Economy faces collapse without change

Dear A.M. Costa Rica:

The article on the weakening of the U.S. dollar against the colon was interesting. On a daily basis I track international money markets on The U.S. dollar has strengthened against all the major currencies in recent times. The colon is bucking the trend.

We should ask why? Is the Costa Rican economy booming? Has its government reduced its U.S. dollar deficits?  Are exports generating large dollar surpluses? Is there a big inflow of foreign investment capital? Are speculators piling into the colon, expecting it to surge against the dollar? You do not have to be an economist to recognize that none of these things is true. The newspapers here contradict such notions on a daily basis.

So how come the colon is less volatile against the dollar than any major currency, and how come it is actually strengthening, despite the weakness of the economy? Your article contains the answer. The currency is managed by the government and is artificially shored up. That is why Costa Rica is so expensive compared to other expat destinations.

The government continues to borrow in dollars as do many Costa Rican citizens. If the colon were allowed to float freely against the dollar, it would crash and burn. This would cause a massive personal and government debt crisis and economic collapse. No wonder the government does not want the currency to weaken on its watch.

Unfortunately, unless the economy unexpectedly and massively improves and individuals and the government change direction, reducing instead of increasing their indebtedness, the downward pressure on the currency will become ever stronger. I personally witnessed a similar situation in Asia in 1997. It was far from pretty. In one week the currencies of Indonesia, Thailand, Malaysia and their smaller neighbors collapsed. There was massive unemployment. High end cars were dumped on the streets, because the owners could not afford the payments. Consumer spending and property prices collapsed.

Asia had high wage flexibility and came out of the crisis in just a few years. Costa Rica has little such flexibility and could be heading for disaster.

Chris Clarke
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