Sunday 5 February 2023

In Costa Rica: dollar collapses and prices remain high?

The appreciation of the colon may result in lower production costs; however, it is not necessarily passed on to the consumer in the way of better prices

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Dollar Exchange

¢567.55 Buy

¢576.23 Sell

4 February 2023 - At The Banks - BCCR

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QCOSTARICA – The dollar exchange has fallen ¢32 colones so far this year. In the last seven months has gone from a high, in June 2002, of almost ¢700 to below ¢600 at the beginning of the month, to around ¢560 today.

The exchange rate has an indirect impact on inflation. In a country that imports most of what it consumes, the foreign currency exchange rate places upward or downward pressure on the final cost to the consumer.

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However, the ‘exchange rate pass-through effect’ (the effect of changes in the exchange rate of a domestic currency for foreign currency) is not immediate and does not occur for all goods and services.

For example, prices related to recreation, food, and tourism continue to rise at the moment, at a time when the colon appreciates; while fuels have fallen, with expectations to fall even more.

Why does all this happen? The answer is multifactorial.

Josué Alfaro, in his article in El Financiero, explains the ‘pass-through effect’ acts proportionally,  in other words, an increase in the price of the dollar usually translates into higher prices for the consumer and a downward behavior acts in the opposite way.

Róger Madrigal, president of the Banco Central de Costa Rica (BCCR) – Central Bank, explained that some imported products experience a faster effect from the fall in the price of the dollar; but others may slow down or not see it at all.

An example of a type of product in which there is an immediate relationship is that of fuels. in Costa Rica, gasoline is imported by the State through the Refinadora Costarricense de Petróleo (RECOPE) – the Costa Rican refinery that refines nothing and its prices are regulated by the regulatory authority, the Autoridad Reguladora de los Servicios Públicos (Aresep), which implies that a ‘lower’ dollar translates directly into lower import costs and lower prices for the population.

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The line of events is not so direct in other cases. Savings from lower import costs can also remain in the hands of the importing person or company. In addition, price formation tends to be more complex for most products, when contemplating other variables in addition to the exchange rate, such as competition between suppliers.

“It is a fact that Costa Rica is an importer of raw materials. Part of the imported production costs should be reduced; but it corresponds to the market structure (make the transfer),” explained Madrigal. “We have already seen, for example, cases in which some tariffs are reduced, but the merchants do not necessarily pass this on to the consumer, perhaps due to competition concerns.”

Many of the production chains also require time to reflect changes in their final costs. This implies that the costs at which a producer buys raw materials from him today can be reflected in prices in the weeks or even months that follow.

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In Costa Rica, inflation has slowed in recent months, according to reports from the Instituto Nacional de Estadística y Censos (INEC) – National Institute of Statistics and Censuses. However, the behavior is more pronounced for some goods and services than others.

This scenario implies risks and complex decisions for the business sector, however, is not the same in all sectors.

The tourism sector, for example, warned last week of the negative effects due to the appreciation of the colon, arguing that the rise in the exchange rate considerably reduces its competitiveness.

As pointed out by the Cámara Nacional de Turismo (Canatur) – National Chamber of Tourism, the fall of the dollar in Costa Rica from June to date has implied a decrease of about 18% in the income and cash flow of the sector (about ¢128 per dollar), since its companies trade primarily in foreign currency.

From his point of view, the margin to compete for local producers could be reduced if imported products become cheaper than the domestic economy can handle.

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