The World Bank In Costa Rica

In many aspects, Costa Rica is a success story in terms of development. It is considered an upper middle-income country, which has shown a steady economic growth over the past 25 years. This growth resulted from an outward-oriented strategy, based on the openness to foreign investment and gradual trade liberalization.

Costa Rica is also a global leader for its environmental policies and accomplishments, which have helped the country build its Green Trademark. The pioneering Payments for Environmental Services (PES) program has been successful in promoting forest and biodiversity conservation; making Costa Rica the only tropical country in the world to have reversed deforestation.

The combination of political stability, social contract and stable growth has resulted in one of the lowest poverty rates in Latin America and the Caribbean, where the proportion of the population living below the World Bank’s upper middle-income line (US$6.85 per person per day in 2017 PPP) decreased slightly from 15.6 to 13.7 percent between 2010 and 2019.

The success of the country in recent decades is also reflected in its strong indicators of human development, which have contributed to move the country up the global ranks, higher than the other countries in the region.

While these achievements are celebrated, the country faces fiscal and social challenges that have been intensified by the COVID-19 pandemic which has hit hard Costa Rica.

Fiscal consolidation efforts, launched in 2018, were interrupted as revenues collapsed amid increasing expenditures needed to mitigate the impact of the pandemic. Unemployment rates nearly doubled -surpassing 20 percent in mid-2020- and family income declined despite the government’s emergency response. As a result, the poverty rate (US$6.85, in 2017 PPP) increased to 19.9 percent in 2020.

A strong economic performance in 2021 and spending discipline enabled a faster than expected fiscal consolidation and allowed to improve labor market and social outcomes. The Gross Domestic Product (GDP) recovered 7.8 percent in 2021 after the largest drop in four decades in 2020. A strong rebound in manufacturing, particularly of medical equipment, and a gradual recovery in services and agriculture lifted GDP above pre-crisis levels. The poverty rate (US$6.85, in 2017 PPP) declined quickly to 14.3 percent in 2021 as the economy recovered.

However, new external pressure, including high international energy and food prices and tighter financing conditions, are starting to slowdown economic activity.

Growth is expected to moderate to 3.3 percent in 2022 and 2.7 percent in 2023, reflexing the challenging external environment, but should rebound to around 3.1 percent in 2024 supported by Costa Rica’s dynamic exporting sectors. Inflation is partially offsetting the effects of economic growth and putting the purchasing power of the lowest income groups under strain. Considering current compensating social assistance measures, poverty (US$6.85 line, 2017 PPP) is estimated to have decreased modestly to 14.1 percent in 2022.

As inflation stabilizes,labor market conditions improve, driven by growth in the services sector, and the temporary emergency programs conclude, the poverty rate is expected to stabilize at around 14.3 in 2023 and 2024. Poverty could be further reduced with the implementation of targeted social assistance measures to historically disadvantaged groups and those living under the poverty threshold.

A small, open economy, Costa Rica is highly vulnerable to external shocks, including global inflationary pressures and tighter financing conditions; all these increase food and energy costs and add financing pressures, increasing uncertainty of the economic outlook both at the macro and household-level.

Fiscal consolidation is expected to continue over the forecasting period, anchored in the fiscal rule and the IMF supported program. Additional announced reforms, such as reduction of tax expenditures and reduced fragmentation of social programs, are critical to reinforce fiscal consolidation and create buffers against shocks while protecting the poor and implementing a well targeted, effective and flexible social protection policy. Building consensus around reforms is key but will take time.

These challenges affect the basic pillars of the Costa Rican development model: inclusion, growth, and sustainability.

The government has strived to address these problems and is committed to an inclusive society that guarantees the welfare of its people, supported by transparent and accountable public institutions.

Last Updated: Apr 04, 2023

To date, the Country Partnership Frameworks (CPFs) established by the World Bank and the Government of Costa Rica have fostered a closer partnership between the World Bank Group (WBG) and Costa Rica, based on mutual learning and knowledge sharing.

The fourth and current CPF, which reflects the analytical underpinnings of the Systematic Country Diagnostic, features a highly selective program that is organized around the following two strategic pillars

• Reducing constraints to productive inclusion; and
• Bolstering fiscal, social, and environmental sustainability

Based on this CPF, the WBG is supporting the Government’s efforts to bolster fiscal sustainability, increase the efficiency of its fiscal management, strengthen its capacity, manage its natural assets, and address climate change.

As of early April 2023, the active portfolio in Costa Rica includes five projects totaling US$811.74 million in net commitments. Cooperation includes a US$420 million loan to support the efforts of the Government to improve the availability and quality of the universal health insurance system and to enhance its institutional efficiency.

Additional projects, approved in March 2020, are supporting the Government in their policy response during and after the health crisis to ensure fiscal sustainability. The Sustainable Fisheries Development Project (US$75.1 million) aims to help Costa Rica increase the productivity and sustainability of the fisheries sector and improve the livelihoods of coastal communities, while the Fiscal Management Improvement Project ( US$156.64 million) will promote voluntary compliance of tax obligations, facilitate trade, and improve expenditure management.

A US$300 million loan was approved in June 2021. This was the second in a series of three operations to support Costa Rica’s Government program to protect people’s income and jobs from the impact of COVID-19 (Coronavirus), benefit small and medium enterprises (SMEs), reinforce fiscal sustainability in the aftermath of this health crisis, and to lay out the foundations for a strong post pandemic recovery by promoting green growth and low-carbon development.

Finally, on March 2023, the second Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (Cat DDO) was approved. This loan will enable the country to secure readily available financial resources in the event of major disasters, including the adverse effects of climate change and disease outbreaks.

In December 2020, Emission Reductions Purchase Agreements for US$60 million were signed. The agreements are for the purchase of measured, reported and verified Emission Reductions (ERs) related to reduced deforestation and forest degradation (known as REDD+), the enhancement of forest carbon stocks at the national level in Costa Rica, and distribution of ER payments in accordance with an agreed Benefit Sharing Plan.

Environmental, climate change, and disaster risk interventions have been supported through trust funds, such as the Partnership for Carbon Market Readiness (PMR), the Nationally Determined Contribution Just-in-Time (NDC JIT), the Forest Carbon Partnership Facility, the Global Partnership for Sustainable and Resilient Landscapes (ProGreen), and the Global Facility for Disaster Reduction and Recovery (GFDRR).

In addition, support was provided to enforce a Sustainability Protocol at the Reventazón Hydroelectric Plant of the Costa Rican Institute of Electricity, an international example that proves it is possible to develop hydroelectric projects applying the industry’s best environmental and social practices.

Regarding energy and transportation electrification, the World Bank is supporting the initiative to transition towards an energy model that optimizes the use of renewable resources. The decarbonization of the industrial and transport sectors is sought through the progressive electrification and diversification of the energy matrix, in an environment of greater regional integration and opening of international energy markets.

The following trusts support this undertaking: the Spanish Fund for Latin America and the Caribbean, the Korean Fund for Sustainable Growth, the Alliance for the support of the National Determined Contributions (NDCs) achievement and the Energy Sector Management Assistance Program (ESMAP). The training of technical teams and the design of financial instruments and sector plans outstand among the activities to achieve improvements, both in the regulatory framework for the electrification of public transport and in the integration of renewable energies in the electricity grid.

Last Updated: Apr 04, 2023

Through the Higher Education Project, Costa Rica’s public higher education system has benefitted from an improvement in access and quality. Enrollment in undergraduate programs has reached the target of more than 102,000 students, and in graduate programs, more than 7,000. The total number of officially accredited programs in the four participating universities has also surpassed the target of 106. 

In the area of infrastructure, more than thirty construction projects have been completed, including new schools and university buildings, research laboratories and dormitories. The benefits for the indigenous population also stand out, with the number of indigenous students enrolled in the four universities doubling between 2014 and 2017.

The World Bank also conducts research and analysis in Costa Rica. In recent years, a Poverty and Inequality Assessment stands out, which contributed to understanding the factors that explain the stagnation of the poverty rate and the increase in inequality in a context of economic growth. The report provides high-level policy recommendations, which have made it possible to prioritize areas for dialogue with the government and other actors in the country. Other analytical work in recent years includes a case study entitled Primary Health Care Achievements and Challenges within the Framework of the Social Health Insurance, the Costa Rica Social Sector Expenditure and Institutional Review, research series on green and inclusive growth, a working paper titled A Behavioral Approach to Water Conservation, and a gender assessment.

Through the Program for Results project "Strengthening of the Universal Health Insurance", the availability and quality of the universal health insurance system, as well as the institutional efficiency of the Costa Rican Social Security Fund (CCSS), have been improved. Under the project, objectives such as the reduction of waiting lists and improvements in the treatment of chronic diseases have been met. For example, the goal of 43 percent of patients with type II diabetes identified and with optimal clinical control was exceeded. Improvements in colorectal cancer screening also exceeded the goal of 40 percent of the target population. In addition, expectations were exceeded in the percentage of surgeries performed on an outpatient basis (46 %). One of the greatest achievements is in the expected percentage of the total number of primary health care units equipped with the Unique Digital Health Record (90.10 % achieved). The successful implementation of a pilot of integrated health care networks is another one of the attainments of the project.

Disaster Risk Management (DRM) programs have further improved Costa Rica’s preparedness to respond to disasters through risk reduction and prevention programs. The regulatory and institutional DRM framework was strengthened with the introduction of a legal framework that requires all new public investments to follow DRM best practices and include a hazards assessment. This enhanced capacity of Costa Rica to implement its DRM program was supported by the WBG’s Catastrophe Deferred Drawdown Option (CAT DDO), which provides a source of immediate liquidity in case of disasters.

In December 2020, Emission Reductions Purchase Agreements for US$60 million were signed. In August 2022, Costa Rica became the first country in Latin America and the Caribbean to receive payments from the Forest Carbon Partnership Facility (FCPF), receiving $16.4 million for reducing 3.28 million tons of carbon emissions during 2018 and 2019.

Last Updated: Apr 04, 2023