I. Introduction: An Atypical Phenomenon in the Region
While the vast majority of Latin American economies focused their efforts on combating inflationary spirals after the pandemic, Costa Rica has entered a period of macroeconomic exceptionalism that radically distinguishes it from its peers. The country, along with Panama, crossed the threshold into sustained deflation, becoming an atypical case in a region historically characterized by inflationary pressures.
Official figures confirm the depth of this phenomenon. Costa Rica closed 2025 with negative inflation of -1.23%, marking the fourth consecutive year outside the target range established by the Central Bank of Costa Rica (BCCR), which fluctuates between 2% and 4%. Far from reversing, this trend intensified at the beginning of 2026: in January, the Consumer Price Index (CPI) recorded a year-over-year decline of -2.5% (with a monthly variation of -0.96%), marking the weakest reading since August 2023 and the largest monthly decrease observed since 1983.
What makes this situation a true “Costa Rican paradox” is that this systematic fall in prices does not respond to an economic recession or a depression of domestic demand, scenarios where deflation is traditionally observed. On the contrary, the economy showed robust dynamism, recording Gross Domestic Product (GDP) growth of 4.6% in 2025, one of the highest rates within the Organisation for Economic Co-operation and Development (OECD).
Experts and monetary authorities attribute this behavior to a complex interaction of factors: a positive “supply shock” derived from falling international commodity and fuel prices, combined with a historic appreciation of the colón against the dollar that has made imports cheaper. However, this scenario has generated an economy of contrasts, where macroeconomic stability coexists with structural tensions in traditional productive sectors and a relative increase in the country’s cost for external markets, challenging the competitiveness of the so-called “Switzerland of Central America.”
II. Causes of Deflation: Why Are Prices Falling?
To understand why prices are falling in Costa Rica while the economy grows, it is necessary to look beyond domestic demand. Unlike classic recessionary deflations, where people stop buying due to lack of money, the Costa Rican case primarily stems from a positive supply shock and a monetary policy that has maintained restrictive conditions in real terms.
Experts identify three major drivers behind this sustained drop in prices.
1. The “Super Colón” Phenomenon
The most decisive factor has been the massive and sustained appreciation of the national currency. From mid-2022 to August 2025, the colón appreciated approximately 27% against the dollar, even outperforming strong currencies such as the Swiss franc.
Cheap dollars: During 2025, the exchange rate reached levels not seen in 20 years, breaking the psychological barrier of 500 colones and trading in the wholesale market (Monex) near ₡481 by the end of the year.
Origin of abundance: This strength is due to an excess of dollars in the economy, resulting from the export success of Free Trade Zones, Foreign Direct Investment (FDI), and the recovery of tourism.
Price effect: As Costa Rica is a small and open economy, a large portion of the basic consumption basket is imported. With a cheap dollar, the cost of importing goods plummeted. Vehicle imports grew by 23% and imported food prices fell by 20% during this period, acting as a powerful anchor pulling the CPI downward.
2. External Factors: Commodity Relief
Costa Rica has imported global commodity deflation. After the logistics crisis of 2021–2022, international prices of key inputs normalized, eliminating pressure on local production costs.
Energy and Food: The country’s oil bill fell drastically due to the drop in international crude prices (WTI), translating into cheaper fuel at service stations, a component with significant weight in inflation calculations. Likewise, prices of imported raw materials in general registered a 39% decline.
Logistics: Maritime freight and international transportation costs returned to pre-pandemic levels, deflating the final cost of goods delivered to Costa Rican ports.
3. The Central Bank’s Stance: Caution or Rigidity?
The third pillar of deflation is the monetary policy of the Central Bank of Costa Rica (BCCR). Although the institution reduced its Monetary Policy Rate (MPR) from a peak of 9.0% in 2023 to 3.25% by the end of 2025, critics and productive sectors argue that the adjustment has been too slow relative to price realities.
High Real Rates: With negative inflation of -1.23% (December 2025) and a reference rate of 3.25%, the real interest rate of the economy is close to 4.5%–5.8%, which is highly restrictive and encourages savings in colones rather than consumption or investment, perpetuating downward pressure on prices.
BCCR Justification: The monetary authority has defended its gradual approach by citing external risks, such as geopolitical volatility and global trade tensions, maintaining a “neutral” stance to ensure long-term inflation expectations remain anchored.
In summary, Costa Rican deflation is the result of an unusually strong colón and cheap external inputs, in an environment where borrowing money remains relatively expensive.
III. A Two-Speed Economy
Behind the macroeconomic figures that position Costa Rica as a growth leader within the OECD lies a marked structural duality. In practice, the country operates as two distinct economies moving at very different speeds: a dynamic external sector disconnected from local prices, and a stagnant domestic economy facing the rigors of deflation and exchange-rate pressures.
1. The “Growth Scissors”: Free Trade Zones vs. Standard Regime
Although GDP grew a solid 4.6% in 2025, this dynamism is not widespread. Growth is concentrated almost exclusively in the Special Regimes (Free Trade Zones), driven by medical device companies and high-tech service firms.
• The high-speed engine: Output in special regimes grew at double-digit rates, reaching 12.3% year-over-year during certain periods of 2025. These firms, representing nearly 14% of GDP, have shown high productivity, and their exports have grown exponentially (an average of 20.3% annually since the pandemic).
• The slow wagon (Standard Regime): In contrast, the Standard Regime, which accounts for 86% of national production and generates the vast majority of employment, shows worrying stagnation. Its growth has stabilized around 1.9% or, at best, averaged 3.3% for the 2025–2026 period.
• Sectors in red: The disparity becomes evident when examining specific activities. While medical input manufacturing soars, labor-intensive sectors such as private construction declined by 5.0% and agriculture contracted by 2.0% in 2025, hit by the loss of exchange-rate competitiveness and climatic factors.
2. Fiscal Erosion: When Deflation Hits Public Finance
The “paradox” of having deflation alongside economic growth has begun to take its toll on public finances. Tax revenue has deteriorated significantly because taxes are collected on the nominal value of transactions; as prices and the value of the dollar fall, the taxable base shrinks.
• Decline in revenue: The Ministry of Finance reported a decrease in the collection of key taxes such as Value Added Tax (VAT) at customs, the single fuel tax, and corporate income tax. The appreciation of the colón reduces the value of imports (and their associated taxes) and decreases exporters’ profits in colones, lowering their contribution to the treasury.
• Impact on debt: This deterioration in revenue forced the government and the Central Bank to postpone the goal of reducing public debt below 60% of GDP. Originally scheduled for 2025, this target has been moved to 2026, delaying the relaxation of the fiscal rule.
• Brake on social investment: Technical reports warn that the margin for fiscal adjustments through spending cuts has been exhausted. Falling tax revenues are closing the door to greater social investment in education, health, and security—areas already experiencing weakening real funding.
In summary, while part of the country celebrates export records, the domestic economy and public coffers face a resource constraint that threatens social cohesion and medium-term fiscal sustainability.
IV. Special Focus: Impact on Tourism and Foreign Visitors
The tourism sector—traditionally a driver of foreign exchange and employment in Costa Rica—faces what experts and business leaders describe as a “perfect storm.” While the country records deflation in colones, Costa Rica has become drastically more expensive for the international market. This section analyzes how exchange-rate appreciation has eroded destination competitiveness and altered travel flows.
1. Loss of Competitiveness: An “Expensive” Destination in Dollars
Although the Consumer Price Index (CPI) shows negative figures domestically, the reality for foreign tourists is the opposite. Due to the appreciation of the colón (around 27–28% since mid-2022), visitors receive significantly fewer colones for their dollars, effectively making their stay more expensive.
• The price effect: For a tourist paying in dollars, goods and services in Costa Rica are perceived as much more expensive compared to previous years and other destinations. Reports indicate that visitors find travel to Costa Rica more costly than to neighboring countries.
• Loss of market share: This loss of exchange-rate competitiveness has had tangible consequences. Between 2019 and 2024, Costa Rica’s share of U.S. tourists (its main market) among regional competitors fell from 20% to 17%. Countries such as the Dominican Republic and El Salvador, with more stable currencies or dollarized economies without Costa Rica’s internal costs, gained ground. Meanwhile, currencies in direct competitors such as Nicaragua and Guatemala remained stable or depreciated slightly, widening the cost gap.
2. The Financial Margin “Squeeze
The tourism industry is experiencing a structural financial mismatch under the current circumstances. Most of its revenues are denominated in dollars (hotel rates, tours), but its operating costs are in colones (wages, social charges, electricity, taxes), which have not fallen nominally.
• Profitability hit: Receiving dollars that are worth less while paying expenses in a currency that is worth more has severely compressed profit margins. This has limited companies’ ability to reinvest in infrastructure and, in some cases, has slowed hiring.
• Sector protests: This situation led productive sectors, including tourism workers, to take to the streets in early 2026, claiming that exchange-rate and monetary policy were compromising their stability and causing business closures.
3. Slowdown in Tourism Growth
Macroeconomic data confirm the sector’s loss of dynamism. Unlike the double-digit growth rates seen during the post-pandemic recovery, tourism has entered a phase of stagnation or marginal growth.
• Concerning figures: According to recent reports, the hotel and restaurant sector grew only 0.5% in 2025 (other sources cite 1%), and a slow recovery of 1.6% is projected for 2026—well below historical potential.
• Decline in arrivals: The Central Bank reported year-over-year contractions in tourist arrivals during key periods, such as a 3.4% drop in the fourth quarter of 2024 and a 1.8% decline in the second quarter of 2025. Additional factors, such as reduced airline seat availability, also influenced this performance.
4. The Other Side: The Boom in Outbound Tourism (Costa Ricans Traveling)
The “Super Colón” phenomenon has had the opposite effect for Costa Ricans: traveling abroad has become unusually cheap.
• Consumption leakage: Outbound tourism (Costa Ricans traveling abroad) has grown at an average annual rate of 20% between 2022 and 2025.
• Importation of services: This increase in outbound travel is recorded in the balance of payments as an increase in service imports, demonstrating how the purchasing power of the local currency has incentivized consumption outside national borders instead of domestic tourism.
V. Labor Market Paradox
While official figures show a historic reduction in the unemployment rate, a deeper analysis reveals a troubling reality. The Costa Rican labor market faces a structural contraction in its workforce, where statistical improvements in unemployment are not due to massive job creation but rather to thousands of people who have stopped looking for work.
1. The “Mirage” of the Unemployment Rate
By the end of the fourth quarter of 2025, the National Institute of Statistics and Census (INEC) reported an unemployment rate of 6.3%, one of the lowest figures since the Continuous Employment Survey began (2010). At first glance, this indicator suggests a booming labor market. However, analysts and academic sectors warn that this figure is misleading.
• Fewer people searching: The reduction in unemployment is mainly explained by a decline in the Net Participation Rate, which fell to 54.5% by the end of 2025 (a drop of 2.2 percentage points compared to the previous year).
• Job destruction: Rather than robust net job creation, comparative data between the third quarter of 2024 and 2025 suggest that nearly 49,000 jobs were lost in sectors such as commerce, industry, and tourism, while the total labor force shrank by approximately 140,000 people.
• The hidden figure: Independent estimates suggest that if discouraged workers and others of working age who left the labor market were included, the real unemployment rate could be around 14.5%.
2. The Great Exodus: Why Are Workers Leaving?
It is estimated that between 2022 and 2025, nearly 300,000 people left the labor force, moving into inactivity. The Central Bank (BCCR) and INEC identify three main drivers behind this phenomenon:
• Demographic aging: A structural shift in the population pyramid. The group aged 60 or older has increased its relative weight, and 48.8% of labor market exits correspond to this segment, which retires due to age or pension.
• Care responsibilities (Gender factor): The gender gap persists and deepens. Female labor participation (43.2%) is significantly lower than that of men (65.9%). Many women leave the labor force due to “family obligations” (childcare or eldercare), given the lack of support networks and rising service costs.
• Discouragement and studies: Among young people (15–24), although many cite studies as the reason for not working, this group faces a 22% unemployment rate, placing them in a position of high vulnerability and discouragement in the face of market opportunities.
3. Informality and Job Quality
Despite economic growth of 4.6%, job quality has not improved at the same pace. The informality rate stood at 37.8% at the end of 2025.
• Incomplete transition: Although there was a reduction in the absolute number of informal jobs (around 36,000 fewer), this did not translate into a proportional increase in formal employment (which grew by only 14,000 positions). This suggests that many people who lost informal jobs did not find formal employment but instead exited the labor force.
• Exclusion: Informality continues to affect nearly 829,000 people, leaving them outside the social security system and with unstable incomes, limiting the country’s tax base and the sustainability of the Costa Rican Social Security Fund (CCSS).
In summary, Costa Rica is experiencing a paradox in which macroeconomic unemployment indicators improve “for the wrong reasons”: not because there is work for everyone, but because a significant portion of the population has stopped trying.
VI. Outlook 2026–2027: A Soft Landing in Times of Uncertainty
Looking ahead to 2026–2027, economic authorities and international organizations project a scenario of slow normalization for Costa Rica. The country will seek to transition from the exceptional period of deflation and the “super colón” toward a more sustainable macroeconomic balance, although the path will be marked by geopolitical risks and internal challenges.
1. Growth Projections: Slowdown and Rebound
The Central Bank of Costa Rica (BCCR) estimates that the economy will enter a moderation phase after the 2024–2025 boom.
• GDP figures: Growth of 3.8% is projected for 2026, a slowdown compared to the estimated 4.6% for 2025. However, a rebound to 4.0% is expected in 2027.
• External brake: The slowdown in 2026 is mainly due to weaker external demand and idiosyncratic factors, such as the exit or strategic shift of multinational electronic component companies (including Intel’s restructuring and Qorvo’s closure), affecting manufacturing service exports.
• Internal engine: Unlike previous years, growth will be driven mainly by domestic demand, supported by recovery in investment and household consumption, favored by improved real disposable income.
2. Inflation and Rates: The Long Road to Target
The return to price normality will be slower than expected, requiring vigilant monetary policy.
• Persistent deflation: BCCR models indicate that overall inflation will remain negative during the first half of 2026. A return to the tolerance range (2%–4%) is not expected until the second quarter of 2027.
• Monetary policy: The Monetary Policy Rate (MPR) closed January 2026 at 3.25%. Stability at this level or marginal downward adjustments are expected, as the Central Bank considers this rate to be neutral, despite high real interest rates due to negative inflation.
3. Fiscal Sustainability and Debt
Public finance consolidation remains a priority, albeit with adjusted timelines.
• Fiscal rule and debt: The goal of reducing public debt below 60% of GDP—triggering fiscal rule flexibility—has officially been postponed to the end of 2026.
• Revenue risk: The main challenge will be maintaining a positive primary balance (revenues exceeding expenditures excluding interest) in an environment where deflation and a low exchange rate have eroded the tax base, particularly in customs and fuel.
4. Risks on the Horizon: The Trump Factor and Climate
The baseline scenario is subject to significant risks that could alter the trajectory:
• U.S. tariffs: The trade policy of the Trump administration represents a direct threat. The possible imposition of global or specific tariffs (10%–15%) and the revision of incentives for U.S. companies operating abroad (such as the Keep Call Centers in America Act) could hit the export engine and foreign direct investment in Costa Rica.
• Climate factors: The transition toward the La Niña phenomenon could generate supply shocks in agriculture, putting upward pressure on food prices and affecting local production.
• 2026 electoral cycle: Political uncertainty typical of an election year in Costa Rica (February 2026) usually generates caution in private investment and volatility in the exchange market, adding complexity to economic decision-making.
VII. Conclusion: The Crossroads of Stability
Costa Rica’s economic situation between 2024 and 2026 will go down in history as a period of macroeconomic exceptionalism. The country achieved what seemed impossible for many Latin American nations: eradicating inflation while maintaining GDP growth above the OECD average. However, this statistical success has come at a high cost in the real economy, creating a “crossroads” where price stability coexists with deep structural fractures.
The deflation phenomenon, driven by nearly 30% exchange-rate appreciation and falling international prices, has functioned as a double-edged sword. On one hand, it has protected the purchasing power of households consuming imported goods and facilitated the reduction of the debt-to-GDP ratio below 60% earlier than expected. On the other hand, it has eroded the competitiveness of the local productive sector and tourism, making Costa Rica more expensive in dollars and provoking a “consumption leakage” abroad, while fiscal revenues weaken as the tax base of key taxes such as VAT and fuel shrinks.
The “two-speed” model has consolidated: a high-tech engine in Free Trade Zones soaring independently of local costs, and a Standard Regime—where most companies and workers operate—struggling to move forward. This duality is starkly reflected in the labor market, where the low unemployment rate (6.3%) masks the reality of thousands of people, especially women and older adults, who have withdrawn from the labor force due to a lack of attractive opportunities.
Looking ahead, the challenge for monetary authorities and the incoming government in 2026 will not only be to keep inflation low, but to manage a “soft landing” that allows interest rates and the exchange rate to normalize without triggering an inflationary spiral. The sustainability of the Costa Rican model will depend on its ability to reconnect GDP growth with mass job creation and prevent the cost of being the “Central American Switzerland” from becoming unaffordable for its own citizens and visitors.
