RICO’s Q—This week, the US dollar is at a very low point against the Costa Rican Colón, trading around ¢470–¢485.
This is a translated and adapted excerpt from economist Oswald Céspedes Torres’s opinion piece, “Estas son las víctimas silenciosas del dólar barato en Costa Rica,” originally published in La Nación.
I wanted to share with you.
The exchange rate is not just a financial price. It is also a price that directly influences the country’s productive structure, employment, and competitiveness. It is time to generate a debate about which sectors are absorbing the cost of the colón’s prolonged appreciation.
There are two Costa Rican economies. One is growing at headline-grabbing rates, driven by exports of medical devices, software, and high-value services from free trade zones. The other barely grows… when it grows at all. This is the Costa Rica of coffee, bananas, agribusiness, local manufacturing, and tourism outside the main tourist destinations. It’s the Costa Rica of the permanent tax regime. And in recent years, this second Costa Rica has faced the effects of significant currency appreciation that has altered its competitiveness.
Since mid-2022, the colón has strengthened by approximately 25% against the dollar, rising from levels close to 690 colones to around 500 colones, according to data from the Central Bank of Costa Rica.
For importers, this reduces costs. For urban consumers, it helps contain inflation. For the government, it reduces the cost in colones of servicing the external debt. But for those who produce locally and sell in dollar-linked markets, this change significantly alters their relative cost structure.
The mechanism is straightforward. A company that pays its payroll in colones but competes in international markets sees its costs, measured in dollars, automatically increase when the colón appreciates. A monthly payroll of 500 million colones was equivalent to approximately $722,000 in July 2022. With an exchange rate close to 500 colones, that same expense is equivalent to about $1 million. There were no salary increases. There was no expansion of operations. The only thing that changed was the relative value of the currency. And since these companies are price takers in international markets—they cannot pass on this higher cost to the external buyer—the appreciation impacts their profit margins without any possibility of compensation.
Business surveys reflect this reality. The Chamber of Industries’ Business Outlook Survey identified the exchange rate as one of the main factors negatively affecting the competitiveness of the local manufacturing sector (a factor that, prior to 2022, was not among the sector’s central concerns).
Meanwhile, the Real Effective Exchange Rate Index (REER), published by the Central Bank itself, shows a sustained real appreciation since that year, implying a relative increase in the price of goods produced in Costa Rica compared to its international competitors: Colombia, Mexico, Chile, and the Dominican Republic, among others.
The impact has not been uniform. While exports under the special regime have maintained high growth rates, those under the definitive regime have grown at a considerably slower pace. This divergence reflects structural differences in productivity, international integration, and, importantly, in the degree of exposure to the real exchange rate. The sectors with the strongest local presence—those that generate employment in more regions of the country—are precisely those with the greatest exposure.
The effect on employment is more difficult to observe directly because it doesn’t manifest as visible layoffs, but rather as less job creation, slower production growth, and postponed investment decisions. According to data from the National Institute of Statistics and Censuses, the period following the currency appreciation coincided with a significant reduction in labor force participation, particularly in sectors intensive in local production. These are jobs that were not created, not jobs that were lost: a distinction that aggregate statistics don’t always clearly capture.
It is important to note that this outcome is not solely due to monetary policy decisions. It also reflects the interaction of multiple factors: capital flows, external financing of the public sector, the dynamism of specific export sectors, and the dynamics of the global foreign exchange market itself. The Central Bank, in accordance with its mandate, has intervened in the market to preserve macroeconomic stability and prevent abrupt fluctuations, a legitimate and necessary objective.
However, recognizing the legitimacy of this objective does not imply ignoring that exchange rate movements have real and differentiated effects on the country’s productive structure. A prolonged appreciation can benefit some sectors and harm others. This is an inherent reality of open economies and does not, in itself, imply a policy error. But it does underscore the importance of an informed debate about its implications: about which sectors absorb the cost, which regions are left behind, and which instruments (such as a more developed foreign exchange hedging market or more transparent intervention criteria) could better distribute that cost among those who have the capacity to manage it.
The exchange rate is not just a financial price. It is also a price that directly influences the country’s productive structure, employment, and competitiveness. Costa Rica has built solid macroeconomic institutions over decades. The challenge ahead is to ensure that macroeconomic stability is compatible with broad and inclusive productive growth, one that also reaches the “second Costa Rica,” the one that doesn’t make the headlines but sustains the productive fabric of the regions.
Read the original article in La Nación here.
Tips for visitors getting the best exchange rate:
- The strongest “cheap” dollar rates are found at banks like Banco Cathay or Banco CMB. See the Central Bank’s list of rates at banks and financial institutions.
- Avoid airport currency exchange kiosks, which offer poor rates
- Utilizing a local ATM with a card that has no foreign transaction fees typically provides the best exchange rate.
- Exchange rates fluctuate throughout the day.