GDP growth will recover gradually to 2.5% in 2021 and 3.4% in 2022, supported by strong external demand from Costa Rica’s main trade partners. Domestic demand will strengthen in the second half of 2021, as economic restrictions are gradually lifted and the vaccine campaign progresses. Inflation will slowly increase, but remain below the 3% target rate as spare capacity remains large. An extended fund facility agreement has been negotiated with the IMF with the aim of putting public debt on a declining and sustainable path.
To attain a strong and inclusive recovery top policy priority should be on boosting formal jobs creation, with reforms ranging from removing obstacles to firm entry and competition, to improving the quality of education and training.
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2021 Structural Reform Priorities
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.