IMF Executive Board Concludes Article IV Consultation with Costa Rica

Public Information Notice (PIN) No. 09/124
October 19, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2009 Article IV Consultation with Costa Rica is also available.

On September 23, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the 2009 Article IV consultation with Costa Rica.1


The global crisis has hit Costa Rica hard. After experiencing an economic boom with output growth averaging 6.6 percent during 2003–2007, the Costa Rican economy decelerated sharply in 2008 as output growth turned negative in the fourth quarter of 2008 (-1.7 percent compared to the same quarter of the previous year) and continued to decline in the first quarter of 2009 (-4.8 percent). A major correction in inventories and a decline in sectors most dependent on external conditions were key factors behind the slowdown. Nonetheless, the decline in output appears to be approaching an end. The index of economic activity rose 1.2 percent on a quarter-on-quarter basis in the second quarter of 2009, as output in key sectors stabilized. At the same time, inflation remained on a firm downward path, falling from 13.9 percent in December 2008 to 5.7 percent in August 2009, its lowest level in over 30 years.

Despite the worsening of economic activity, the banking sector has remained sound. Although the nonperforming loan ratio of banks has risen moderately and profitability declined in the first half of 2009, liquidity and solvency indicators remained adequate. With the slowdown in activity, demand for credit declined, contributing to a leveling of bank lending to the private sector. Nonetheless, bank deposits continued to grow, especially dollar-denominated deposits, allowing banks to repay foreign credit lines and reduce their net external position. In light of the strength of the balance of payments position, the authorities have treated the first purchase (about $500 million) under the SBA as precautionary.2

Fiscal policy has provided significant support to domestic demand. The fiscal deficit of the central government increased to 1.3 percent of gross domestic product (GDP) in the first half of 2009 as noninterest expenditures rose 14 percent in real terms, despite a significant revenue shortfall. The central government’s gross financing requirements, including large amortization payments were met through domestic bond issuances. Fiscal policy is expected to remain expansionary in the second half of 2009. As a result, the central government deficit for the year as a whole is expected to reach 4.1 percent of GDP, compared to a deficit of 0.3 percent of GDP in 2008.

Monetary conditions have tightened somewhat in 2009. Despite the rapid decline in inflation, nominal rates of colon-denominated deposits and government bonds remained largely unchanged, contributing to an increase in real interest rates. In July 2009, the central bank lowered its key policy interest rate by 100 basis points to 9 percent in July 2009. The exchange rate has remained close to the ceiling (most depreciated end) of the currency band so far in 2009, though occasionally traded up to 2 percent below the ceiling. Central bank (BCCR) interventions were generally moderate.

Near term prospects have improved. Although real GDP is estimated to decline by 1.5 percent in 2009, it is projected to increase by 2.3 percent in 2010 as activity recovers. Inflation would continue to drop to reach 5 percent by end-2009, pulled down by economic slack, prudent monetary policy, and the lagged effect of the commodity price adjustment. After a sharp contraction in 2009 to 3.6 percent of GDP, the current account deficit is expected to widen in 2010 to 4.8 percent of GDP, as imports bounce back with the economic recovery. Nonetheless, some downside risks to this outlook remain. Concerns about the sustainability of the incipient global recovery could weigh in on domestic demand and a concomitant loss in domestic confidence could weaken the balance of payments.

Executive Board Assessment

Executive Directors noted that the Costa Rican economy has withstood the impact of the global crisis relatively well. Directors commended the authorities for their strong policy performance focused on preserving stability, protecting the external position, and supporting the nascent recovery. They welcomed the prospects for positive output growth in 2010 and a gradual return to potential growth over the medium term.

While noting that the immediate risks to Costa Rica’s economic outlook have moderated with the stabilization of the global financial environment, Directors encouraged the authorities to remain vigilant as confidence could weaken if the incipient recovery falters or the fiscal deficit widens more than expected. They emphasized that timely implementation of structural reforms in the areas of fiscal revenues and the financial sector will be key to maintain the positive growth momentum.

Directors noted that fiscal policy should continue to strike a balance between supporting domestic demand and keeping domestic government borrowing and the public debt in check. Once the recovery takes hold, the fiscal deficit should be brought down to reduce the debt burden and rebuild fiscal space. Achieving this goal, while maintaining higher levels of public investment and social spending, will require a substantial increase in revenues, including by broadening the tax base and strengthening tax administration.

Directors welcomed the recent decline in inflation, which would strengthen monetary policy credibility and facilitate the transition to inflation targeting. Directors encouraged the authorities to move forward with the recapitalization of the central bank, and recommended further steps to improve communications and the coherence of the monetary policy framework, including by clarifying the central bank’s role in the debt and foreign exchange markets.

Directors observed that Costa Rica’s balance of payments has adjusted rapidly to the deterioration in the external environment. They noted staff’s findings that the current level of the real effective exchange rate remains broadly in line with fundamentals. Most Directors found merit in a gradual build up of international reserves over the medium term to further improve resilience to external shocks.

Directors agreed that the banking sector remains sound. While the cyclical downturn of activity has led to a moderate increase in nonperforming loans and a decline in bank profitability, liquidity and solvency indicators remain adequate and banks have reduced their net foreign exposure by repaying external credit lines. Directors welcomed the planned implementation of risk-based supervision and called for strengthened market discipline by modifying legal provisions that limit the dissemination of prudential indicators for individual banks. They encouraged the authorities to continue to monitor financial sector risks closely, and to press ahead with their well-focused reform agenda to strengthen bank supervision, regulation, and the financial sector safety net.

It is expected that the next Article IV consultation with Costa Rica will be held in accordance with the Executive Board decision on the consultation cycle for members with Fund arrangements.

Costa Rica: Selected Economic Indicators

  2006 2007 2008



(Annual percentage change, unless otherwise indicated)





National Income and Prices




GDP at constant prices

8.8 7.8 2.6

Implicit deflator

11.0 9.3 12.1

Consumer prices (end of period)

9.4 10.8 13.9





External Sector




Exports of goods (volume, FOB)

10.6 9.2 -3.4

Imports of goods (volume, CIF)

9.3 4.1 5.8

Terms of trade (deterioration -)

-3.9 -3.7 -4.6

Real Effective Exchange Rate (eop; depreciation -)

0.9 2.8 5.4





Money and Credit


Base money

26.9 33.0 11.9

Broad money

25.3 16.3 17.3

Bank credit to private sector

28.5 38.3 31.8

Lending interest rate (end of period)

20.7 16.3 20.7





(In percent of GDP)

Public Finances


Combined public sector primary balance 1/

2.8 4.1 2.3

Combined public sector overall balance 1/

-0.7 1.2 0.1

Combined public sector debt (gross) 1/

47.8 43.2 35.8

Of which: External public debt

13.1 10.5 9.1





Savings and Investment




Gross domestic investment

26.4 24.6 25.8

Gross national savings

21.3 18.3 16.6





External Sector




Trade balance

-12.7 -11.4 -16.8

Current account balance

-5.1 -6.3 -9.2

Foreign direct investment

6.1 6.2 6.8





(In millions of U.S. dollars, unless otherwise indicated)

Memorandum items


Change in net international reserves (increase -)

-1,034 -839 315

Net international reserves 2/

3,115 4,114 3,799

Gross Domestic Product

22,528 26,269 29,664

Sources: Central Bank of Costa Rica; Ministry of Finance; and IMF staff projections.

1/ The combined public sector includes the central government , central bank, and other public enterprises and entities, excluding ICE.

2/ Includes valuation adjustments of US$160 million in 2007 for reclassification of capital contribution to FLAR. 

1 Under 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 Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:

2 The 15-month Stand-By Arrangement (SBA) with total access of SDR 492.3 million (about US$740 million) was approved in April 2009.


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