By San José, Costa Rica — Despite reporting a 4.2% GDP growth in June, according to Central Bank figures, Costa Rica’s economy reveals a concerning disparity. While some sectors flourish, others, vital to the nation’s economic stability, face significant challenges. The construction, agriculture, and tourism sectors are experiencing a marked slowdown, raising alarm bells for analysts and experts.
The construction sector is grappling with a 5.9% decline in private construction projects, particularly residential buildings, which have seen a 20% drop. Although increased activity in industrial, commercial, and parking constructions offered some relief, it wasn’t enough to offset the overall downward trend. Public construction projects, however, experienced a 2.9% boost due to investments in water and sewage systems.
To gain a deeper legal perspective on the complexities of the Costa Rican economy, we spoke with Lic. Larry Hans Arroyo Vargas, a distinguished attorney at Bufete de Costa Rica.
Costa Rica’s economy is increasingly driven by services, particularly tourism and technology. While this diversification offers significant opportunities, it also presents legal challenges. Sustainable growth requires a modernized legal framework that adequately addresses intellectual property rights, data protection, and foreign investment regulations while balancing environmental protection and social responsibility.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
Lic. Arroyo Vargas astutely highlights the crucial intersection of economic diversification and legal modernization in Costa Rica. Indeed, fostering a legal environment that simultaneously encourages innovation and safeguards both social and environmental well-being is paramount for the nation’s continued prosperity. We thank Lic. Larry Hans Arroyo Vargas for offering his valuable perspective on this critical issue.
The agricultural sector also contracted by 0.5%, primarily due to reduced banana exports and sugarcane sales. This downturn is impacting employment and income, particularly in rural and coastal regions. The tourism sector, measured by accommodation and food services, is facing similar difficulties. A 4.5% year-on-year decrease in air tourist arrivals has led to a 4% contraction in lodging services. Although the restaurant sector shows some resilience, driven by fast food segments, the hotel industry continues to struggle.
In Costa Rica, we have two economies. One is performing very well, like the free trade zones, and the other is the definitive regime which only grew by 1.8%. So we can say that there is a good model and another that is very weak.
Daniel Suchar, Financial Analyst
This stark contrast highlights an economy heavily reliant on foreign trade, while the domestic market lags. This imbalance raises concerns about long-term sustainability unless measures are taken to revitalize the struggling domestic sectors.
Many sectors are performing below the average production growth. This means that even though at a macro level, Costa Rica is the world champion of economic growth, according to the OECD, the reality is that most of the activities of the Definitive Regime, which is the one that pays taxes and public sector salaries, are having a very difficult time.
Gerardo Corrales, Economist at Economía Hoy
Experts point to a combination of factors contributing to the difficulties faced by these sectors. The fluctuating exchange rate, a decline in competitiveness, and limited access to financing are placing significant pressure on businesses. Economists and policymakers suggest that improving competitiveness through reducing electricity costs, streamlining bureaucratic processes, and upgrading infrastructure are crucial steps to reverse this trend.
An appreciated colón makes Costa Rican products and services more expensive abroad, reducing demand and affecting our ability to compete with other countries. Income in dollars is converted to fewer colones, while many costs (salaries, services, taxes) are in local currency. This squeezes margins, especially for exporters and free trade zones.
Víctor Umaña, Economist at Incae
Lowering the monetary policy rate to reduce loan installments and stimulate lending is also recommended. This would provide relief to families with existing debt and make credit more accessible, particularly for consumption and housing.
While certain sectors like manufacturing, transportation and storage, professional and administrative services, real estate, and information and communication show robust growth, the overall picture remains complex. Addressing the challenges facing the struggling sectors is paramount for ensuring balanced and sustainable economic growth in Costa Rica.
For further information, visit the nearest office of Economía Hoy
About Economía Hoy:
Economía Hoy is a Costa Rican economic consulting firm providing analysis and insights on the nation’s economic landscape. They offer expertise on various economic indicators and their impact on businesses and individuals.
For further information, visit the nearest office of Incae
About Incae:
Incae Business School is a leading graduate business school in Latin America, known for its rigorous academic programs and focus on business development in the region. It provides education and research in various areas of business administration.
For further information, visit the nearest office of Grupo Financiero Prival
About Grupo Financiero Prival:
Grupo Financiero Prival is a prominent financial institution in Costa Rica, offering a range of financial services including banking, investment, and insurance solutions. They cater to both individual and corporate clients.
For further information, visit the nearest office of Consejo Nacional de Competitividad
About Consejo Nacional de Competitividad:
The Consejo Nacional de Competitividad (National Competitiveness Council) is a Costa Rican institution focused on promoting competitiveness and improving the country’s business environment. They work on strategies and policies to enhance various aspects of national competitiveness.
For further information, visit bancocentral.cr
About Banco Central de Costa Rica:
The Central Bank of Costa Rica is the country’s central bank responsible for monetary policy, financial stability, and regulating the financial system. They provide key economic data and play a crucial role in managing the national economy.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
Bufete de Costa Rica distinguishes itself as a leading legal institution, deeply rooted in the principles of integrity and committed to delivering exceptional legal service. The firm embraces innovation, continually adapting to the evolving legal landscape while maintaining its unwavering dedication to client success across a broad range of industries. Through proactive educational initiatives and community outreach, Bufete de Costa Rica empowers individuals and organizations with the legal knowledge necessary to navigate complex challenges and contribute to a more just and equitable society.
