The challenges facing the Costa Rican national economy for the remainder of 2023

International organizations such as the World Bank, the International Monetary Fund, and the Economic Commission for Latin America and the Caribbean (ECLAC) have advised that economic growth will be very modest, even decelerated, potentially affecting the Costa Rican national economy.

The estimates of the Gross Domestic Product (GDP) growth for Costa Rica stand at 2.3%. According to the most recent Quarterly Analysis carried out by the Institute for Research in Economic Sciences (IICE) of the University of Costa Rica (UCR), this figure marks the end of the recovery from the post-pandemic period.

The small margin of economic growth that has been forecasted stems from multiple causes. First, they include a drop in global economic growth. This circumstance will likely intensify the latent reality of Costa Rican households who feel that essential goods and services are becoming increasingly expensive and those who must pay more for their credit and no longer have enough resources to cover basic needs.

“After reaching a year-on-year growth rate of the Costa Rican national economy of more than 10% throughout 2021, this indicator showed a clear decline from the first quarter of 2022 (8.08%), plummeting to 3.30% for the third quarter of 2022. Last year, the interannual growth rate of the Monthly Economic Activity Index (IMAE) fell. Under this scenario, the country’s internal demand continued to decrease, which projects great challenges for Costa Rican in the current year,” said Daniela Córdoba Solano, IICE researcher.

To project what the country could face in economic matters for the remainder of 2023, it is necessary to understand the legacy of the recent past. Since 2022, the Costa Rican national economy has experienced very high inflation as a ballast. This circumstance slowed economic recovery, leaving families with decreased purchasing power. 

The Costa Rican national economy will recover at a slower pace

The slowdown of the economy is an international phenomenon. In a context of uncertainty in the foreign market, all the countries of Latin America and the Caribbean are expected to have moderate growth that will be well below the rates reached for 2021 and 2022.

In this sense, the Economic Commission for Latin America and the Caribbean (ECLAC) estimates that the economic growth of the entire region will barely reach 1.3% and, although slightly higher, projections for the Costa Rican economy that is close to 2.3 % for 2023.

Leiner Vargas, economist and professor at the National University of Costa Rica indicated that growth expectations are similar to those achieved in 2022 but well below a solid recovery.

“The recovery in Europe and the United States will be prolonged. This affects exports from countries like Costa Rica due to our close relationship and dependence on these markets,” Vargas explained.

The exchange rate, which has shown a downward trend in recent months, will depend to a large extent on factors that are difficult to predict. However, experts project that it will continue with stable parameters. This circumstance is due to the approval of Eurobonds and official loans, which will allow more dollars to circulate in the market.

For his part, economist Luis Paulino Vargas noted that it is difficult to think about economic reactivation policies on the part of the Government, which continues to be affected by the limitations imposed by the government’s new Fiscal Rule and a recent agreement made with the International Monetary Fund.

Dynamic sectors of the Costa Rican economy

Several productive sectors of the Costa Rican national economy have experienced improvements in recent months. This includes tourism, encompassing accommodation and food sales activities. Also, the technology, transport, and storage companies showed positive recent gains.

Among the assessments made by economic experts is the suggestion that it is feasible for the expansion of exports from Costa Rican free zones to continue, although at a different rate than the country has been accustomed to.

Niches such as construction, agriculture, fishing, and livestock had decreasing activity levels, negatively affecting areas that in the past generated significant employment.

The recovery has been slow and has been different for all sectors. There have been small growth spurts, but many companies, especially small and medium-sized ones, carry a significant debt burden. Nevertheless, if economic indicators such as the exchange rate and inflation stay the same, the complete recovery of the Costa Rican economy will be easier.

Inflation and employment

Small productive poles will not create increased employment.

In terms of employment, Rodríguez added, the Monthly Index of Economic Activity has shown a slowdown of important economic activities in the last quarter of 2022. This includes sectors such as construction, manufacturing, and commerce, which employ many people. If they fail to recover further, it is probable that the jobs that are required will not be recovered. Unemployment levels may even increase.

In this sense, Leiner Vargas warned that the Costa Rican national economy has developed an economic model to create employment for a particular and specialized segment of workers. It encompasses workers with technological and bilingual skills and only translates into employment gains for a sector of the population. Within a slowdown in the economy, informal, temporary, and poor-quality employment will likely grow, which is insufficient to provide long-term benefits.

“The Costa Rican economy has become bifurcated and economic growth is no longer synonymous with opportunities, but rather a concentrator of wealth with limited employment dynamism. Some sectors are growing and doing well, but they are not lifting the rest of the economic ecosystem since they are small poles that do not evenly distribute jobs,” said Vargas.

Inflation unknowns

Inflation problems remain unresolved, geopolitical pressures continue in the energy sector, and the war in Ukraine has not stopped. The international scenario is not yet back to normal. This brings inflation consequences for the Costa Rican national economy and fewer opportunities to generate more quality jobs.

In 2022, inflation was a determining factor, and the increase in global interest rates directly affected the conditions of the nation’s stock market, affecting the pensions of Costa Ricans. A good part of these savings is invested abroad.

“We might think that inflation will have a moderate outlook, but a recession or drop in global growth would push it down. Many analysts are already warning about the crisis in China. Still, even so, we would expect inflationary pressure to stabilize a bit,” said Fernando Rodríguez, an economist at the National University.

But it will be necessary to consider that with a very strong inflationary history throughout the past year, where wages were depressed, Costa Rican families were left with a marked hole in their budget.

It is clear that if supermarket purchases are more costly, credit installments are higher, income is the same, or even a reduction in expenses is unavoidable.

In summary, added the economist Luis Paulino Vargas, 2023 will possibly be a year of recessive tonality, in which unemployment, labor informality, and underemployment will continue at elevated levels.

Interest rate stability will take time to be felt

According to the economist Fernando Rodríguez, the interest rates established by the Costa Rican Central Bank have already reached their maximum ceiling. However, this does not mean that the rates that families pay for their loans will rise. This is the situation because there is a gap between the monetary policy rate (set by the Central Bank) and the passive basic rate.

However, if inflation is moderated, it would be possible to lower the rates of loans paid by households and companies. This would generate some level of stability for the Costa Rican national economy.