Costa Rica

Growth to slow but stay resilient

In 2024, Costa Rica's economy maintained solid growth, albeit at a slightly slower pace than in 2023. In 2025, growth is expected to slow somewhat further. Base effects will not be as favourable. Private consumption (64% of GDP in 2023), which is still the main driver, could be less supportive. First, the unemployment rate is expected to be the lowest in more than a decade (at around 6.5%). Second, inflation is expected to return as the steep currency appreciation that was seen in 2024 ceases. Real wages are set to grow only moderately. Gross fixed investment (9% of GDP) will continue to play a key role in economic expansion, supported by strong business confidence. The country attracts significant foreign direct investment (FDI), which reached record levels in 2023 and remained robust in 2024, driven by the country's political stability and low operational risks compared to neighbouring countries.

Monetary policy will remain loose, but further rate cuts are unlikely. The central bank’s decision to hold rates in January 2025, potential inflationary pressures from the US, and its tendency to follow the FED point to a cautious outlook. Last, foreign trade will make a more muted contribution to growth. While resilient US demand supported exports and tourism in 2024, export growth is expected to slow in 2025 due to weaker US demand and the strong colón, the local currency. Tourism (8% of GDP) continues to be a plus, with visitor arrivals returning to pre pandemic 2019 levels, but base effects from post-pandemic recovery and the robust currency will weigh on growth. Meanwhile, strong domestic demand will drive steady import growth, limiting the overall impact of net exports on headline growth.

Continued fiscal consolidation alongside the IMF

The country has made significant progress in fiscal consolidation in recent years, aligning with the programme agreed upon with the IMF in 2022. A key component of the programme is the public employment bill which introduced a unified pay scale and eliminated additional salary components. The reform is enabling the government to cut spending, with estimated average annual savings of 1% of GDP over the first five years following its introduction. In 2025, fiscal consolidation is expected to continue, driven by the fiscal rule that limits spending growth and reallocates resources to priority areas. The primary surplus (excluding debt interest) is projected to reach 1.6% of GDP, supporting fiscal stability. The draft budget 2025 and updated Medium-term Fiscal Framework (MTFF) prioritise reallocation from personnel expenses, aided by the wage freeze, to capital investment projects aimed at supporting long-term growth. Recent advancements in debt management and the deepening of domestic financial markets are anticipated to lower financing costs (9% of GDP in 2025). Although no substantial tax policy changes are planned, ongoing tax administration efforts should strengthen revenue (25% of GDP) mobilization. These measures will collectively ensure the sustainability of public finances and maintain the downward trend in the debt-to-GDP ratio (public debt is 70% domestic).

The current account deficit widened slightly in 2024 due to more sluggish external demand and is unlikely to vary by much in 2025. Weaker US demand (accounting for around 46% of exports) coupled with a durably strong currency will weigh on exports, while resilient domestic demand will support steady import growth, which is somewhat restricted by lower hydrocarbon prices. Tourism will continue to contribute to the services surplus (around 10% of GDP) which offsets most of the trade and income deficits. On that score, the primary income deficit will remain high (8% of GDP), reflecting high external debt servicing. As the country remains a major recipient of greenfield FDI relative to its GDP, these inflows are expected to continue playing a key role in financing the current account deficit. Since most of external debt (42% of GDP) is private and likely linked to FDIs, this further underscores the importance of sustained investment flows.

Challenges arise with Trump’s second term and looming elections

The 2022 presidential election was marked by the victory of the "outsider", Rodrigo Chaves, the centre-right candidate of the new Social Democratic Progress Party (PPSD). His term has been marked by high popularity (54% positive ratings in September 2024 according to the CIEP-UCR poll) as the country's economic conditions have improved markedly in recent years with lower inflation and a stronger fiscal position. The political and social climates are expected to become somewhat tenser in 2025 as preparations for the February 2026 presidential election unfold. President Chaves is constitutionally barred from seeking immediate re-election, but his high popularity means that any candidate he chooses to back could play a decisive role. His government has struggled to pass reforms as the PPSD party holds only nine of the 57 seats in Congress. In May 2024, Chaves proposed a national referendum to push through key reforms and passed the Jaguar Law to boost Costa Rica's development. The law aims to streamline investment projects by limiting the powers of the Comptroller General, but critics argue that it could weaken anti-corruption measures. The Constitutional Court rejected two versions of the bill in July and October 2024, prompting Chaves to criticise the legislature and judiciary for blocking his agenda. With elections looming, tensions between Chavez and lawmakers could escalate, leading to further delays in rolling out reforms.

In terms of foreign policy, Costa Rica maintains strong economic ties with the US, its main trading partner. In addition, the fight against drug trafficking and related crime, and the challenge of growing northbound migration through the region remain two common objectives. In particular, the massive flow of migrants from Venezuela through the Isthmus of Panama to the US raises social, budgetary and health concerns, especially since Donald Trump's inauguration in January 2025. Under his leadership, the US has launched mass deportation campaigns, ended programmes such as Biden's Safe Mobility Initiative and closed migration processing centres in Costa Rica and other Latin American countries. Donald Trump has warned of strict consequences for irregular immigration, halting asylum arrivals and legal pathways for refugees. Chancellor Arnoldo André is seeking speedy involvement with the new administration to secure Costa Rica's position amid regional uncertainty. Despite the challenges on the horizon, opportunities may also arise, including attracting US companies relocating from Asia.

Last updated: February 2025