Legal experts, business owners and economists this week expressed doubts about the country’s new currency band exchange rate system.
As the country adjusted to the new regime this week, the colón stabilized after it abruptly appreciated last week after the new system went into effect.
Vice-Minister of Labor Alvaro González said Wednesday that the reactions of banks and the public to the change have been mostly positive, though he acknowledged “many questions” remain unanswered.
Marco Durante, a consultant for Tax and Labor, a regional consulting firm, told The Tico Times the new system has raised questions about how workers should be paid, how employers should calculate social security payments and whether renters should pay rent in U.S. dollars or colones.
“We are interpreting a scheme for us that is completely foreign; we’ve never done this before. We’re giving first analyses, but this isn’t over. There’s no absolute certainty about what should be done,” he said.
Durante said it is unclear what exchange rate employers should use to calculate employees’ paychecks if wages are based on a dollar amount but workers are paid in colones. The best bet, he said, is for employees whose salary is defined in dollars to request to be paid in dollars to avoid possible losses from exchange rate variations.
Nor is it clear what exchange rate employers should use for employees’ social security tax deductions.
“How are you going to pay social security tax to the Caja (Social Security System) when you have a salary in dollars?” he asked, adding that the Caja requires payment in colones.
It is also unclear what the new system will mean for those who rent. Up until now, landlords by law are allowed to increase rent amounts established in colones by 15% each year, but not rental prices established in U.S. dollars.
“Though the (exchange rate) system is changing, the law is the same,” said Emilia Piza, president of the Chamber of Costa Rican Real Estate Agents, adding that the new system may encourage landlords to demand rent be paid in colones, since they may take in more money with the annual increases.
Durante said it is uncertain whether landlords will be allowed to periodically increase rent amounts in dollars under the new exchange rate system.
He said all of these unanswered questions will have to be answered in a “period of trial and error, until people find the best way.”
Vice-Minister González said the new system will change the landscape for those who have debts in dollars and earn in colones, because financial institutions will demand payment in dollars.
He said people should seek the best exchange rate for their colones – not necessarily the bank where they have their loan – and then pay their loan in dollars.
This, however, can mean more risks for those with debts in dollars who would have to carry their cash from one bank to another for the exchange, he added.
Under the new system, the Central Bank buys and sells dollars in the wholesale market – where the Central Bank, private and public banks, public institutions and other financial agencies exchange foreign currency – in order to keep the wholesale market (MONED) exchange rate within the new price ceiling and floor bands.
The Central Bank’s actions are limited to the wholesale market, but in turn regulate the price of the colón by influencing supply and demand of foreign currencies.
Commercial banks are free to buy and sell U.S. dollars and colones at whatever price the market permits – not necessarily within the bandwidth. Though most financial institutions offer prices within the band or just below the floor, not all do.
Casa de Cambio Global Exchange, the exchange booth in the Juan Santamaría International Airport, this week was selling dollars at a price just above the ceiling, ¢531.73, and was buying them at a price ¢49 below the floor, ¢466.07, which means tourists exchanging their U.S. dollars there lose nearly 10% of the amount they could get at a bank.
“We’re going to see if we can’t do something to let tourists know about where they can find the best prices,”Marcela Villalobos, spokeswoman for the Costa Rican Tourism Institute, told The Tico Times this week.
The Central Bank reference rate Thursday for buying was ¢515.03 (down from ¢515.05 last Friday) and the rate for selling was ¢520.08 (down from ¢521.82).
The reference rate is the average of the public buying or selling exchange rates that banks and other financial agencies offered their clients the day before, and can be obtained, along with other exchange rate information, on the Central Bank’s Web site: www.bccr.fi.cr. Bank officials said that since the new system took effect, the site has had an average of 50,000 hits per day, compared to 600 under the previous regime.
Though a Central Bank economist called the first week a success, a former Central Bank president and a former presidential aide said Tuesday that the way things are going, the new system may not reduce the country’s high inflation rate as it is designed to do (TT, Oct. 13, 20).
“We could be taking a medicine that won’t cure our illness,” said former presidential aide Ronulfo Jiménez.
Jiménez and former Central Bank president Jorge Guardia both said the new exchange rate system won’t reduce inflation as long as the Central Bank is steeped in debt.
They spoke at a roundtable meeting for small and medium-sized businesses organized by the Costa Rican Development Organization Association (ACORDE), a private organization that offers credit to small and medium-sized businesses.
Business owners have also expressed qualms about the new system.
Ramón Mena, owner of Librería Francesa bookstore in San José, said he’s “a little worried” about the Central Bank’s insistence that it will help reduce inflation.
“I think it’s to the contrary. I don’t know what the exchange rate will be now. I have to calculate what the dollar will be in nine months,” he said, adding that under the previous system of mini-devaluations,which lasted more than two decades until this month, he was able to calculate the exchange rate ahead of time when making orders to import.
“Because I don’t know (what the exchange rate will be), I have to inflate my prices now …10-15% higher than before,” he said.
Despite doubts about the new system, Central Bank economist Eduardo Prado said the results from the first week of the new system are “very, very satisfactory.”
“Now the market is determining the price of foreign currency more, and the variations have been inside the established limits of the Central Bank,” he said, referring to the fact that the exchange rate for the wholesale market stayed inside the bands.
For the time being, the price ceiling and floor are increasing at fixed rates. Each day, the floor will increase 6 céntimos (one hundredth of a colón) and the ceiling will increase 14 céntimos.