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New Money Exchange Rate System Takes Effect

When Bob Nahrgang went to the Banco de Costa Rica in Escazú Wednesday to exchange his greenbacks for Costa Rican colónes, like he has done for years, things were suddenly different.

For the first time in decades, the colón had appreciated.

“Yesterday the exchange rate was ¢520 (for U.S.$1) and today it was ¢515. It surprised me that it went down,” said the U.S. expatriate who is now a Costa Rican citizen. What’s more, other banks offered better prices for his dollars.

When Nahrgang went to the Internet to check the Central Bank’s new online system in which it posts the exchange rates that different banks offer, he was confused. He couldn’t find what he was looking for. “I tried to pull up information from the banks. It’s just not there; it’s not clear,” he told The Tico Times.

Nahrgang is one of millions of Costa Rican residents trying to get a grip on the new exchange rate system the Central Bank put into effect this week.

The “crawling band” system, in which Costa Rica’s colón is allowed to fluctuate between a ceiling and a floor, was set into motion Tuesday.

Before the new system went info effect, the buy rate was ¢521.22 and the sell rate was ¢522.91. Tuesday, the price floor started at ¢514.78 and the ceiling at ¢530.22. Today, the floor was expected to be at ¢514.96 and the ceiling at ¢530.64

The Central Bank announced that for the time being, the price ceiling and floor will increase at fixed rates. Each day, the floor will increase 6 céntimos (one hundredth of a colón) and the ceiling will increase 14 céntimos, Central Bank economist Eduardo Prado told The Tico Times.

The new system is intended to liberalize Costa Rica’s devaluating currency, in turn giving the Central Bank the ability to control Costa Rica’s high inflation rate with its monetary policy (TT, Oct. 13).

It is the first time in 22 years that the country’s exchange rate system has taken such a step towards liberalization. Since 1984, the country has been using a minidevaluations system in which the Central Bank devaluated the colón in predictable, daily increments of a few céntimos.

This week, the colón’s price was opened to the volatile market of supply and demand.

However, under the band system, the Central Bank will intervene in the market if the colón creeps above the price ceiling or below the price floor that the Central Bank has set.

Central Bank president Francisco de Paula Gutiérrez has said the new system is a phase in a larger attempt to liberalize the colón completely, and have it one day fluctuate freely against the U.S. dollar.

The exchange rates that banks offer to the public are all now published at one place – online at the Central Bank’s Web page Scroll down the page and click on the box that says “Tipo de cambio anunciado en ventanilla.”

Central Bank economist Carlos Mora said the bank’s Web site is being clogged with traffic, which is why some visitors like Nahrgang have had problems.

“Sometimes the page is saturated, so it goes down, because there has been a massive number of visitors … We’re working to solve those problems,” he told The Tico Times Wednesday.

Prado explained that when banks make changes to the exchange rate they offer during the day, they have 10 minutes to inform the Central Bank, which is supposed to post the new exchange rate on its Web site immediately.

Gutiérrez explained that the Central Bank’s interventions, if necessary, will increase or decrease the supply of colónes, putting upward or downward pressure on the price of the currency at the banks.

Officials plan to replace the current system that the Central Bank and other financial agencies use to exchange currencies, called MONED, managed by the National Stock Exchange. The new system, called MONEX, would modernize the electronic exchange system and be managed by the Central Bank.

The currency band is applied only to the wholesale market of currency, where public and private banks, the Central Bank, financiers, exchange rate booths and other financial agencies exchange currencies, according to Prado. The rates banks offer to the public aren’t necessarily restricted by the currency band, and can be outside it.

Prado explained that aside from the exchange rates at the window – which banks offer to the public, there is also a reference exchange rate, which will be used to pay Customs taxes, the exit tax and contracts that are settled in court.

The reference exchange rate is an average of the public buying or selling exchange rates that banks and other financial agencies used the day before. The reference exchange rate started Tuesday at ¢516.56 for buying and ¢523.15 for selling. Yesterday, it was ¢515.05 and ¢521.82, respectively.

Mora said it is too early to read into exchange rate fluctuations.

“These first days are a time of transition. People have to learn to work with a new exchange rate regime. These first weeks will be a learning phase,” he said.

Nahrgang agreed. “Of course there’s frustration because (exchange rates) aren’t uniform,” he said.

Though he was surprised that the colón appreciated, he said it’s too early to see a pattern.

“Let’s not evaluate the colón just yet,” he said.

Economy Vice-Minister Jorge Woodbridge said Wednesday it is “unjust” that the buying price of the dollar dropped more than the selling price from Tuesday to Wednesday. That means consumers get less bang for their bucks.

“All that does is benefit the banks,” he said in a statement.



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