OECD expects gradual economic recovery in Costa Rica but worries about debt

After enduring the effects of Covid-19, Costa Rica will experience a gradual economic recovery starting in 2021, but it must rush structural reforms to put its public debt “on a sustainable path,” the OECD said.

This Central American nation, invited to be the 38th member of the Organization for Economic Cooperation and Development (OECD), entered a recession due to the pandemic and reached a record unemployment rate of 24.4% in July. After the initial onslaught of the coronavirus, it began to show slight signs of recovery and unemployment fell to 22% in September.

With a 5.6% contraction of the economy forecast for this year, “GDP is expected to grow 2% in 2021 and 3.8% in 2022. Exports will continue to lead the recovery, driven by the growing demand from the United States. The gradual relaxation of containment measures supports heavily affected service sectors,” said the OECD in its latest report, released Wednesday.

“Private consumption will improve slowly, but high unemployment continues to weigh on family incomes,” the report added.

When responding to the pandemic, Costa Rica increased spending on social services and healthcare, for which it had to break some fiscal rules.

The country’s deficit is expected to “expand to around 9.5% of GDP in 2020, and the ratio of central government debt to GDP will rise to around 80% in the coming years,” the OECD said.

“Placing public debt on a decreasing and sustainable path is key to macroeconomic stability and, therefore, fiscal prudence and fiscal rule should be restored at that stage,” said the organization, which groups 37 countries that together represent the 60% of world GDP.

“Reducing tax exemptions could help increase revenues. Reducing the administrative burden to start and formalize businesses would increase investment and the creation of formal employment,” the report added.

It also suggested that Costa Rica work to reduce labor informality, reduce the social security contributions that low-wage workers must pay, and improve the quality of education and training to ensure inclusive growth.

For its final acceptance before the OECD, the country must still comply with some accession protocols.