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With vaccinations underway, Costa Rica hopes for economic recovery

January 30, 2021

Costa Rica, which has already started its vaccination campaign against Covid-19, will have a gradual economic recovery from 2021, conditional on Congress approving a fiscal adjustment negotiated with the IMF, the Central Bank anticipated on Friday.

The Costa Rican economy, which contracted 4.5% in 2020 due to the impact of the pandemic, will grow 2.6% this year and 3.6% in 2022, said the president of the Central Bank (BCCR), Rodrigo Cubero, when presenting the annual macroeconomic program in a teleconference.

He also predicted that the fiscal deficit, which last year reached the historic figure of 8.1% of GDP, will be around 7% this year and 5.9% in 2022.

The BCCR maintained the inflation target of 3% per year for the coming years, although in 2020 it closed at 0.9%.

However, Cubero clarified that the positive scenario depends on the Legislative Assembly (Congress) approving a fiscal adjustment package that the government has negotiated with the International Monetary Fund (IMF).

“If legislative approval is given, we would have a transition to sustainable public finances and better macroeconomic prospects, with less uncertainty for economic agents,” he commented.

However, he warned that “if this fiscal adjustment does not occur, or if it is insufficient and the agreement with the IMF is not reached, the consequences would be severe.”

This would lead the country to pay higher premiums for the financing that the government requires, which would put pressure on the domestic financial market with an increase in interest rates.

In that case, growth would be more difficult, and Cubero estimated a drop of one percentage point in the projections for the next two years.

The technical agreement with the IMF, pending approval by the agency’s executive board, contemplates a loan for $1.75 billion and will fortify Costa Rica’s macroeconomic policies to recover its financial situation.

The fiscal consolidation agreement with the IMF contemplates cuts in public spending and increases in income, with a 0.5% tax on houses considered luxury and the transfer to the treasury of up to 30% of the profits of 14 state companies.

Cubero also clarified that the world economic scenario remains uncertain due to the persistence of the Covid-19 pandemic, which has caused new closures in the United States and Europe.

For this reason, he said, the recovery of the world economy will depend on the ability of countries to roll out Covid-19 vaccines — and that these shots are indeed effective in containing the pandemic.

Costa Rica was one of the first countries in Latin America to begin vaccination against the coronavirus, on December 24.

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