Costa Rica Economic Crisis: Should I Cancel My Trip?

ChifrijoJones Jul 20, 2023 9:28:47 AM

If you’ve been paying close attention to the news in Costa Rica, you might notice stories about unrest, roadblocks, and protests in the streets. In related news, you might also read that the country is dealing with challenging economic problems. The unemployment rate is reaching record highs of more than 20% and growing [source in Spanish]. 

Naturally, news like this might create doubts about a pending trip to the country. 

Should you cancel or postpone your trip? Only you can make the ultimate decision on that, but the short answer is probably not. The odds are low that these issues will negatively impact your trip. Additionally, spending on goods and services by foreign travelers helps the Central American country’s economy recover. 

Costa Rica’s economic problems are why people are protesting.

The COVID-19 pandemic has put the entire world under economic pressure. However, Costa Rica’s economy was already dealing with mounting public debt. Debt as a percent of GDP has been rising since 2016, with the total projecting double since 2016. 

The country closed 2019 with public debt equaling an alarming 6.96% of the gross domestic product (or GDP).  

Costa Rican President Carlos Alvarado. Photo credit:MadriCR, CC BY-SA 4.0, via Wikimedia Commons

As the Costa Rican economy worsens, the nation’s currency, the Colón, is progressively losing value against the USD, further exacerbating the crisis as the money loses spending power. The nation’s central bank has taken action to stave off the impending currency crisis by selling $53.6 million US dollars. 

Now, as the COVID-19 pandemic cuts a massive hole in the country’s tourism industry, the government’s Ministerio de Hacienda (Treasury Department) is projecting a budget deficit of 9.7%. In late-June of 2020, the World Bank made a USD 300 million loan to address the pandemic’s hardships. 

The Costa Rican government has petitioned the International Monetary Fund for another loan to alleviate the short term stress on the economy. The measures associated with this potential loan, such as more and higher taxes and spending cuts to institutions such as the education system, are a significant part of the protesters’ complaints. 

The protest movement, known as Rescate Nacional (National Rescue), blocked vital roads in the country and, in some cases, physically clashed with police. 

The protestors are no longer conducting roadblocks as the president of Costa Rica has created a summit of more than 60 groups and sectors of the community to find solutions that the majority of Costa Ricans can support. 

The summit is scheduled to end on November 20th. The resulting proposed legislation is to be sent to the national legislature, known as La Asamblea de Diputados, by December 1st.  

How did Costa Rica get to this point?

Long-time Costa Rican television reporter Pilar Cisneros recently published an editorial video on YouTube (see it here). She outlined her understanding of this problem’s history and her suggestions on what structural reforms should be taken to alleviate it. 

According to Cisneros, “Costa Rica isn’t a poor country; it’s a country that is impoverished by irresponsible or inept politicians.” She highlights the four most recent presidents’ administrations of two parties, the moderate National Liberation Party and the center-left Citizens Action Party. 

President Arias, or Don Oscar, as many Costa Ricans call him, achieved a budget surplus in his first two years in office, 2006 & 2007. However, in 2008, as the world struggled with a significant economic crisis, President Arias increased public spending to boost the domestic economy. By 2010, the national debt was the highest in Latin America, equaling 5.5% of the GDP. The number of public employees increased by 20%.  

During the successive three administrations, those of Laura Chinchilla, Luis Guillermo Solis, and the current president, Carlos Alvarado, the debt has increased along with government spending. 

From 2008 to 2020, government spending has increased by 87%. Now, the average compensation for public employees is three times more than the average worker in the private sector. Cisneros points out two egregious examples of government over-spending: bonuses to public employees for arriving early at work, and so-called luxury pensions for retired public employees, which can total more than the workers’ previous salary. 

Cisneros goes further by rhetorically asking her viewers if they feel like the 320 government agencies and bureaucracies that these highly-paid public workers deliver an excellent quality of service. 

Regarding taxes, Cisneros proposes that the government tighten up enforcement of tax collections. She references a lack of investment in tax collection, as illustrated by obsolete tax formulas and few auditors, which means that tax evaders have been able to skirt tax law for decades. She implies that this situation is partly due to politicians looking out for their rich friends via 192 tax loopholes in the current code, which equals 5.57% of the gross national product. According to Cisneros, closing these loopholes would cover the fiscal deficit, eliminating the need for additional taxes. 

What is the way forward?

As a rule, I don’t express my opinion on controversial political topics of a country of which I’m not a citizen, even Costa Rica. However, I am willing to share an outside perspective as a frequent visitor with a long history in the country and many close friends who are Costa Rican.

I’ve asked many of my tico friends what they understand about the causes of the current fiscal crisis. Their understanding of the situation is almost universally consistent with the history that Cisneros outlines in her video. 

There are two parts of the deficit-reducing formula: more tax revenue and less public spending. 

It seems inevitable that the government will be forced to cut at least some public spending. I have no idea how much it will be and how it will happen. 

Based on the intensity and ferocity of the recent protests, it seems that the Costa Rican people don’t have an appetite for more taxes. 

From my limited perspective, the best option is to boost tax revenue, not through increased taxes on ticos, but by creating policies that drive economic growth by attracting money from outside the country. 

There are multiple pieces of legislation under consideration that would potentially do just that.

Digital Nomad Visa

One proposed law, which is of great interest to me and many other FoCJs (Friends of Chifrijo Jones), is a new type of visa for remote workers, or the so-called Digital Nomad visa.  

The pandemic has changed how and where many people work. It forced many companies, who probably wouldn’t have considered employing a remote force, to rapidly create the infrastructure and processes necessary to use a distributed workforce. When the pandemic is over, a portion of those businesses won’t bring their workers back to offices in the way that it was pre-pandemic. They have adapted and, in some cases, are benefiting from increased productivity. Many have saved money on real estate leases. 

The proposed law would allow visa-holders to remain in the country for one year with an option to extend for six months. Visa-holders could open a bank account and drive. They could bring in with them the equipment they need to do their jobs without paying import duties. 

As the proposal is written now, visa applications would be taken via a website and must be accepted for denied within 15 days. Maria Luisa Madrigal, a writer for El Financiero, doubts the government bureaucracy’s ability to act so quickly [source in Spanish]. 

Additionally, unless the bill is amended, applicants would be required to have a monthly income equal to or greater than USD 5,000. This requirement would disqualify many early-career remote workers, who are the most likely to work from abroad due to fewer family commitments. For comparison, the rentista visa requires a $2,500 monthly income, and pensionado status only requires $1,000. 

Hemp and Cannabis

Costa Rica faces some big decisions regarding its future role in the quickly growing legitimate hemp and cannabis industries. 

The global industrial hemp industry totals an estimated USD 4.71 billion. Industry revenues are projected to grow at a rate of 15.8% [source]. 

One Costa Rican legislator, Zoila Volio, introduced a pending bill to legalize the industrial hemp and medical cannabis industries in Costa Rica. President Carlos Alvarado has supported the bill’s industrial hemp portion but has not yet commented on the medical cannabis portion [source in Spanish]. 

The hemp and cannabis industries seem like excellent opportunities to facilitate more foreign direct investment in the country, as entrepreneurs look to take advantage of the growing market. Additionally, as marijuana becomes more accepted in places like the United States and Canada, Costa Rica could become a significant exporter to their northern neighbor countries. 

Should I be worried about traveling to Costa Rica during this economic crisis?

Probably not.

There are additional risks associated with international travel anywhere due to the pandemic. Only you can make the final decision regarding your tolerance for health risk in this most unusual time. 

If you’re okay with increased risk associated with travel, then I wouldn’t let the fear of political unrest or economic problems cancel your trip. They are unlikely to impact your trip. In fact, this might be an excellent time to travel because the lower demand drives great values for tourists, and the money you spend on your journey helps the country’s economy recover. 

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