Caribbean & Central America - May 2022

Costa Rica’s new president Rodrigo Chaves has started to lay out his plans to kickstart the country’s troubled economy after winning the presidential run-off on 3 April, but details remain thin on the ground.

Chaves boasts an economics background as a former World Bank (WB) official who briefly served as finance minister (2019-2020), but he faces a difficult situation after taking office on 8 May. Costa Rica’s GDP rebounded from the effects of the coronavirus (Covid-19) pandemic, growing 7.6% in 2021 after declining by 4.1% in 2020, but poverty and unemployment remain high, at 23% and 14.4% in 2021, respectively.

On the other hand, the fiscal deficit came in at 5% of GDP in 2021, which marks an improvement from 8% in 2020. This follows the implementation of a 2019 fiscal reform under his predecessor Carlos Alvarado (2018-2022), whose government reached a US$1.78bn Extended Fund Facility (EFF) agreement with the International Monetary Fund (IMF). On 25 March the lender hailed the work of Alvarado’s government, saying that “the Costa Rican authorities have made important progress under their economic reform programme supported by the IMF over the last year”.

In addition, on 11 March international credit ratings agency Fitch also revised up Costa Rica’s outlook to stable from negative, citing “better-than-expected improvements in the fiscal position and economic activity”. Despite these positive pronouncements, Chaves has pledged to renegotiate the agreement with the IMF. Since his victory Chaves has described the deal as “indispensable,” but said it would need to be adapted to “global dynamics, the Costa Rican economy, and the new government’s priorities".

These priorities include reducing the cost of household goods, with Chaves promising to do so via executive decree. Other pledges include reviving economic growth by promoting a more business-friendly environment and reducing bureaucracy to attract more investment. “We will let you work, without getting in the way,” reads his manifesto. The document also proposes “radical digitalisation of the state” and promoting access to the banking system, as well as facilitating female involvement in the labour market by improving access to childcare. Chaves also pledges to boost tourism, citing medical tourism and digital nomads in particular. Other proposals include implementing bilingual education in schools and colleges and fighting corruption, as well as using public-private partnerships to improve infrastructure. Chaves also promises to apply the 2019 fiscal reform “without exception” and end tax exemptions for the wealthy.

His manifesto also includes a section on pension reform which calls the current system “unsustainable.” Chaves proposes that the state pay the same contribution to every pension scheme; strengthen voluntary and obligatory pensions; and crack down on so-called “luxury pensions,” which pay out more than their previous salary to former civil servants such as judges or university professors. This is a topic which regularly makes news in Costa Rica, although there are only around 4,000 people who receive them, according to a 2018 analysis by local media outlet Nación.

Chaves ran on an outsider ticket and has promised to shake up the existing power structures in Costa Rica. However, he may face some difficulties enacting his plans as his conservative Partido Progreso Social Democrático (PPSD) will have only ten of the 57 seats in the new unicameral legislature. The traditional right-of-centre opposition Partido Liberación Nacional (PLN) will have 19 seats, while the other traditional right-of-centre opposition party, Partido Unidad Social Cristiana (PUSC), will have nine seats. The rest of the legislature will be made up of seven lawmakers from the Christian conservative Partido Nueva República (PNR), six from the liberal Partido Liberal Progresista (PLP), and six from the left-wing Frente Amplio (FA).

Chaves did meet with the PLN’s 2022 presidential candidate, former president José María Figueres (1994-1998), in the days following the run-off, and said that the pair had “agreed to agree on the most important projects for the country” without providing further details. Suspicions have also been raised about the new president’s commitment to existing political rules: for example, his manifesto pledges to expand “direct democracy” along with populist rhetoric have invoked comparisons with authoritarian leaders such as El Salvador’s President Nayib Bukele, raising questions about Chaves’ commitment to Costa Rica’s institutions. If Chaves does attempt to circumvent democratic processes it will create further problems for the economy as investors and ratings agencies reassess the country’s prospects.

The fiscal deficit looks set to dominate the economic conversation as it has in recent years in Costa Rica, and on 28 April Chaves met with all 57 legislators to lay out his proposals. Eliécer Feinzaig, PLP leader, told Nación following the meeting that Chaves did not put forward plans to cut public spending but instead focused on combatting tax exemptions and evasion.

Chaves has said that he wants to make changes to the public employment law, a key part of the deal with the IMF which was approved by the legislative assembly on 7 March. He believes that the law, which would introduce a single pay scale and eliminate other salary components, doesn’t fix the problem of public spending on salaries, and he wants to pass a reform in his first year in office. In a statement dated 10 February Fitch said it believes that the existing measures “are important to keep meeting the primary fiscal targets,” but moving ahead with the law could spark street protests, like those which greeted the news that the bill had passed its first debate in the legislative assembly in June 2021. 

Chaves inherits a sticky situation, and it seems likely that he will struggle to resolve it, just like his predecessor. Inequality has increased in recent years and the trend worsened during the coronavirus (Covid-19) pandemic, while social unrest, including street protests against fiscal reform in recent years, are threatening Costa Rica’s image as the Switzerland of Central America. The new president will have to balance demands for social spending with the IMF programme on which the country’s attractiveness to investors largely hinges. His vaguely populist proposals may have been enough to win the election, but Chaves will now have to deal with the realities of governing in a fragmented political system.