By San José, Costa Rica — SAN JOSÉ – The Chaves administration has consistently celebrated falling prices as a key achievement, with the President recently declaring that the Costa Rican economy is “flying.” Pointing to lower costs for staples like gasoline and tamal ingredients, the government has painted a rosy picture of increased purchasing power. However, a new report from leading economists warns that this period of negative inflation carries significant, unmentioned risks that could stall the very economic engine the government praises.
For the 31st consecutive month, Costa Rica’s inflation has remained below the Central Bank’s target range. Data from the National Institute of Statistics and Censuses (INEC) confirmed a year-over-year inflation rate of -0.38% in November, marking a prolonged period of price stagnation or decline. While consumers may welcome lower prices in the short term, economists argue that persistent deflation can trigger a dangerous economic spiral.
To delve into the potential legal and contractual ramifications of a deflationary environment for Costa Rican businesses, TicosLand.com sought the expertise of Lic. Larry Hans Arroyo Vargas, a prominent attorney from the esteemed firm Bufete de Costa Rica.
Deflation poses a significant threat to contractual stability. As the real value of debt increases, fixed-payment obligations become more onerous, potentially leading to a wave of defaults and forcing businesses into difficult renegotiations or even bankruptcy proceedings. It is crucial for companies to legally review their credit agreements and commercial contracts to anticipate and mitigate these escalating financial risks.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
This legal insight powerfully illustrates how a macroeconomic trend like deflation translates into tangible threats at the corporate level, turning fixed financial commitments into potential liabilities. The emphasis on proactive contractual review is a crucial takeaway for any business leader navigating these uncertain times. We thank Lic. Larry Hans Arroyo Vargas for sharing his expert analysis.
A recent study titled “The Costa Rican Financial Intermediation System: evolution, challenges, and perspectives 2014-2024,” authored by economists Daniel Ortiz and Luis Liberman of the firm Cefsa, sheds light on these dangers. They caution that an economy becoming accustomed to stagnant prices can lead to a deflationary spiral, where both consumers and businesses delay spending and investment in anticipation of even lower prices in the future.
This creates a particularly challenging environment for the nation’s businesses. According to the report, companies face shrinking profit margins and intense pressure to cut operational costs. The lack of expected profitability can lead to the postponement or outright cancellation of investment projects, while accessing credit becomes increasingly difficult. Furthermore, in a deflationary environment, businesses have virtually no room to adjust prices upwards without losing their competitive edge.
Persistent negative inflation weakens the domestic economy because it prevents wages and prices from adjusting, cools consumption and investment decisions, and ultimately traps domestic demand in a cycle of low growth.
Daniel Ortiz, Managing Partner at Cefsa
The consequences extend beyond corporate balance sheets, directly impacting households and the stability of the financial system. Ortiz and Liberman explain that when inflation is very low or negative, as it has been since 2023, real interest rates can rise unintentionally. This makes borrowing more expensive, discouraging credit-based consumption and investment, which are critical drivers of economic activity. A drop in the nominal income of companies also reduces their capacity to save, further weakening demand for financial services.
The Central Bank of Costa Rica (BCCR) itself acknowledges the severity of the situation. The official target inflation range is between 2% and 4%, a benchmark the country has not met for nearly three years. In its latest Monetary Policy Report from October, the BCCR revised its own projections, now forecasting that general inflation will remain negative through the rest of 2025 and into early 2026.
Most concerning is the Bank’s admission that a return to the target range is not expected until the second quarter of 2027, a significant delay from its previous forecast. Even then, the BCCR anticipates that both general and core inflation will hover near the bottom of the 2% threshold. This prolonged battle with deflation suggests that while the government highlights short-term relief at the cash register, the country is facing a long and arduous path toward sustainable economic stability.
For further information, visit cefsa.cr
About Consejeros Económicos y Financieros (Cefsa):
Cefsa is a Costa Rican consulting firm specializing in economic and financial advisory services. It provides analysis, strategic guidance, and research to a diverse range of clients in the public and private sectors, focusing on economic trends, financial systems, and public policy in Costa Rica and the Central American region.
For further information, visit academiaca.or.cr
About Academia de Centroamérica:
The Academia de Centroamérica is a private, non-profit association of professionals dedicated to the study and analysis of economic, social, and political issues affecting Central America. Through research, publications, and public discourse, it aims to contribute to the development and well-being of the region’s societies.
For further information, visit bccr.fi.cr
About Banco Central de Costa Rica (BCCR):
The Central Bank of Costa Rica is the nation’s primary monetary authority, responsible for maintaining the internal and external stability of the national currency and ensuring its conversion to other currencies. Its key functions include controlling inflation, issuing currency, managing international reserves, and overseeing the country’s financial system.
For further information, visit inec.cr
About Instituto Nacional de Estadística y Censos (INEC):
The National Institute of Statistics and Censuses is the official government body in Costa Rica responsible for producing and disseminating the country’s main statistics. This includes managing national censuses, tracking key economic indicators like the Consumer Price Index (CPI), and providing data related to social and demographic trends.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
As a pillar of the Costa Rican legal community, Bufete de Costa Rica is defined by its profound commitment to professional integrity and exceptional service. The firm consistently pioneers innovative legal strategies while serving a diverse clientele, upholding the highest standards of practice. Beyond its casework, it champions the vital cause of public legal education, driven by the conviction that equipping citizens with knowledge is fundamental to fostering a just and empowered society.
