The Costa Rican economy in the time of the coronavirus

At present, Costa Rica’s governmental authorities are concentrating their efforts to halt the advance of the deadly Covid-19 virus.  Some policymakers, however, are projecting what the effects of the ongoing pandemic will be on the Costa Rican economy.  Undoubtedly, there are consequences that are both macroeconomic and microeconomic in nature. 

Macroeconomic effects on the Costa Rican economy

Among the macroeconomic effects that will be manifest in the Costa Rican economy, as well as in the global economic system as a whole, are:

1. A reduced rate of overall growth: Overall growth is projected to be lower than at any point during the past decade.  In fact, on only two occasions during the last forty years has the Costa Rican economy recorded negative growth rates.  This happened for the first time as a result of the economic crisis of the early 1980s (in 1981 there was an economic decline of 2.3%, while 1982 saw a contraction of 7.3%). 
   
   The second decline of the Costa Rican economy occurred due to the effects of the global financial crisis that struck in late 2008. This event led to an eventual 1% drop in Gross Domestic Product (GDP) in 2009.  Today, economists project that the effects of the current health and economic crisis may be similar to those experienced in 2009, that is if the country takes measures aimed at minimizing the impact of the coronavirus on the Costa Rican economy.
     
2. An increase in unemployment: In response to a drop in growth, companies will decrease their employment rolls.  There is an expectation that the Costa Rican economy will begin to regain jobs as the country, and the rest of the world, recovers during the third and fourth quarters of this year.
   
   
3. A low rate of inflation: Inflation in the Costa Rican economy is projected to be at a low level in 2020.  Economists are predicting price rises of only 1.54%.  This is the case because there have been no internal macroeconomic imbalances. This state of affairs is partly due to the Central Bank’s efforts to shift foreign exchange risk into the market and to capitalize losses that have been carried for decades. 
   
   
4. Government debt at its limit: Central government debt began to grow appreciably in the second half of 2008 when it was above 23% of the nation’s GDP.  According to Moody’s Investors, Costa Rica’s fiscal deficit for 2020 will be at 8.1%, while the level of public debt will stand at 66% of the country’s GDP. 

National debt reduction is a government priority

Earlier this year, prior to the effects of the pandemic being felt, Costa Rica’s government launched a plan to reduce the national debt without resorting to public sector layoffs or the levying of new taxes.  Features of the plan include:

• The reduction of the public debt by 2.35% of GDP by making extraordinary debt payments during 2020 and 2021.
• The lowering of public spending by US $630 million per year (1% of GDP) through the enaction of a new public employment law that was presented to the country’s Congress on February 27^th.
• Saving US $138 million per year (0.22% of GDP) by replacing expensive debt with lower interest debt.
• An increase in revenues of US $3.9 billion during the period 2020-2023 through the modification of tax exemptions and the use of a portion of the revenues of state-owned companies to pay off debt.

The coronavirus pandemic will have an adverse effect on the government’s ability to apply these remedies to the Costa Rican economy.

The crisis has created serious microeconomic implications

As regards the effects of the coronavirus crisis on the nation’s microeconomic well-being, the following should be noted:

1. As of this past February, the Costa Rican Consumer Confidence Index registered 36.7 out of a possible 100 points. Given the present turbulence being felt in the Costa Rican, projections are that this indicator may fall to levels that are close to 20 points.  This, of course, implies a low consumption capacity.
   
   
2. The indicator for domestic credit granted by the financial system reached its peak in November of 2018 at an indicator of 284 points.  The current score of 276 points reflects that the nation’s financial institutions have a portfolio of loans that has not grown since November 2018.  This shows a decline in the demand for credit by the productive sector of the Costa Rican economy.
   
   
3. In the last two years, public banks have lowered the cost of credit by 39%, while private banks have done the same at a rate of 23%. These two sectors cover more than 80% of the Costa Rican market for credit.  A reduction in the interest rates paid on loans is a further indicator of the low demand that is manifest in the productive sector of the economy.

In addition to the aforementioned macroeconomic and microeconomic effects on the Cost Rican economy, the Covid–19 crisis has stifled the country’s import and export trade.  For instance, Costa Rican foreign trade companies report slow shipments and landings at ports in Asia, delays in returning containers, and reduced purchase orders from countries to which Costa Rica exports its products.