Maintaining Momentum: Q&A With Costa Rica’s Central Bank Governor Róger Madrigal López

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Róger Madrigal López, Costa Rica’s central bank governor, speaks to Global Finance about the country’s outlook for the coming year.

Global Finance: What is your view of the Costa Rican economy in the coming 12 months?

Róger Madrigal López: Costa Rica’s economy is set to maintain its positive momentum in the coming months, with growth expected to hover around 4%. This growth trajectory builds on several favorable developments observed in recent years.

First, the country’s trade surplus has been improving significantly, reflecting a strong export sector. This trend is likely to continue, based on robust foreign direct investment [FDI] thanks to Costa Rica’s appeal as a destination for international capital, and complemented by the tourism sector returning to its pre-pandemic levels. Additionally, the services sector continues to gain prominence, evidencing the shift toward more service-oriented economic activities, which allows more economic diversification in products and markets.

However, there are some short-run challenges to address. Higher interest payments are putting pressure on fiscal resources, potentially limiting the government’s expenditure. This situation requires careful management to ensure that essential services and investments are not adversely affected.

Moreover, there are ongoing issues in the labor market, particularly with the integration of the female workforce. Addressing these issues through targeted policies will be crucial for fostering inclusive economic growth. Additionally, there are long-term challenges like improving human capital, enhancing infrastructure, and fostering competition.

In summary, while Costa Rica is on a positive path with continued growth and improving economic indicators, tackling the challenges related to fiscal constraints and employment will be key to ensuring a sustainable and equitable economic future.

GF: How important is it to institutionalize the central bank’s autonomy, as demanded by the International Monetary Fund?

Madrigal López: Institutionalizing the Central Bank of Costa Rica’s autonomy is crucial, which has been noted not only by the IMF but also by other international bodies, such as the Organization for Economic Co-operation and Development [OECD]. These organizations have consistently emphasized the importance of this measure for ensuring effective and independent monetary policy.

The empirical observation is that, in the long run, independent central banks are more successful in achieving price stability and autonomy.

There is a proposed legislative initiative that aims to address these recommendations by adding a final paragraph to Article 188 of the Costa Rican Constitution. This amendment would grant the BCCR administrative and governance autonomy, thereby safeguarding its essential functions. It ensures that the bank can set its own objectives and targets without undue external interference.

GF: What is your view on the economic outlook of the Central America region?

Madrigal López: The economic outlook for the Central America region is quite varied, as each country faces its own unique set of challenges. For instance, some countries share similar characteristics with Costa Rica, such as a shift toward a services-based economy and notable growth in recent years.

In contrast, other countries in the region are grappling with the need for greater economic integration and accelerated growth to enhance their average income levels. Notably, these other nations have benefited significantly from remittance flows, which play a crucial role in their economies. All our economies have also simultaneously faced the challenge of increasing their debt-to-GDP ratios following the pandemic shock.

Overall, there are opportunities for growth and improvement across the region. The path forward involves addressing these diverse challenges and leveraging the benefits of economic reforms. They also need to convince the rest of the world that they can become good commercial partners, which will inevitably benefit our integration as a larger market.

GF: What keeps you up at night?

Madrigal López: The Central Bank of Costa Rica remains committed to fulfilling its primary objective of maintaining price stability. Ensuring this stability is crucial for fostering a predictable economic environment and supporting sustainable growth. This sounds like a trivial concern for central banks, but for BCCR, to have low inflation is a relatively recent achievement that must be protected. To attain this objective, the autonomy of the BCCR’s governance must be effectively de jure and de facto guaranteed. This autonomy is needed to safeguard the bank’s ability to manage monetary policy independently and effectively. There is a concern regarding the risk to the BCCR’s management capabilities, particularly related to the availability of skilled technical personnel. Addressing this concern is important to uphold the bank’s operational efficiency and decision-making.

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Maintaining Momentum: Q&A With Costa Rica’s Central Bank Governor Róger Madrigal López

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