Costa Rica experienced a surge of infection cases in the second half of 2020, which delayed the easing of confinement measures. After a deep recession this year, GDP is projected to recover gradually in 2021 (by 2%) and gain momentum in 2022 (by 3.8%). As confinement measures are progressively lifted, domestic demand will recover, but remain subdued due to high unemployment. Uncertainty related to high public debt will weigh on investment. The rebound of the US economy will help exports recover, particularly of medical supply and business services.
In reaction to the pandemic, the authorities have appropriately increased health and social protection spending, after having suspended the fiscal rule. However, once the recovery is underway, putting public debt on a declining and sustainable path is key for macroeconomic stability, and hence fiscal prudence and the fiscal rule should be reinstated at that stage. Ensuring that social spending primarily reaches those who need it the most would support incomes, reduce poverty and raise spending efficiency. Reducing regressive tax exemptions could help to increase revenues. Lowering the administrative burden for starting and formalising businesses would raise investment and formal job creation.
Costa Rica’s social and economic progress has been remarkable. A strong commitment towards trade openness has been key to attract foreign direct investment and move up in the global value chain. The effort to provide virtually universal health and pensions has translated into well-being indicators comparable with OECD standards in several dimensions. Costa Rica has also shown a strong commitment to preserving natural resources. Challenges to retain achieved successes and to continue converging towards higher living standards are substantial. The fiscal situation remains a critical vulnerability. Reform momentum has been extraordinary, as a significant number of legal initiatives linked to OECD accession have been finalised. This includes the fiscal reform approved in December 2018, a historic step to restore fiscal sustainability. These reforms would also facilitate the recovery from the COVID-19 shock. In the short term, addressing the coronavirus outbreak is the overarching priority. Once the recovery is established, full implementation of the fiscal reform is critical to restore medium-term fiscal sustainability, ensure macroeconomic stability and set the basis for higher incomes and wider spread improvements in living standards.