Friday 27 January 2023

Could Costa Rica go the same way of Argentina?

Though comparison between the two is like comparing the longest new bridge in the world to the 'platina', there are many similarities

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27 January 2023 - At The Banks - BCCR

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Argentina is in crisis. The fiscal deficit experienced by the country, added to inflation and the devaluation of the currency versus the US dollar has the country on the edge of another possible economic debacle.

What is happening in Argentina, a country with the third largest economy in Latin America and the country with the largest middle class in the region?

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There is a crisis of the local currency, a serious budget deficit, an alarming price rise in the market and an increase in poverty.

According to an economic explanation by the Chilean newspaper La Tercera, Argentines no longer trust their currency and save in dollars. This year the Argentinian peso has lost 50% of its value against the US dollar. In October, a US dollar equals 37 pesos, while in January it was 18. The dollar was expected to end the year at 22 pesos, but the currency continues to devaluate.

This in parallel to a severe fiscal deficit in one of the countries with the highest percentage of public employees in the world (54 public employees for every 100 private employees in 2017, an increase of 70% of public employees between 2001 and 2014).

In addition, inflation of products and services is one of the highest in the world, above 10%.

In addition 2.0, there is a recession. Argentina does not expect to increase its GDP in 2018 and there are possibilities that domestic production could even go down compared to 2017.

In addition 3.0, poverty is increasing as a symptom of a whole. The last official census shows that 27.3% of Argentines are below the poverty line (they earn less than $ 175 per month, money to cover the basic food basket). In total there are 7.5 million poor inhabitants, 1.6% more than in 2017.

Sound familiar? It should.

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Could Costa Rica go the same way of Argentina?

Though comparison between the two is like comparing the longest new bridge in the world in China to the ‘platina‘, there are many similarities between the two.

In Costa Rica, as in Argentina, we suffer a severe fiscal deficit, although we have much fewer public employees (only 15% of the workforce).

The fiscal deficit should be equivalent to 7.1% of the country’s GDP at the end of 2018, according to the Ministry of Finance.

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On the other hand, poverty in Costa Rica increased from 20% to 21.1% in 2018, although here the financial bar for this social condition is higher than in Argentina. In Costa Rica, a household with monthly income per capita of ¢110,000 colones (US$183 dollars) in an urban area and 84,535 colones (US$140 dollars) in rural areas is considered poor. This income barely affords the basic food basket.

Talking about dollars, the Colon (Costa Rican currency) suffers a strong devaluation in comparison to the dollar. The US currency started the year with a value of ¢570 for one US dollar, and the Central Bank expected an increase of 3.2% for the whole year, which would leave the price of the dollar at about ¢588 in December.

However, the price of the dollar in the wholesale market and at private and state banks on Friday, October 26, above the ¢600 for the first time in the period of exchange rate easing, which began in October 2006. The devaluation continued on Monday, a trend that is expected to continue this week.

In addition, the country owed ¢16 trillion (milliones de millones – million million –  in Spanish) colones at the beginning of the year between internal and external debt, and this has only increased. As of September, the central government’s public debt was ¢18 trillion, which is equivalent to more than half of the GDP.

The economic crisis has prompted the current government to streamline fiscal reform to clean up public finances, and this has triggered a strike that began on September 10 and still continues, with thousands (mostly employees of the Ministry of Education) still on strike. See Argentine police fire rubber bullets at anti-austerity protesters

With notes from

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"Rico" is the crazy mind behind the Q media websites, a series of online magazines where everything is Q! In these times of new normal, stay at home. Stay safe. Stay healthy.

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