Costa Rica’s Gross Domestic Product (GDP) is expected to shrink by 5% due to the COVID-19 pandemic, according to updated predictions from the Central Bank (BCCR).
The figure would represent the country’s largest fall since Costa Rica’s economic crisis of the 1980s. It’s a steeper decline than previously forecast and takes into account the ongoing effects of the crisis.
“This year, the national economy is going to suffer its strongest contraction since 1982,” said Rodrigo Cubero, president of the BCCR.
The financial institution anticipates a partial recovery of 2.3% of GDP in 2021.
Pandemic halts slow recovery
According to the BCCR, the Costa Rican economy was experiencing a slow reactivation through February.
But that changed in March, when Costa Rica declared a state of emergency and began applying restrictions to contain the spread of the coronavirus.
While “all the world’s regions are in recession” due to the pandemic, factors such as a reliance on tourism have had magnified impacts on some countries. Costa Rica, which has banned foreign tourists for more than four months, has seen its hotel and restaurant sector suffer the biggest affectation, Cubero said, followed by the transportation sector.
“The sharp slowdown in economic activity at the end of the first quarter turned into a contraction over the following three months, with a direct negative impact on the labor market, which already had a high unemployment rate,” the BCCR analysis reads.
The latest figures from the National Institute of Statistics and Census (INEC) show unemployment reached 20.1% from March to May 2020, the highest-recorded level of that economic indicator. Meanwhile, an estimated 17.6% of laborers are underemployed.
BCCR said its downgraded forecast for 2020 is based on the International Monetary Fund’s global economic predictions coupled with the likelihood of ongoing coronavirus restrictions.
Internal and external risks
Cubero acknowledged that the BCCR’s economic forecasts are subject to significant changes due to uncertainty in the context of the global crisis.
BCCR identified the following risks that could affect Costa Rica’s anticipated partial economic recovery in 2021.
The largest external risks include:
- A larger contraction of the world economy in 2020 and a slower recovery in 2021, as a consequence of an unfavorable progression of the pandemic and reimposed restrictions in other nations.
- A smaller-than-expected reduction in international prices of raw materials, particularly oil.
The largest internal risks include:
- Difficulties in controlling COVID-19, which would cause authorities to apply more restrictive measures. This would have negative economic consequences while increasing the risk of social tension.
- The lack of consensus around fiscal measures while the deficit increases.
- Difficulties accessing external financing.
- A prolonged drop in consumer and business confidence, in addition to unanticipated internal supply shocks — especially due to adverse weather.
“There are risks from the international and internal context that, if materialized, could generate deviations in relation to the projections,” BCCR said.