Why is the cost of living in Costa Rica so high?

Price tags always seem to catch visitors to Costa Rica by surprise. Expectations for cheap prices for goods and services are quickly dispelled after a first trip to the grocery store or gas pump. Costa Rica isn’t cheap.

Despite having the world’s 85th largest gross domestic product (GDP) in 2009, according to the World Bank, many prices in Costa Rica are on par with those of “developed” nations. Certain goods and services, such as a bottle of wine, a box of cereal or a tank of unleaded fuel, are as expensive – in some cases more expensive – than in the U.S, Canada or Spain.

So why is Costa Rica so expensive?

“My explanation is the appreciation of the colón,” said Adriana Rodríguez, an investment strategy manager at the economic consulting firm Aldesa. “The colón appreciates until all the essential goods and services become more expensive to compensate for its fluctuation.”

Of the reasons for Costa Rica’s high cost of living, the exchange rate is undoubtedly found at the top of the list. Due primarily to the mini-devaluations system of the national currency from 1984 to 2006, the value of the colón versus the U.S. dollar has depreciated by 500 percent in the last 20 years (see graph on next page). In 1991, $1 was worth about 100. Now, it is worth 500.

As the value of the colón plummeted against the dollar, prices have adjusted accordingly. In the last 10 years, prices of goods and services in the nation’s 292-product “basic package” have risen 101.72 percent. Costa Rica’s accumulated inflation rate is by far the highest in the region during the last decade: 17 percent higher than Nicaragua’s and 74 percent higher than Panama’s, in a dollarized economy.

“Historically, the inflation rate has been one of the biggest concerns of the Central Bank during the last 10 to 15 years,” Central Bank of Costa Rica (BCCR) President Rodrigo Bolaños told The Tico Times in 2010. “While the rest of the world was already attempting to lower their inflation rate, Costa Rica, well, we weren’t doing that. We worked at it some, but not as much as the rest of the world. We were delayed in our efforts to monitor the inflation rate.”

Much of the increase in consumer prices stems from the hefty, and increasing, amount of imports Costa Rica brings in annually. Each year since 2006, Costa Rica has imported more than $10 billion worth of goods, and has had a trade deficit of at least $1 billion since 2001. In 2008, the trade deficit hit its highest mark, at $5.8 billion.

Costa Rican import costs aren’t expected to slow anytime soon, particularly with the ever-increasing price of fuel. Costa Rica, like every Central American country, imports all of its fuel. As of Tuesday, the average price for a barrel of fuel was $91.50. That price is expected to hit the $100 mark sometime this year.

“My suspicion is that Costa Rica is so expensive because the price of fuel and the costs to transport the fuel are transferred to the cost of goods,” Rodriguez said. “In comparison to the other countries in the region [which also import fuel], we pay more taxes for a liter of gasoline than the other countries. We all import fuel, but our fuel taxes are higher.”

Gisela Chávez, director of economic studies at Costa Rica’s Economy Ministry, shared Rodriguez’s outlook that both fuel and production costs were behind Costa Rica’s inflated prices.

“We have one of the highest production costs in the region,” Chávez said. “When national production costs are higher than the other countries in the region, our prices become higher than theirs in comparison.”

Many of the metals, equipment and machinery used in production are imported from across the globe. The combination of purchasing more from abroad than producing at home, the increased cost of fuel to transport foreign goods, the additional costs of production, and the erratic behavior of the colón has made Costa Rica a perfect storm for elevated prices.

Can Costa Rica hold the line?

At last week’s annual economic forecast presentation by the BCCR, Bolaños announced that the inflation rate for consumer prices for 2011 was expected to grow an estimated 4-6 percent, after finishing 2010 at 5.8 percent. The prediction of a third consecutive year in the 4-6 percent range (4.05 percent in 2008) is a far cry from previous decades, where consumer prices increased an average of 10 percent annually.

But as control of consumer prices gradually improves in Costa Rica, neighboring countries Panama and El Salvador have already managed to slow inflation and keep it at a more sustainable level by switching the national currency to the U.S. dollar. In 2010, the consumer prices in El Salvador increased 2.1 percent, while in Panama they rose 3.5 percent.

While most economic leaders have waived their finger at the idea of a dollarized economy, with the continued struggles to control the exchange and inflation rates, the idea of dollarization continues to linger in the air.

 “From what I understand, people who want to dollarize the Costa Rican economy want to do so as a measure to lower inflation,” Bolaños said. “However, we believe that inflation can be lowered without dollarizing the economy. The problem with dollarization is that it ties your hands… A flexible exchange rate, such as the one in place now, makes something like an external economic shock more manageable for the national economy. If a flexible exchange rate did not exist because of dollarization, it would tie the hands of the Central Bank and the exchange rate could not be adjusted. This could severely damage many sectors of the Costa Rican economy.”

On Wednesday, the National Statistics and Census Institute (INEC) announced that consumer prices rose 0.68 percent in January, which includes the first price increase of the year for fuel prices. While the minor increase in price might not have an immediate effect on national consumers, INEC estimated that the average monthly income per person in Costa Rica in 2010 was about $540.

As consumer costs continue to increase, wallets that were already light are likely to keep getting lighter.

Log in to comment