QCOSTARICA (Revista Summa) Costa Rica is at the center of a large-scale economic phenomenon: the depreciation of the U.S. dollar against the Costa Rican colon. However, this event does not generate a unanimous consensus, since it affects different sectors of the population in a disparate way, with some benefiting and others harmed by the current exchange rate phenomenon.
According to Malberth Cerdas, professor of Economics and Business Administration at Fidélitas University, “those with loans in dollars and salaries in colones celebrate the current depreciation of the currency, as do those who must pay rents in dollars. However, homeowners who receive these dollar payments likely do not share the same feeling of joy”.
“This simple example illustrates how the increase in the value of the dollar benefits some and harms others. On the contrary, when the dollar appreciates, owners who receive payments in this currency benefit, while tenants who receive income in colones and must pay in dollars face difficulties,” explained Cerdas.
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The rise of the dollar hits us all
However, one thing is clear, in terms of costs, an increase in the exchange rate negatively impacts all consumers, especially it will be significant for those with lower incomes. Let’s take into account that we import gasoline and by paying for it in dollars, this increase would spread through all sectors and economic agents in the country, as was experienced in previous years.
When the exchange rate was almost ¢700 colones per U.S. dollar, we witnessed how the price of fuel was on the verge of reaching ¢1,000 colones per liter. This increase was due to a combination of factors, including the price of oil above US$100 and a high exchange rate.
However, subsequently, with the decrease in the exchange rate and the decrease in the price of oil, we have seen how fuel prices have decreased compared to May 2022, which marked the highest point at which we paid for the fuel, highlighted the Fidélitas teacher.
Dollar depreciation causes deflation
On the other hand, the depreciation of the dollar causes deflation (a drop in the price of the products that make up the Consumer Price Index), since imported products reduce their prices, if there are no other changes that counteract this trend in the prices (for example scarcity of some goods).
Diverse impacts depending on the sector
Each industry will experience varying impacts: those that generate revenue in dollars will suffer a decrease in revenue, while those whose costs are in colones will experience a reduction in their profit margins, especially if they have not implemented strategies to mitigate exchange rate fluctuations (such as exchange hedges). On the other hand, those whose income is in colones and have some expenses in dollars will be pleased today, since at the end of the day they have a lower net expense.
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Exporters
Exporters, whose main source of income comes from the sale of products in dollars, are especially harmed by exchange rate appreciation. This situation implies a decrease in their income since their production costs are denominated in colones.
In this context, it is essential to recognize the importance of financial tools, offered by banks, that can help mitigate the impact of these fluctuations. However, the historical trend of a constantly rising exchange rate has created a kind of comfort zone that limits the perception of the need to hedge these currency risks.
Among those who are disadvantaged by the fall in the price of the dollar are also foreign investors, tourism service providers and workers who receive their salaries in that currency.
Tourism and foreign investment
Although the increase in the number of tourists is a positive thing, since it implies a greater flow of visitors to the country, it also means a greater influx of dollars, which contributes to the depreciation of the currency. Therefore, the tourism sector must implement strategies to bill in colones, thus mitigating fluctuations in their income and avoiding exposure to exchange volatility, especially considering that the majority of their expenses, such as salaries, are in colones.
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On the other hand, Costa Rica’s natural wealth has great potential to attract tourists, which will generate an increase in the entry of dollars into the economy and, therefore, contribute to the depreciation of the dollar.
Technology to increase efficiency and competitiveness
To face this situation, these sectors must focus on the search for technologies that allow them to reduce expenses and improve their operational efficiency. For example, according to a publication in Elmundo.cr, Juan Carlos Sandoval, an expert in the rice sector, highlighted that, according to statistics from the Food and Agriculture Organization of the United Nations (FAO), Argentina produces 8.5 tons of rice per hectare (t/ha), while Costa Rica only produces 4.3 t/ha.
This disparity in productive efficiency reflects the successful implementation of technologies and best practices in Argentina, which allows them to be more competitive in the market.
The dollar exchange reference rate set by the Banco Central (Central Bank) has increased this week, going up ¢503.11 for the buy and ¢510.49 for the sell on May 2, to ¢506.91 and ¢513.78, respectively, today, May 9. Experts are hesitant to predict a return to previous levels at this moment.
Article adapted and translated from RevistaSumma.com. Read the original in Spanish here.
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