major macro economic indicators
|2020||2021||2022 (e)||2023 (p)|
|GDP growth (%)||-4.1||7.8||3.8||2.9|
|Inflation (yearly average, %)||0.7||1.7||8.9||6.4|
|Budget balance (% GDP)||-8.4||-5.5||-4.8||-3.9|
|Current account balance (% GDP)||-1.1||-3.3||-4.8||-4.4|
|Public debt (% GDP)||67.2||68.2||67.6||66.5|
(e): Estimate (f): Forecast
- Significant progress in economic (diversification) and social (education, health) development
- Advanced industries (pharmaceuticals, microprocessors) attractive to FDI
- Diversified trade thanks to multiple free trade agreements: European Union, United Kingdom, South Korea, CARICOM
- Tourism resources: hotels, national parks
- IMF support through its three-year Extended Fund Facility signed in March 2021 (USD 810 million already disbursed out of a total of USD 1.78 billion), and its Resilience and Sustainability Facility signed in November 2022
- Exposure to natural disasters
- Insufficient transport infrastructure
- Low level of foreign exchange reserves (3 months of imports)
- Dependent on the United States for economic and financial matters
- Full dollarisation of the economy
Lack of improvement in external conditions drags on activity
In 2022, external conditions marked by the US slowdown and high commodity prices slowed activity. In 2023, the deceleration in growth is set to continue. First, imported inflation (oil, cereals, intermediate products) is expected to erode private consumption (64% of GDP in 2020). The control of fuel prices (1 litre of diesel capped at USD 1.18 and 1 litre of petrol capped at USD 1.33) will not erase the decline in purchasing power, which has been accentuated by the rise in unemployment. From the point of view of private investment (19% of GDP in 2021), the National Bank of Costa Rica should further tighten access to credit (main policy rate of 9% at the end of 2022) in order to achieve its inflation target of around 3%. Secondly, the economic slowdown in the US and Europe is likely to add further external pressure. Exports (21% of GDP in 2021) will weaken (the US accounts for 43% of exports, the Netherlands 39%). Agri-food production, which accounts for 17% of exports (bananas, pineapples, coffee, palm oil, fruit juice and concentrate, sugar, sauces and preparations), is expected to fall. However, the robustness of IT and medical exports (35% of exports in 2021), tourism (47%) and the free trade zone (54% of exports were generated by the zone in 2021), will avert any risk of economic recession. Conversely, budget discipline will weigh on public consumption. Following the recurrent hurricane damage, public investment will be concentrated in the construction sector.
Slight deleveraging and reduction of the current account deficit
In 2022, the freeze on government spending made it possible to reduce the public deficit. In 2023, under the agreement with the IMF, fiscal consolidation will continue in view of a large debt servicing expense (5.4% of GDP for 2023). The primary surplus (1.5% of GDP in 2023) will exceed the targets of the fiscal law (minimum 1.3% of GDP in 2023). On the one hand, public revenues will grow. Amid the rebound in the tourism industry, the broadening of the tax base (VAT, income tax and fuel tax) will increase revenues by more than 8%. The sale of the country's two main banks (Banco de Costa Rica and Banco Internacional de Costa Rica) would generate significant revenues (3% of GDP in 2023). On the other hand, public spending will decrease despite the continuation of the hydrocarbon subsidy. The decrease in ministerial allocations will reduce current expenditure by at least 2%. The reduction of the wage bill of government administrations voted by Parliament (50% of public expenditure, 15% of the active population in 2022) would allow the country to reach its medium-term objectives (at least 4.5% of GDP of primary surplus by 2027). Issuing bonds on the domestic and international markets will finance the deficit and reduce the pressure to repay the maturities due between 2023 and 2026. To this end, the legislature approved three external bond issues in December 2022: one at the end of 2022 (7.2% of estimated 2022 GDP) and two in 2023 (2.3% of projected 2023 GDP). The central government debt is 32% external and 43% denominated in foreign currency.
The rising energy bill deteriorated the country's external position in 2021 and 2022. In 2023, the current account deficit should improve slightly due to the recovery of tourism. FDI, supported by the 2021 and 2022 IMF agreements, external borrowing and bond issues will finance this deficit. The country's foreign exchange reserves will not change. However, a less ambitious consolidation of the current and public accounts could reduce foreign portfolio investment.
Disagreements between Congress and the executive
The 2022 presidential election was marked by the victory of an “outsider”, Rodrigo Chaves of the Partido Progreso Social Democrático (PPSD). The low turnout and his lack of a majority in Congress (10 out of 57 seats) following the legislative elections of the same year slowed fiscal consolidation. The decision to cut public employment, which was voted by the new legislature in March 2022, and privatisation plans, remain uncertain. On the international scene, a rapprochement with Beijing has taken place in the hope of new investments and to boost tourism. Tensions with Nicaragua over control of the San Juan border river remain high.
Last updated: April 2023