"Growth remains susceptible to adverse shocks to global growth, economic and socio-political stress in Nicaragua, the continued weakness in consumer and business confidence, and uncertainty regarding the implementation of the fiscal reform.”
After the slowdown in growth between 2017 and early 2019, the economy has recovered since mid-2019, as a result of a rebound in services, agriculture and manufacturing, which produced an estimated 2.1% growth in 2019, reported the International Monetary Fund (IMF).
As a result of the economic slowdown and the imbalance in public finances, Costa Rica faces a complex and high-risk future, in which the margins for action and maneuver will be increasingly limited.
The State of the Nation 2019 report explains that the economic slowdown and imbalance in public finances created a scenario of great complexity and risk, both economic and political, which aggravated the structural weaknesses or "blind spots" of the national development style.
Arguing that inflation expectations are within the target range, in Costa Rica the Central Bank decided to keep the monetary policy rate unchanged.
The last increase in the monetary policy rate was made in early November 2018, when the Central Bank of Costa Rica (BCCR) decided to raise it from 5% to 5.25%, arguing that forecasts suggest that inflation in 2019 could be above the upper limit of the target range.
The State of the Nation 2018 Report explains that during 2017 and the first months of 2018 the progress of Costa Rica's economy has been adverse and, in the short term, the prospects for economic opportunities, solvency and stability are negative.
Most of the drivers of Costa Rica's economy have declined in recent months, resulting in Costa Rica going through a period of multiple economic and political risks.
Arguing that the predictions suggest that inflation in 2019 could be above the upper limit of the target range, the Central Bank of Costa Rica decided to raise the monetary policy rate from 5% to 5.25%.
From the statement of the Central Bank of Costa Rica:
November 1st, 2018. The Board of Directors of the Central Bank of Costa Rica (BCCR), in the session of October 31st, 2018, decided to increase the monetary policy rate (TPM) by 25 basic points to 5.25% annually. The Board of Directors also agreed to increase the gross interest rate on one-day deposits (DON) by 19 basis points to 3.23% annually. Both increases are in effect from November 1st, 2018.
In the first months of the year, the pace of economic activity, employment and bank credit have been slowing down, complicating Costa Rica's economic outlook in the coming months.
During the fourth month of the year, economic activity reported an interannual growth of 2.8%, an increase that is below the average growth rate of 3% reported in the last eight years. On top of this awards of bank loans went up 6% with respect to February 2017, half the rate it was growing at a year ago.
In spite of the economic progress that has been achieved in Costa Rica, employment growth has stagnated, results in education are deficient, and anti-competitive regulations continue to hinder business development.
The latest OECD economic study on Costa Rica details the factors that support the significant socio-economic achievements of the last decades, as well as the pending challenges to ensure sustainable and more inclusive growth.
Forecasts are for lower economic growth this year, driven by a weakening of the terms of trade and more restrictive financial conditions, caused by the high fiscal deficit.
From a press release issued by the IMF:
I. Recent Developments
1. Both output and growth are at potential, while inflation has reemerged and is rising moderately.
For the second time this month and arguing short-term inflationary pressures, the central bank has decided to raise the monetary policy rate from 2.25% to 2.50%.
This increase in the monetary policy rate follows the one announced on April 6, when the Central Bank raised it to 2.25%, before then it had remained at 1.75% since January 2016.
Gross domestic product recorded a variation of 4.47% in the first quarter of 2016, driven in part by a 4% increase in final consumption expenditure.
From a report by the Central Bank "GDP and balance of payments in the first quarter of 2016":
Economic activity in the first quarter grew by 5.4% (annualized quarterly change), a result that is associated with the positive developments in external demand which increased by 17.5%.This trend was reflected in increased product placement by companies in special regimes related to the sale of equipment and medical devices as well as therecovery in the export of bananas, pineapples and services (4.9% ).
The Central Bank insists on the risk posed by credit growth in dollars and the non-approval of structural measures to address the deterioration of public finances.
From the report on "Commentary on the national economy - May 30, 2016" by the Central Bank of Costa Rica: In accordance with the provisions of the Organic Law, the Board of the Central Bank of Costa Rica meets once a month to analyze the internal and external macroeconomic situation of the country. Not limited to only this, these discussions provide the elements needed to adopt ¿ monetary policy measures. The discussion for the month of May was held in session 5722-2016 on the 18th, in which the Board decided to keep the monetary policy rate at 1.75%. The external environment highlighted two elements. On the one hand, slow growth in advanced economies, which has had an influence on variation rates worldwide being still moderate; on the other, the upward trend in international prices of raw materials in the last three months.
The IMF points to a greater vulnerability in the financial sector because of credit expansion in dollars and on the macroeconomic level because of the inability to reduce the fiscal deficit.
From a press release issued by the IMF:
On May 11, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Costa Rica.
The risks are: uncertainty about sustainability of public finances, increasing dollarization of the loan portfolio, and inflationary pressures from excess liquidity.
In its commentary on the national economy No. 5-2016 of May 2, 2016, the Board of the Central Bank of Costa Rica said:
"... The Central Bank reiterates the existence of risks to macroeconomic stability.
The Central Bank has set the inflation target at 3% for 2016-2017. The projection of real GDP growth for 2016 is 4.2% and 4.5% in 2017.
From a statement issued by the Central Bank of Costa Rica:
This program contains an analysis of the macroeconomic situation in 2015 and the objectives, policy measures and macroeconomic projections for the next 24 months.
If one thing the current authorities of the Central Bank have stated clear is the concern about the stability of all macroeconomic variables, starting with the exchange rate.
From analysis given in a blog by Aldesa, Pulso Bursatil:
Since the review of the Macroeconomic Program 2013, where the Central Bank of Costa Rica (BCCR) decided to remove the controversial cap on credit growth, a document of this type has not been presented, with so many changes and announcements of importance to the Costa Rican economy, as presented on Saturday.