Press Information Notice: IMF Concludes Article IV Consultation with Costa Rica

May 14, 1998

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

The IMF Executive Board on March 18, 1998 concluded the Article IV consultation1 with Costa Rica.


Costa Rica is recovering from a slump in economic activity in 1995–96, following a sharp deterioration in the public finances and higher inflation associated with the 1993–94 political-economic cycle. Led by an expansion in private consumption and investment, and a strong growth in manufactured exports, real GDP grew by 3.2 percent in 1997, while the unemployment rate declined to 5.7 percent from 6.2 percent in 1996. At the same time, inflation decelerated to 11 percent from 14 percent a year earlier.

Regarding the public finances, in early 1997 the government adopted fiscal measures equivalent to 1.5 percentage points of GDP. Moreover, through continued efforts to con tain noninterest current expenditure and strengthen tax collections, and lower interest obligations resulting from a decline in the average interest rate on government domestic debt, the combined public sector deficit declined from 5.3 percent of GDP in 1996 to 3.7 percent of GDP in 1997.

Reflecting the recovery of private domestic investment and increasing inflows of foreign direct investment, import growth accelerated in 1997 and the external current account deficit widened in spite of the continued strong growth of nontraditional exports. Public sector capital flows turned positive for the first time since 1993 reflecting in part disburse ments of balance of payments support loans. This, together with a sharp increase in private capital inflows resulted in an accumulation of net international reserves by US$216 million in 1997, to the equivalent of nearly 3 months of imports of goods and nonfactor services. The external public debt to GDP ratio declined further to 30 percent in 1997 from 36.6 percent in 1995.

Progress also was made in the area of structural reforms in 1996–97, particularly in strengthening tax administration, on public expenditure management, and in increasing private sector participation through concessions, management contracts, and privatization. On financial sector reform, regulations were issued for the functioning of an interbank market and the central bank continued to lower reserve requirements, unifying them at 15 percent in March 1998. The auction mechanism for open market operations, and the payments system were improved. Also, legislation was enacted to strengthen the national commission of securities and the superintendency of pensions, and regulations issued to cover offshore banking operations of financial conglomerates.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ efforts to avoid a repetition in 1997 of the usual political-economic cycle, and welcomed the satisfactory macroeconomic performance under the staff-monitored program. In contrast to previous cycles, there had been a strong pickup in the pace of economic activity, inflation had decelerated further, net international reserves had increased, and the social indicators had continued to improve. In addition, the steps taken to put in place legislation to increase private sector participation in the economy were noteworthy, as they are expected to facilitate progress in this area by the new government. Directors stressed the importance of a sustained implementation of sound macroeconomic policies and structural reforms to strengthen private sector confidence.

While welcoming the improvement in the public finances in 1997—through sustained efforts to contain noninterest current expenditure, strengthen tax administration, and lower interest obligations—Directors underscored the need to continue to reduce the public sector deficit, in order to help reduce interest rates and to further the recovery of economic activity. In this respect, Directors urged the new administration to move forcefully in the area of fiscal consolidation and structural reforms, including by selling public assets and applying the proceeds toward a reduction in the public debt. Directors also stressed theimportance of removing existing rigidities in the structure of the public finances and strengthening the weak revenue base.

Directors noted that the conduct of monetary policy had been complicated by short-term capital inflows induced by high domestic interest rates and by segmented financial markets. In this regard, they welcomed the reduction and unification of legal reserve requirements, the plans to privatize one large state commercial bank, and the enactment of legislation to develop the capital markets. However, Directors stressed the importance of allowing market forces to play a greater role in the determination of interest rates by developing the interbank market, and of enhancing competition by permitting foreign banks to open branches in Costa Rica. Directors commended the authorities for the progress made in improving the health of the financial system, but underscored the need to continue the efforts in this area, especially by improving the supervision of the offshore financial groups and of the stock market.

Directors expressed concern about the widening of the external current account deficit in 1997, and while noting that the deficit was financed in part by private direct investment, they stressed the importance of preventing a further deterioration in 1998. They wel comed, in this regard, the authorities’ decision to accelerate the exchange rate crawl to offset the appreciation of the U.S. dollar in the recent past. It was noted that the exchange rate rule had been successful in maintaining external competitiveness over the last several years.

Directors urged the new administration to accelerate and broaden structural reforms to foster strong and sustained growth over the medium term. They stressed the importance of reducing the dominant role of the state in the productive sectors, and noted that policies to raise participation by the private sector—including in the electricity and telecommunications sectors—should be pursued.

It is expected that the next Article IV consultation with Costa Rica will be held on the standard 12-month cycle.

Costa Rica: Selected Economic Indicators

  1993 1994 1995 1996 Est.

Real Economy (change in percent)
Real GDP 6.3 4.5 2.4 -0.6 3.2
GDP deflator 10.9 16.9 21.3 16.3 14.6
Consumer Prices (end of period) 9.0 19.9 22.6 13.9 11.2
Unemployment rate (in percent) 4.1 4.2 5.2 6.2 5.7
Gross national savings (in percent of GDP) 18.8 21.2 20.5 16.6 18.8
Gross domestic investment (in percent of GDP) 26.6 24.2 21.5 17.9 23.2
Public Finance (in percent of GDP)
Combined public sector balance1 -0.9 -8.0 -4.0 -5.3 -3.7
Nonfinancial public sector 0.6 -4.7 -2.1 -3.2 -2.0
Central bank losses -1.5 -1.4 -1.9 -2.1 -1.7
Central government domestic bonded debt 14.6 17.2 19.9 24.0 25.5
Money and Credit (end-year, percent change)
Broad money2 15.4 21.0 24.8 25.5 22.3
Net domestic assets3 12.8 13.4 3.9 8.7 18.0
Credit to the private sector3 12.9 6.1 2.2 7.3 9.1
Credit to the public sector3 -3.8 2.0 -2.2 -4.0 -7.0
Interest Rates (end of period)
Six-month deposit rate 21.0 22.0 24.0 16.0 14.0
Six-month government bonds 16.2 19.6 24.2 22.4 18.1
Prime lending interest rate 37.0 37.0 37.0 28.0 24.5
External Sector (in percent of GDP)
Trade balance -13.7 -10.9 -7.6 -8.4 -11.9
Current account (including official transfers) -7.8 -3.0 -1.0 -1.3 -4.4
Direct investment 3.0 2.6 4.0 4.4 4.9
Overall balance -0.2 -0.3 2.7 -0.7 2.3
Net international reserves (in millions of U.S. dollars) 752 758 986 925 1,140
(In months of imports of goods and nonfactor services) 2.7 2.5 3.0 2.7 2.8
External public debt 45.6 40.3 36.6 34.1 30.1
Real effective exchange rate (percent change, depreciation -) -0.7 1.0 1.7 -0.8 3.3

Sources: Ministry of Finance; Budgetary Authority; Central Bank of Costa Rica; and IMF staff estimates.

1In 1994, includes losses of the Banco Anglo Costarricense, a state commercial bank closed in December 1994.
2Includes holdings of central bank and government bonds.
3In relation to liabilities to the private sector at the beginning of the period.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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