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Costa Rica: Country and Foreign Investment

Economy and Currency

With a mild annual average temperature of 21C the Costa Rican economy has traditionally been based on tourism and the export of agricultural products such as bananas and coffee; low prices for these two commodities have caused problems for the country in the past. Its Pacific and Caribbean coastlands are lined with luxury hotel resorts. National parkland which covers 10.3% of the country includes coral reefs, virgin rainforests and volcanic craters.

The introduction of a free trade zone fiscal regime resulted in a major national economic transformation, with non-traditional goods now accounting for 68% of exports and agriculture representing only 17% of GDP.

Although Costa Rica's favorable taxation regime meant that it has for decades had all the characteristics of an offshore tax haven it was not until relatively recently that the Government became aware of the financial services potential and began to actively legislate and promote this sector of the economy.

Real GDP grew by an estimated 5% in 2012, compared to 4.2% in 2011 and 4.7% in 2010. Unemployment is reported to be around 7.8% in 2012, an increase from a level of 6.5% in 2011. One of the main factors for the unemployment levels are the legal and illegal immigrants of Nicaragua which provide a cheap unskilled labour force.

Inflation for 2012 was recorded at 4.5%, a decline of 0.4% compared to 2011.

The current account deficit is estimated to have widened to 5.5% in 2012, driven by a surge in non-resident income on foreign direct investment. Both exports and imports grew strongly during the year. GDP per head is USD12,800 (2012 est) at purchasing power parity. Costa Rican labour costs are relatively high for the area, but it attracts inward investment due to its skilled labour force, absence of labour problems, political and economic stability, and the attractive fiscal regime.

The currency is the colon, divided into 100 cents. Costa Rica is not a member of any monetary union; in recent times the colon has tended to depreciate against the dollar by about 10% annually.

In 2004 Costa Rica concluded negotiations to participate in the US-Central American Free Trade Agreement CAFTA). The agreement was ratified in a popular referendum in October, 2007, but problems over the legal basis of the agreement, which had been accepted by all other parties, delayed final implementation until December, 2008.

Then United States Trade Representative (USTR) Susan C. Schwab made a statement on December 23 regarding the entry into force of the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) for Costa Rica, saying: "With the President’s issuance of a proclamation to implement the CAFTA-DR for Costa Rica as of January 1, 2009, I am very pleased to be able to celebrate the entry into force of this important multi-country agreement."

Since the implementation of CAFTA-DR, foreign direct investment in key sectors such as insurance and telecommunications, recently opened to private investors, has increased.

Under CAFTA, 80% of US exports of consumer and industrial goods became duty-free in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic, immediately, with remaining tariffs phased out over 10 years.

 

 

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