Costa Rica has suffered from chronic inflation during the last 25 years. Inflation rates exceeded 100 percent at the height of the debt crisis in the early 1980s, but monetary authorities have successfully managed to bring the inflation rate under control. Inflation rates at the end of the 1990s varied from 10 percent to 15 percent annually.
The country's high level of social spending generated fiscal deficits that were financed through the Central Bank. An administrative structure that provided for government control of the Central Bank allowed its easy manipulation. Although subsequent reforms granted the Central Bank more freedom from the government, it still carries the burden of high debt. Since interest payments on the public debt represent as much as 30 percent of the spending budget, total debt is increasing, requiring ever larger amounts of public funds and limiting the ability of the government to spend in other areas such as health and education. The government's inability to balance the fiscal budget has led to inflationary pressures.
The persistence of inflation has led to periodic currency devaluation in order to protect the competitiveness of Costa Rican exports. The government's policy aims at maintaining a neutral currency value by comparing domestic inflation to an index of international inflation rates. The goal is to maintain the local currency at its 1992 level, adjusting for inflation so that its purchasing power is neither greater nor lower than what it was at that date. Devaluation rates typically follow inflation rates, and are currently at a 10 percent to 12 percent annual level. The exchange rate for January 2001 was approximately 320 colones to the dollar.
Although the legal currency is the colón, dollar-denominated transactions are legal and widespread. This practice developed in the 1980s as people tried to protect themselves against inflation and devaluation. Legalization took place in the early 1990s. Convertibility of the colón to the dollar is unrestricted and can be done at every bank and financial institution. Loans and investments can be contracted in dollars, and rent contracts are typically denominated in dollars.