Noting my friends confusion and fear over last week’s business/government group nonsense comments regarding the impact of U.S. dollars, and adding to the lucid commentary Monday by Dennis Jay of Alajuela, please allow me to add my two colons.
Costa Rica is upset about the flow of “speculative” U.S. dollars into their economy. As usual, they have floated trial balloons that will solve nothing and make many aspects of life here more expensive or uncertain.
How does one separate ‘speculative’ dollars seeking to ‘exploit’ offered time deposit interest rates from ‘nice’ dollars needed to buy rice and beans and marchamos and pay the guy watching your car while you shop the feria for fruit?
As Dennis Jay noted, U.S. dollars are here in great numbers because the U.S. is Costa Rica’s #1 trade partner and because tourists bring them.
I’ll add that dollars abound because some Ticos get paid in them to move, store and look-the-other-way when cocaine passes through going north, because Costa Rica mandates every legal foreign resident exchange large amounts into colons as a condition of residency, because Ticos working outside the country send them back to the family, because multi-nationals like Intel and Merck are important parts of the economy.
US Dollars are everywhere because they are the world’s reserve currency upon which every commodity from pineapples to gold is priced.
Costa Rica NEEDS them to purchase oil, foods, medicines, whatever, because the colon’s value approaches zero once past the frontier.
I once met a former Costa Rican Central Bank president. I asked him why Costa Rica, a country one-third the size of Florida, needed its own currency. He chuckled knowingly. “Patria.” There is no other logical reason. Unfortunately, the colon will not save Costa Rica from future U.S. dollar depreciation.
It’s too early to know what’s in the works, but there are so many examples of how people will be hurt if the government institutes restrictions, i.e. taxes, on international currency movement.
Here’s one example that has already occurred because “investment abhors uncertainty”.
I have been contemplating the purchase of a house here to live in — just little ole me. But for this purchase I now wonder if money wired into Costa Rica for this home-of-my-dreams will soon be categorized as speculative. Will I have to prove this house isn’t to flip? To rent out as a business?
If so, experience teaches that to avoid this damning definition and any tax, an attorney and a mountain of time-consuming papers will need to be tra(u)mitized. And knowing that when I eventually sell and repatriate the money back to the U.S.A., that Costa Rica would tax the entire sum up to 25 percent more, would I still go ahead with the purchase? Game over. Not me. Listo. I owned a home here before, and I will not purchase another house here without clarity going into the future.
So the Tico electricians and plumbers and painters and furniture sales people I would automatically need for this new purchase can stay home and rot, I mean root for Saprissa (or Liga), because I won’t be hiring them and buying things as I remain a contented renter.
So Costa Rica, initiate these money movement taxes/restrictions and watch the housing market further collapse when word gets out to the Internet. And note that with me, the snowball just started rolling down the hill. All it takes is the threat from a government of currency controls, and they lose customers. That is not a good way to run a business, and it already seems to be Costa Rica, S.A.
Unfortunately, this new ‘tax concept’ is just more of the same mariachi song. The tax collector just doubled the value of my little 2004 Toyota Yaris with roll up windows and no extras so they could increase my 2013 marchamo tax 50 percent. My car is worth again as much as when I purchased it used in 2006! Forget monkeys, this is the true magic of Costa Rica!
Curiously, the purchase of time deposits — CD’s — the horror of Señora Laura’s weapon of mass destruction dreams, are not normally considered economic speculation, but the most boring, widow’s-and-orphans safe investment in existence.
And since Ticos can buy their high interest CD’s all day without stigma, some also changing dollars to colons, the balloon floated that money coming in and out of Costa Rica to purchase these ought to be selectively taxed is discriminatory. Hola, Sala Cuatro!
But the people in charge of the country I love enough to care about, should just be thrilled out of their pejibaye skins that folks will actually LOAN THEM MONEY, because that is what one does purchasing a CD.
And they the borrowers are paying a higher interest rate to the person LOANING them the money because 1. the time deposit currency is itself CONTROLLED BY THE BORROWER without public review and is nonconvertible on Main Street, and 2. the credit rating of the BORROWER is below average. The person loaning the money is doing THE BORROWER a favor in taking back a piece of paper known as a contract in exchange for cash.
There are certain aspects of living here (for 15 years now) that enamor me to love this country. But the Costa Rican way of raising taxes while crying about some invented hurt without cutting spending is not one of them.
As a conservative investor, I’ll posit that loaning money to Costa Rica or any of its state institutions is risky business and one should be remunerated accordingly.
Rio Oro, Santa Ana