Costa Rican currency
Category: Business & Economics

Title: Central America’s Economic Recovery from COVID-19

Author: Mauricio Garita and Sergio Martínez
Date Published: February 6, 2023

Central America has often been described as a mosaic—a mixture of different cultures and viewpoints in a small area of just 201,497 square meters. It has experienced internal wars, financial turmoil, and developmental challenges during its history, and it now faces a new challenge: recovering from the coronavirus pandemic. Moving forward, maintaining financial stability will be a pressing task for Central American governments so that they may meet the needs of their populations and recover from the COVID-19 pandemic.



Central America has experienced a variety of severe economic impacts from COVID-19, beyond the virus’ direct impact on the population’s health. In Guatemala, for instance, deaths from acute malnutrition doubled in 2021 as consumers struggled to pay for necessities due to the pandemic’s economic fallout. Food insecurity has also been linked to migration in the Northern Triangle of Guatemala, Honduras, and El Salvador, where recent surveys indicated 32 percent of migrants said that they did not have enough money to cover food expenses. While poverty and violence have long driven Central Americans away from their home countries, the pandemic has only exacerbated this trend. According to a 2021 joint report published by the World Food Programme, Migration Policy Institute, and Civic Data Design Lab, the percentage of people living in Central America who considered migrating internationally increased from 8 percent in 2019 to 43 percent in 2021. Even before the onset of the pandemic, 30 million people already lived in poverty in Central America, a fact which has only made the region more vulnerable to economic downturns.

Action from governments, the private sector, international organizations, and society at large is vital to counteract harmful economic impacts from the pandemic. As such, this article, aims to understand the current economic situation in Central America, highlight the region’s recent challenges, and identify a viable path forward to ensuring economic prosperity.


Divergent Challenges Between Countries

During the financial crisis of 2008, Central America was one of the most resilient regions in the world. While North America registered real gross domestic product (GDP) growth of -2.9 percent and South America registered a growth rate of -1 percent, Central America saw only a 0.1 percent decline. A crisis that severely affected most of the world’s economies had much more mild impacts in Central America. Despite Central America’s ‘V-shaped recovery’ from this downturn, with -0.1 percent GDP growth in 2009 and 5.2 percent in 2010, the region’s growth has been steadily declining since 2010. Before the pandemic, the 2019 real GDP growth rate for Central America was 3.2 percent, with an average growth rate of 4.6 percent between 2010 and 2019 (see table 1).


Table 1: Central America Real GDP Growth Rate  

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
5.20% 5.10% 4.50% 4.20% 4.80% 4.90% 4.50% 4.30% 3.90% 3.20% -7.10%

Table created by the authors with information from the (International Monetary Fund, 2021)


When the COVID-19 pandemic struck in 2020, Central America was one of the most deeply affected regions in the world: the region’s GDP growth rate fell from 3.2 percent in 2019 to -7.1 percent in 2020. In comparison, North America’s GDP fell 4 percent, South America’s fell 6.6 percent, and Western Europe’s fell 6.6 percent. This decline has led to a discussion about the region’s economic future. Historically, the average length of time it takes for a given Central American country to recover from a recession varies widely. The diversity of economic realities present in Central America creates a challenge when analyzing the impact of COVID-19. Generally, all Central American countries have seen declining growth rates, however, there are some differences in the challenges faced by each economy. While the region’s GDP fell by 7.10 percent, Panama registered a severe decline in GDP of 17.9 percent, while Guatemala’s GDP fell by a meager 1.5 percent (see table 2).  Projections for how quickly the individual economies will recover also vary somewhat. The International Monetary Fund predicts that Panama, the Dominican Republic, and El Salvador will recover much faster than the rest of the region. The Economic Commission for Latin America and the Caribbean (ECLAC) gave similar, but more conservative predictions. At the time of such predictions, there was a consensus among economists that the region would see a ‘V-shaped recovery.’


Table 2: Central America GPD Growth Rate in real terms

GDP Growth during the pandemic
Central America Costa Rica Dominican Republic Guatemala Nicaragua Panama El Salvador
-7.10% -4.10% -6.70% -1.50% -2% -17.90% -7.90%

Table created by the authors with information from the (International Monetary Fund, 2021)


Central American Financial Risk: An Indicator?

One of the main challenges facing the region is the large amount of debt that Central American countries accrued to address the pandemic. In 2016, debt levels as a percentage of GPD were at 42 percent and the fiscal deficit as a percentage of GDP was -5.5 percent. In 2021, Central America’s gross debt stood at 58.7 percent of GDP. Considering that a healthy debt to GDP ratio should be below 60 percent, Central America as a region is healthy, but the situation at a country-specific level is more alarming. Only Guatemala (32.1 percent), Honduras (58.9 percent), and Nicaragua (49.5 percent) register a debt to GDP ratio lower than 60 percent. Costa Rica (71.2 percent), El Salvador (84.2 percent), and Panama (62.2 percent) are at worrisome levels.

These high debt levels have affected the region’s risk qualifications. During the pandemic, most Central American countries saw their credit ratings fall. For example, Costa Rica registered a B+ Negative rating by Fitch Ratings and Standard and Poor’s, in March 2020, and, by June 2021, the country was downgraded to a B Negative by both institutions (see table 3).

Indeed, because of the region’s rising sovereign debt, the decrease in economic growth, and the pandemic’s social consequences, all Central American countries were given a lower grade compared to previous years. According to the quoted credit agencies, most countries are currently between highly speculative and lower medium grade. The countries that are most at risk are those with a B Negative rating or below because such a rating could seriously impact their ability to borrow necessary financial resources to address the pandemic’s consequences; lower creditworthiness ratings affect the interest rate which a government must pay on their sovereign bonds.


Table 3: Long-Term Sovereign Debt Ratings in Foreign Currency

Date Costa Rica El Salvador Guatemala Honduras Nicaragua Dominican Republic Panamá
Mar-20 B+ Negative B- Stable BB Negative BB- Stable B- Stable BB- Stable BBB Negative
Jun-21 B Negative B- Negative BB- Stable BB- Stable B- Stable BB – Negative BBB Negative

Table created with information from the Country Risk Report (SECMA, 2021)


National governments face massive challenges in terms of paying off these rapidly growing debts. In Costa Rica, the government of the new president will be forced to pay off $15,400 million in debt during his four-year term. The country also has significant government bonds coming due in 2023. How the country will go about addressing these debts is a vitally important question to safeguard the country’s future economic growth. El Salvador faces a similarly serious situation, with elevated debt levels and ongoing debate among analysts as to whether the country will be able to adequately meet its financial obligations. These discussions surrounding each nation’s capacity to meet its sovereign debt obligations are vital to ensuring a speedy and adequate recovery for the region’s economies.


Conclusion: An Uncertain Future

From a macroeconomic point of view, Central America is predicted to be facing a ‘V-shaped recovery’ from the pandemic, but individual countries like Costa Rica and Honduras are still in a recessive economic phase, despite some signs of improvement. As a result, the economic situation in Central America must be considered from two perspectives—regionally and on a country-by-county basis.

Debt seems to be the most pressing challenge for the region at this time. For some countries, servicing their sovereign debts will pose a threat to their overall budgets and efforts to address the pandemic. Further borrowing will have to be balanced with efforts to keep overall debt to manageable levels. Other countries will find it increasingly difficult to borrow affordably due to the discussed decreases in their sovereign debt ratings. For some, forming multilateral agreements may be necessary to address debt.

In order to address these challenges, it is important to first prioritize the basic needs of the region’s population. With high debt levels across Central America and a continuing need for funds, the region’s governments are generally limited to three options: taking on additional debt, either from public or private sources, increasing taxes, or reducing spending. What is important is that the needs of citizens are not forgotten, regardless of the policy choices made to raise revenues. Priorities, such as improving nutrition and the fight against poverty, remain vital issues in the Northern Triangle.

When deciding how best to raise funds to address the pandemic, it is also important to design policies geared towards each country’s individual fiscal situation. There are countries in Central America, such as Costa Rica, where the room for increasing the tax rate is minimal and in which raising rates would adversely impact the wellbeing of the population. On the other hand, cuts to government spending must be made conscientiously, as funding one priority over another could hurt vulnerable populations. Regarding external or internal debt, countries must consider the potential impacts of additional debts on their future finances. Most importantly, countries must develop a well-defined plan for raising funds, which considers both benefits and risks associated with each option.

Finally, countries should also consider more long-term strategies to improve their fiscal situations. Formalization of certain aspects of the economy, improvement of tax administration processes, and the overall fight against corruption can all help improve the region’s economic future and its capabilities to serve local populations. These efforts should be paired with more immediate endeavors to raise funds, in order drive a full recovery from the consequences of the pandemic and achieve steady growth in the future.

. . .

Dr. Mauricio Garita is an economist focused on development and economic research in the private and public sector. Currently he is a researcher at Universidad del Istmo.

Sergio Martinez is an international economist and data analyst with over eight years of experience at various public and private institutions, including the United Nations and the International Monetary Fund. He is currently a PhD student at the University of St. Gallen.

Image Credits: Flickr, Dennis Sylvester Hurd