe the colon will continue to gain value over the next six to twelve months.

See related posts:

http://blog.therealcostarica.com/2007/08/12/the-colon-vs-the-dollar-watch-your-money/

http://blog.therealcostarica.com/2007/11/22/central-bank-revalues-the-colon/

Back on August 12, 2007, I wrote a post entitled “The Colon Vs The Dollar – Watch your money!” In that post, I cautioned my readers that the weakening dollar could not long stand firm against the Costa Rica colon. I urged readers to move their funds from their dollar accounts (in Costa Rica banks) to colon accounts as I anticipated that the Central Bank had to act soon to bring the dollar down and increase the value of the colon.

Last night, they did just that. The colon has been revalued to about ¢497 and ¢498.39 to the dollar.

So what is the effect of this? Here are some examples:

First, it means that people with money in Costa Rica dollar accounts lost about 4% of the value of their accounts last night. This is true also of CD accounts. Sadly, those who are here seeking residency (pensionados and rentistas) have lost that percentage from any US dollar accounts they opened as deposits for their residency requirements.

Now let’s be clear on the word “lost”. You lost money only if you intend to use those dollars to buy goods and services in Costa Rica. If you were to withdraw those dollars and return to the US for example, you lost nothing. The US did not devalue the dollar. Costa Rica did!

A standard $60,000 rentista deposit is now worth only about $57,800 or so. I say “or so” as each bank in Costa Rica can still set the exchange rate as they see fit, so long as it stays within Central Bank guidelines. Either way, the money is gone.

If, however, you had your money in a colones account, your money now buys about 4% more than yesterday. If exchanging for dollars, you now need shell over only about 498 colones to get one dollar. If you have CD or deposit accounts, they buy 4% more when they are cashed in.

If you are working here in Costa Rica and you receive your salary or wages in colones, your paycheck just got bigger! Example: Your ¢300,000 paycheck now is worth about $602.00. Yesterday, it was worth about $580.00.

However, if you are paid in dollars, something that has been happening more and more frequently in the past couple of years, you just got hosed (unless your employer is really nice), as you just took a about a 4% pay cut.

I also feel that this will not be the end. The true exchange rate should be, in my opinion, now closer to about 460 colones to the dollar. I think the Central Bank simply could not make that large a change in one shot.

However, I think there is a good chance more adjustments are coming. I am expecting that these may be made in increments of 4-5% each until the proper exchange rate is reached.

I do not think that the next change will be in the very short term (2-3 months) BUT, if you read the August Post, I stated. “It is now my opinion that sometime within the time period of from 4 to 8 months from now…” Well clearly I missed that but came close. Almost 4 months! Therefore, when (and if) the next change comes, I think we should be looking at January-March, 2008.

For the almost fifty persons who wrote to me after the August post and told me you were making the switch, felicidades! For some of the others who thought I had lost my marbles (see some of the comments after the August post) , I hope you at least had your money in euros.

What to do now?

I believe we need to wait and watch a bit to see how the banks in Costa Rica value the dollar. I am 99% sure it will stabilize around ¢500 to the dollar (except at Scotia Bank of course!). If it continues to remain solid, then I believe the Central Bank will make at least one and perhaps two more adjustments.

Polite comments welcome as always!

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.

Comments welcome!

Follow-up and related posts have been made.

To see them please click http://blog.therealcostarica.com/category/banking-in-costa-rica/