Costa Rica Considers Dollarization

Costa Rican Congressman Jorge Dengo presented a new bill that is being processed under file No. 24,296 “Law for Dollarization.” “For decades, there has been a significant national discourse surrounding the ‘fair’ exchange rate between the Costa Rican Colón and the U.S. Dollar, the primary foreign currency used in the country for numerous internal and external transactions,” stated the PLP representative.  Dengo believes this discussion has not been transparent to the public, since the criteria for determining both the monetary policy and the mechanisms to establish the exchange rate have remained in the Board of Directors of the Central Bank of Costa Rica under confidential criteria.  The initiative establishes, among other reforms necessary for the adoption of the new currency, the methodology to determine the conversion exchange rate at which citizens could exchange their colones for dollars.  This methodology consists of using the average value resulting from the daily averages of the reference buying and selling exchange rates published by the Central Bank of Costa Rica during the period between February 2, 2015, and the entry into force of the Law.

“This is intended to ensure that the way of establishing the conversion exchange rate follows a logic that is as non-discretionary as possible and in line with the economic reality of the country during that period of time, which corresponds to the period of managed floating implemented by the Central Bank of Costa Rica,” said the Congressman.  This initiative proposes changes and amendments to Central Bank Law No. 7558 to achieve several objectives, such as eliminating volatility and uncertainty associated with the exchange rate to facilitate economic calculation, significantly reduce the discretion of the BCCR’s Board of Directors in the management of monetary and exchange rate policy, sustainably reduce inflation and the cost of credit, reduce transaction costs by eliminating the foreign exchange intermediation margin, and reactivate the economy through investment and the generation of new jobs.  “In terms of financial feasibility, the Central Bank of Costa Rica, at the time of presenting this project, has sufficient international monetary reserves to exchange all colones in circulation for dollars, without the need to resort to indebtedness,” noted the deputy.