The Central Bank of Costa Rica (BCCR) on Monday announced a significant upward revision of the country’s economic growth projections.
In 2021, the Costa Rican economy is forecast to grow 5.4%, and it will expand 4.5% in 2022, the BCCR says. Both are increases over the previous projections (3.9% and 3.7%, respectively).
The BCCR says most economic activities have “already exceeded pre-pandemic levels,” with tourism — which contributed to 8% of GDP before the pandemic — being the most notable exception.
Costa Rica’s economy shrank 4.5% in 2020, the biggest contraction in decades, per Reuters.
“National economic activity has continued to strengthen after the fall recorded in 2020 as a result of the pandemic,” the BCCR report reads.
“This better performance of production has also manifested itself in the labor market, whose main indicators have improved, although at a slower rate than the recovery in economic activity.”
Unemployment in Costa Rica is 17.4%, and it has remained relatively consistent in 2021. The BCCR indicated that employment in the informal sector — which correlates strongly with the tourism sector — is “the furthest from recovering pre-pandemic levels.”
President Carlos Alvarado said the BCCR’s projections “reaffirm we are on a solid path in the process of economic recovery.”
Inflation remains low
Costa Rica has experienced an upturn in inflation over recent months, but the value remains relatively low, the BCCR says. Its forecast models place inflation at or below the 3% annual target in the next two years.
However, the acceleration of global inflation may cause challenges in Costa Rica. The BCCR cited the increase in the prices of imported goods as the primary reason Ticos might see higher prices.
“This is the result of the combination of three factors: the increase in international prices of raw materials (particularly oil), the higher costs of sea freight, and the depreciation of the colón,” the report reads.
“In addition,” the BCCR continues, “the international environment presents other unfavorable aspects or that pose risks to the national economy. First, raw material prices remain at high levels, and this has contributed to a deterioration in our country’s terms of trade. In addition, the costs of sea freight, and in particular containers, have skyrocketed in the last year. All this has resulted in an increase in inflation in a large number of countries, including advanced economies and those of Latin America.”
But the biggest risk to Costa Rica’s economic stability, the BCCR says, is a domestic issue: approval of policies that comprise the country’s $1.75 billion loan agreement with the International Monetary Fund (IMF).
“The rejection, excessive delay or erosion by the Legislative Assembly of such measures could lead to the suspension of the agreement with the IMF, and in turn reduce the likelihood of budgetary support from other multilateral financial institutions,” the BCCR said. “This would increase uncertainty, with adverse effects on interest rates, consumer and business confidence and, in general, on economic growth.”