Costa Rican economic growth is projected to be 2.6% in 2021 if an IMF agreement is approved
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The country’s Central Bank (BCCR) projects Costa Rican economic growth of 2.6% in 2021 after the economic shock caused by the COVID-19 pandemic.
Costa Rican economic growth will experience a slight recovery during 2021 and 2022. However, this progress is conditional on two key factors: the first is restructuring public finances, while the second is a rapid and effective coronavirus vaccination campaign.
Economic developments during 2021 will depend on the coronavirus pandemic and the country’s vaccination program’s progress. While the recovery rate is expected to be significant, it will not be enough to reach the Costa Rican economy’s growth level in 2019. A recovery that meets this level is not anticipated to take place until 2022.
Additionally, it is expected that Costa Rican economic growth will pick up the pace during the second quarter of this year when the population that is most at risk for infection for the virus completes its immunization. Additionally, recovered international mobility will have a positive impact on the country’s vital tourism sector.
These were the data and reasons set out by the Costa Rican Central Bank (BCCR) at a recent press conference at which it unveiled its Macroeconomic Program for 2021-2022. Despite the impact that the coronavirus pandemic has had on the economy, there has been an uptick in the nation’s economic performance in recent months. In this way, the year-on-year economic contraction has decreased from -7.6% to -4.5% opening up space for an anticipated V-shaped recovery over the next two years.
The Central Bank’s report highlights an improvement in the macroeconomic scenario reflected in various indicators for the rest of the year and the 2022 forecasts.
It further emphasizes that the evolution of the leading economic indicators of the export sector will be conditioned by the recovery of local economic activity and Costa Rica’s main trading partners. The current account deficit in the balance of payments will be 3.2% this year but will decrease slightly in 2022.
Inflation indicators affect Costa Rican economic growth
On the other hand, concerning the Central Bank’s goal of containing inflation, Rodrigo Cubero, president of the BCCR, assured that this indicator would remain below the lower limit of the government’s tolerance range, which is 3% ± one percentage point.
The Bank further assured that it would maintain an expansive but prudent and responsible monetary policy to support macroeconomic and financial stability, economic growth, and job creation with a projection of below-target inflation.
The Costa Rican Central Bank will inject liquidity into the markets if necessary to ensure their normal functioning and continue to support the revival of the economy through an expansive monetary policy stance and prudent policy coordination with the other financial authorities. These actions are to ensure the flow of credit to segments that require it, Cubero said.
As for the foreign exchange market during 2020, it was characterized by two determining factors: the first was associated with the effects of health containment measures that the government adopted before COVID-19, and the second was associated with the Costa Rican government’s fiscal problems that deepened beginning of September of 2020.
Consumer confidence has been severely affected by what has influenced consumption. However, by the end of 2021, the Central Bank projects a gradual recovery in domestic demand. This will be driven mainly by the vaccination campaign and the prospect of a societal return to normal.
In terms of expenditures, it is estimated that domestic demand will recover, with a growth of 2.4%, on average, by 2021-2022.
“In particular, the increase in household consumption by the final months of 2021 will be supported by the positive impact that the economic recovery will have on disposable income and employment, as well as by improved consumer confidence to pre-crisis levels,” the text of the BCCR’s Macroeconomic Projections points out.
Additionally, families will have greater access to goods and services restricted during 2020 due to the COVID-19 crisis.
By 2022, consumption will continue to recover in the context of more favorable labor market conditions and the resumption of economic activity to a pre-crisis level.
Costa Rican Central Bank officials have explained that the planned recovery in private investment would be related to the assumption that entrepreneurs will gradually regain the confidence to invest. This will come about as a result of the country’s financial recovery.
“Economic growth in Costa Rica will be underpinned by the positive effect of a favorable external situation and expansive credit conditions that will allow investment projects that have been halted or postponed in the previous year to resume. Also important is the recovery of the confidence of economic actors,” Cubero explained.
According to estimates, Costa Rican economic growth will be led by the manufacturing sector and business services and a widespread recovery in the rest of the country’s productive activities.
Manufacturing activity will grow due to increased global demand for products made by companies located in Costa Rican free zones and, to a lesser extent, by expected positive domestic demand developments. The latter of which expects recovery from agricultural activity and the construction industry.
Despite the macroeconomic deterioration experienced in 2020 following the adverse effects associated with the COVID-19 pandemic, the Costa Rican Ministry of Finance foresees a gradual correction of the country’s fiscal imbalance. This will result from efforts to contain spending, better tax collection, and access to external financing sources under more favorable financial conditions relative to those that it would face in the domestic market.
By the end of 2020, a primary deficit of 3.9% of GDP and a fiscal deficit of 8.7% were estimated. By 2021-2022, a reduction in the primary deficit to 1.7% and 0.3% of GDP is forecasted. This is combined with the decrease in the fiscal deficit from 7.0% and 5.8%, respectively.
These projections consider a financing agreement with the IMF and access to budgetary support credits with multilateral agencies, and the placement of bonds in external markets of US $1 billion each year (from 2022 to 2025).
During the conference, the president of the BCCR warned that several factors could affect the projections for Costa Rican economic growth.
Cubero pointed out that one of the latent risks facing both the Costa Rican and the global economy is a return to coronavirus confinement conditions in the face of a scenario in which the spread of COVID-19 increases in Costa Rica and the world.
Besides, a failed agreement with the International Monetary Fund would slow down the pace at which production in Costa Rica is expected to grow.
Under a scenario where the necessary fiscal adjustment and agreement with the international body are not achieved, access to credit by the private sector would be restricted by approximately two percentage points per year in the 2021-2022 biennium. In addition to this, economic growth would be about one percentage point lower per year than the base scenario. Also, inflationary pressures could increase by just over 3 points per year.
A deterioration in the outlook for public finances could also pressure the exchange rate and create tensions in the financial market.
There is lower growth in the global economy in terms of external risks, especially in the face of a possible regrowth of the virus or delays in the distribution processes of COVID-19 vaccines.
Finally, Costa Rican economic growth can potentially be affected by the rise in petroleum derivatives’ international prices. Higher prices in such commodities could affect the country’s trade and export activities
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