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Overview

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 steady 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 as the government sought 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 19.8 percent in 2020.

A strong economic performance in 2021 and spending discipline enabled a faster than expected fiscal consolidation and started 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 2.9 percent in 2023, reflexing the challenging external environment, but should rebound to around 3.2 percent in 2024 supported by Costa Rica’s dynamic exporting sectors. Inflation is offsetting the effects of economic growth and putting the purchasing power of the lowest income groups under strain. Despite compensating social assistance measures, poverty (US$6.85 line, 2017 PPP) is projected to increase modestly to 14.4 percent in 2022.

As inflation stabilizes and labor market conditions improve driven by growth in the services sector, the poverty rate is expected to decline in 2023 and then stabilize at around 13.8 percent in 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. 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: Oct 04, 2022

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Costa Rica: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments
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Country Office Contacts

San José de Costa Rica
Cynthia Flores Mora
Plaza Roble, Edificio El Patio, Piso 1 Escazú, Costa Rica
+(506) 2549-5806
+(506) 2549-5800
EEUU
1818 H Street NW. Washington DC, 20433
+1 202 473-1000