Costa Rica has had economic growth for 2021 at 7.6% and projects 3.9% for 2022: Central Bank
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The Central Bank of Costa Rica projects for 2022-2023 growth above the long-term trend. While the labor market continues to recover, but more slowly than economic activity.
Costa Rica had economic growth for its powerful performance in 2021 of 7.6% much higher than estimated and well above the last projections of October, where the growth of 5.4% had been predicted; and 4.0% is estimated for 2023, says the Central Bank of Costa Rica in the most recent “Monetary Policy Report”.
Within the framework of the presentation, the Central Bank of Costa Rica projects for 2022-2023, a growth above the long-term trend. While the labor market continues to recover, but more slowly than economic activity.
This report points out that the fiscal performance was much better than projected and helps to contain the debt. And it mentions that inflation has remained relatively subdued, but some risks lean toward an acceleration of growth.
Despite the distinct challenges the country has to face because of inflation, fiscal problems, economic reactivation, the pandemic, among other aspects, the Central Bank sees growth, which could be an early economic reactivation for Costa Rica.
The president of Central Bank of Costa Rica, Rodrigo Cubero, who spoke only with Forbes Central America, said that the factors that have affected the rise in inflation are external elements, but there is also the so-called base factor/effect and there essentially what we are talking about is that a year and a half ago when the pandemic began, inflation tended significantly downward, i.e. in Costa Rica there was even a small deflation.
He added it is against those months of low inflation that we are comparing the inter-annual inflation rate at the time of calculating inflation for the year 2021 and inevitably there had to be a rebound effect, of that base factor that was occurring by comparing inter-annual growth rates as inflation is defined.
When comparing the year 2021 against 2020, which established a relatively low base, there are external factors that push upwards, such as:
- Prices of raw materials, Costa Rica is an importer of these, an example of a raw material that has been most affected directly and indirectly is the price of oil, which has increased significantly since mid-2020 until today, i.e. it is a rise in prices to the producer and consumer.
- Maritime freights by containers and bulk, and although freight costs, as well as raw materials, have moderated, it has been an important factor in the rise of inflation.
- Inflation increases with trading partner countries, particularly with importing countries. If inflation increases in the United States, imported prices increase.
- The depreciation of the exchange rate of the Costa Rican colon has upward pressured the prices of imported goods, which translates into pressure on consumer prices.
There is a monetary component in inflation with Costa Rica. The inflation that has been observed Cubero states is not because of a pressure that has been seen, or a pressure on the demand side, and although it does not have monetary edges, it does not fiscally have them either, there has not been a fiscal stimulus package, it is not an increase in aggregate demand, what has affected inflation is not a supply shock of imported prices.
While it is true, that inflation has increased, it has remained at moderate rates, the year-on-year inflation rate as of December was 3.3%, significantly lower than the average inflation rate of the region, including advanced countries, and within the range for the Central Bank.
Cubero explains that, in a moderately contained inflation, but rising because of external factors that are temporary, foreign analysts have been saying that at least it will last at least until the middle of 2022, so it will be more lasting than initially expected in that context the inflation issue.
In addition, given the rapid recovery of economic activity in Costa Rica, where there was a much higher growth than expected in 2021, the Central Bank is just revising the growth estimates for the coming years and the sustained external pressures on the domestic consumer price index.
“The Central Bank reversed the expansionary monetary policy stance and increase it by 50 basis points. At the last meeting of the Board of Directors in December, 50 basis points were added, and from 75 basis points to 125 basis points with the monetary policy rate. We foresee that in this year we will continue normalizing the monetary policy rate to take it to a relatively neutral position, it is still in an expansive position as it was qualified in the Central Bank, until taking it to a gradual position,” adds the president of the Costa Rican banking entity.
When asking the president of the Central Bank of Costa Rica about the measures that will be taken in terms of the monetary policies of the Central Bank and the government, he explains that:
In the Central Bank, they are going to be collecting a little of the aggregate liquidity position of the economy, and absorb the liquidity that exists to make effective the reversal of the expansionary stance of the monetary policy.
And the government is committed to a process of fiscal consolidation, which is fundamental in Costa Rica, where for decades there has been a significant fiscal problem, manifested in a high fiscal deficit and a growing ratio of central government debt to GDP.
Cubero emphasized that what the pandemic did was exacerbate this problem, there was a fall in the financial regulation and displaced the financial debt to the rise, taking it to top rates, this 2021 the debt will close with 70% of GDP.
He added that another measure is to continue the agreement with the International Monetary Fund (IMF) so that the fiscal stance remains contractionary, which complements the monetary policy stance of gradually normalizing this expansionary stance until it reaches a neutral position.
“The most important engine for the economic reactivation has been the external sector, the manufacturing export sector of the free trade zones and those that have to do with medical devices, these were easily adapted to the needs of the pandemic, adjusted their production lines, that generated a rise in exports, that industry recovered quickly,” said Cubero.
The president of the Central Bank also pointed out that the information and telecommunication industry, with virtual meetings and teleworking, have come out ahead and have grown; and exports of software and business support services have boomed since mid-2020 and 2021.
For Rodrigo Cubero, president of the Central Bank of Costa Rica, the main economic challenges for 2022 are:
The normalization of economic conditions as the pandemic is controlled globally, which is subject to an important risk factor, it has already begun with monetary policy and is starting the normalization path for financial policies, including prudential regulation policies that the Financial System had relaxed against the impact of the pandemic and now at the beginning of 2022 have normalized.
Another challenge is to lead with the pandemic today one of the main economic policies, which are precisely the policies of reducing infection rates and vaccination, Cubero points out are the best solutions we have for the “shock” with the COVID-19, and it is an important economic challenge to continue vaccinating the Costa Rican population, ensure reinforcements, and strengthen the communication of health protocols.
It is also a challenge to continue dealing with external inflationary pressures, and the reversion of the expansionary policy by advanced countries and particularly in the United States, as expected by the markets.
And the economist concluded by mentioning that in Costa Rica to continue focusing on fiscal consolidation and having the agreement with the IMF in force, will undoubtedly be a factor that will give confidence as long as this program remains in force, as it will give familiarity to the domestic and international financial markets, because of the new government that could give uncertainty to markets and investors.
