After five years of the COVID-19 pandemic, the economy has finally fully recovered. For example, after registering a 4.3% drop in production in 2020, the country averaged growth close to 4% starting in 2022. This helped sectors recover, driven by free trade zones, specifically medical supplies and technology-related items.
Inflation is another factor that contributed to this recovery. Although this rate rose to 12% in 2022 as a result of the pandemic and the conflict between Russia and Ukraine, it later decreased, even reaching record levels. The decline in this indicator is primarily due to the reduction in the cost of imported raw materials, including oil, as well as the drop in the exchange rate.
On the other hand, from 2020 to July 2022, the dollar’s price rose against the colon, even reaching ¢700. Therefore, the Central Bank attempted to reverse the trend to control inflation, and the exchange rate began to decline, a process that has continued to this day, with the dollar hovering close to ¢500.
“It is important to ensure that the excess dollars observed in the economy come from various sources, including: the dynamism in tourism and exports, the good performance of foreign direct investment, especially from free trade zones, and the loans provided by the government,” said Vidal Villalobos, economic advisor at Grupo Financiero Prival. Regarding employment, this has also been recovering after reaching 25% in 2020; However, there are sectors lagging behind, such as agriculture.
On the other hand, other sectors such as technology and services have been experiencing growth, while tourism and exports are reporting a decline, mainly due to the fall in the exchange rate.
Way of working changed
Women returned to the labor market after many of them were forced to resign to care for elderly people or children, and a large number of startups also emerged. The way of working changed to a more hybrid model (in-person and virtual), and automation accelerated. Furthermore, artificial intelligence took on a greater role in improving efficiency and reducing costs.
“On the fiscal side, the contributions of the 2018 reform have materialized in revenue as a percentage of GDP that increased by more than one percentage point and spending that has been limited by the fiscal rule, and the debt-to-GDP ratio has entered a downward path. All of this has led to improvements in the external debt rating and puts us on the verge of being rated investment grade if we continue to consolidate our assets,” said Pablo González, portfolio manager at Grupo Financiero Mercado de Valores.
However, he stated that he is concerned about something, and that is that new challenges have arisen. For example, the budget has shown a deterioration in allocations to key sectors such as education, health, and social programs, an element that has not been satisfactorily explained by the sectors that have been affected.
On the other hand, tax revenue was affected by the lower exchange rate, which is associated with the success of the foreign trade and tourism promotion strategy of recent years.
An investment destination
However, this economic recovery has caused countries to once again look to Costa Rica as an investment destination. “The country has seen the fruits of a strategy to attract foreign direct investment, implemented for more than three decades, especially with the arrival of Intel in the mid-1990s, which was strengthened by the nearshoring and friendshoring practices implemented by companies migrating from Asia to the West in search of stabilized supply chains, something our country took full advantage of,” said José Antonio Vásquez, Corporate Finance Director of Banco Nacional.
He added that, looking at FDI data for the five-year period prior to 2019, it averaged approximately $2.8 billion annually, while for the five-year period following 2019, even considering the decline in 2020 due to the pandemic, it rose on average to approximately $3.8 billion.
“This acceleration in the structural transformation that our economy has been experiencing since the end of the last century is also producing changes in other variables. For example, GDP has been evolving more rapidly in terms of its share of the special or free trade zone regime. Before 2020, the special regime accounted for less than 10% of Costa Rica’s GDP; today, that share has risen to 15%, demonstrating this rapid change in the structure of domestic production,” he said.
