15/07/2020 - Costa Rica is rightly focusing its efforts on combating the health, social and economic crisis caused by the Covid-19 pandemic with timely confinement measures as well as well-targeted and innovative economic support. Once the worst is past and a recovery is under way, it will be critical to stabilise public finances and improve spending efficiency to invigorate the recovery and maintain the economic and social gains of recent years, according to a new OECD report.
The latest OECD Economic Survey of Costa Rica shows that sound public policies including trade openness and the sustainable use of natural resources have led to a tripling in GDP per capita in three decades. Living standards are high, with near-universal access to education, healthcare and pensions. Reform momentum over the last 18 months has been outstanding, with the finalisation of numerous initiatives linked to OECD accession. Yet large budget deficits and rapidly rising public debt pose a threat to these achievements, even without the added pressures of the coronavirus crisis. In the short-term addressing the coronavirus outbreak and supporting those hardest hit are the overarching priorities. Once the recovery is well established, strict adherence to the recently agreed budgetary framework, in particular the “fiscal rule” aimed at limiting overspending, will be key. Continuing reforms to improve productivity and public spending efficiency will also be key for a strong recovery. Further reforms should seek to address the high levels of inequality and informality, and improve women’s participation in the labour market.
“Costa Rica has made remarkable progress on reforms to bring its public policies in line with OECD best practices, and this leaves it in a solid position to tackle the shock of Covid-19,” said OECD Secretary-General Angel Gurría, presenting the Survey by video conference alongside President Carlos Alvarado Quesada. “That said, the economic and social consequences from the virus will be significant. Maintaining the reform momentum and undertaking additional reforms as identified in this Survey will be the best way to uphold living standards for all Costa Ricans.” Read the Secretary-General's full speech.
As a small and open economy, Costa Rica is highly exposed to the global recession triggered by the coronavirus, the drop in international tourism and disruptions in global trade and global value chains. The Survey projects only a very gradual recovery. The best-case scenario sees GDP growth recovering to 2.7% in 2021 after a drop of 4.1% in 2020.
Vital spending on health and social protection in response to the coronavirus means the public deficit will rise again this year to reach nearly 9% of GDP, making it crucial to return to a deficit-reduction path once a recovery is well established. The analysis included in the report suggests that, once the recovery is well entrenched, adhering to the fiscal rule – which was a key element of the 2018 fiscal reform and aims to constrain growth in spending over time – would halt the rise in the public debt over time. However, any slippage would put the debt ratio back on a rising trend.
Looking beyond Covid-19, the Survey says further advances in living standards will hinge on raising productivity, which is held back by burdensome and costly regulations compared to OECD countries and regional peers. It suggests ways to improve product market regulations and lower barriers to competition as a way to boost business dynamism, lower the price of goods and services, and boost the purchasing power of Costa Ricans.
With financial inclusion key to reducing income inequality, the Survey also sets out ways to expand financial services and credit to a broader share of people and businesses in Costa Rica. Better access to credit and services can help households manage volatility in income and invest in education, and helps firms to invest, grow and increase productivity.
Costa Rica was invited to become the OECD’s 38th member in May, and is in the process of completing the relevant treaty ratification procedures to ensure the continuity and quality of joint work with the organisation in delivering the reforms identified in the Economic Survey as well as other post accession commitments.
See an Overview of the Survey with key findings and charts (this link can be included in media articles)
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