IMF Executive Board Concludes 2012 Article IV Consultation with Costa Rica

Public Information Notice (PIN) No. 13/25
March 1, 2013

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.

On February 22, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Costa Rica.1


Costa Rica’s economy has proven resilient to the adverse shocks of recent years. A proactive policy response, supported by a high-access precautionary Stand-By arrangement with the Fund (that expired in mid-2010), helped Costa Rica to maintain macroeconomic and financial stability and mitigate the effects of the global financial crisis of 2008-09. After falling by 1 percent in 2009, output recovered quickly. Real Gross Domestic Product (GDP) grew at an average pace of 4½ percent per annum in 2010-12, while inflation stood within the 4-6 percent official target range.

A sizable rise in capital inflows more than offset a modest increase in the current account deficit (estimated at about 5½ percent of GDP in 2012). The resulting balance of payments surplus placed strong appreciating pressure on the local currency. Net international reserves rose to US$6.9 billion at end-2012 (from US$4.8 billion at end-2011), reflecting large foreign exchange purchases by the central bank and the government’s placement of a US$1 billion bond in international capital markets in late 2012. This notwithstanding, competitiveness, which eroded significantly in recent years, may pose a risk to external stability in the long term. The reversal of this tendency requires enhancing productivity while improving fiscal sustainability and maintaining prudent monetary and exchange rate policies.

The overall public sector deficit stayed broadly unchanged at about 4½ percent of GDP in 2012. Efforts to contain expenditure growth and strengthen tax administration continued, while enactment of an ambitious tax reform approved by Congress was voided by the Constitutional Court owing to procedural problems. The consolidated public sector debt rose to 38 percent of GDP at end-2012, up from 27 percent of GDP at end-2008. The authorities are preparing a fiscal consolidation plan that will be discussed with all sectors of society. Once consensus is reached, the plan would be submitted to Congress aiming for approval before the next administration takes office in May 2014.

Financial sector indicators remained healthy, with adequate levels of liquidity and capitalization. Although the authorities maintained the policy rate unchanged, other interest rates rose significantly, particularly during the first half of 2012. Financial conditions began to ease toward the end of year. Credit to the private sector increased by about 13 percent (y/y) in nominal terms, with stronger growth in the foreign-currency denominated segment.

Real GDP growth is expected to slow from about 5 percent in 2012 to about 4¼ percent in 2013 and hover at around its estimated potential rate of 4½ percent over the medium term. In the absence of significant fiscal consolidation, inflation is projected to remain above that of trading partners, at about 5 percent, while the external current account deficit is anticipated to rise to about 6 percent of GDP through 2018.

The economic outlook is generally positive, but the balance of risks is tilted to the downside amid external uncertainties and domestic policy challenges. Weaker-than-expected growth in the United States, a global financial shock, or a rise in world oil prices are the main sources of external risk. Risks also arise from an eventual resumption of large private capital inflows, which would call for a combination of tighter fiscal and monetary policies and greater exchange rate flexibility to avoid overheating. Finally, lack of fiscal consolidation would lead to a steady rise in public debt, which would increase vulnerabilities and may erode the underpinnings of macroeconomic stability.

Executive Board Assessment

Directors welcomed Costa Rica’s strong economic recovery since the global financial crisis and the continued favorable outlook for growth. In light of the risks posed by the external and internal challenges, Directors emphasized that policies should be geared towards maintaining macroeconomic stability, reducing vulnerabilities, and boosting growth potential and competitiveness.

Directors underscored the importance of preserving fiscal and debt sustainability and commended the authorities’ efforts to enhance revenues and contain expenditures. However, additional measures will be necessary to reduce the large deficits and the public debt-to-GDP ratio. In this context, Directors welcomed the authorities’ intention to resubmit to congress a tax reform proposal which aims at broadening the tax base, reducing tax exemptions, and strengthening revenue administration, with a view to have it approved by May 2014 when the new administration takes office. Directors also highlighted the importance of keeping current expenditure growth in check, especially on public sector wages and transfers, while improving its quality in the social sectors. Strengthening the pension system should be a priority as well.

Directors recognized that the current fiscal trend is unsustainable in the long run and therefore welcomed the authorities’ commitment to fiscal consolidation. Most Directors agreed that a moderately front-loaded adjustment would strike an appropriate balance between addressing Costa Rica’s fiscal challenges and maintaining robust growth. Some Directors were of the view that adjustment efforts should be considered in light of the political economy situation and should also not jeopardize the success of the Costa Rican social-economic model.

Directors commended the authorities for strengthening the monetary framework and bringing inflation down to single digits. However, given the risks posed by the rigid exchange rate regime and continued capital inflows, they called for further action to upgrade the monetary and exchange rate policy framework. Directors noted the authorities’ concern about exchange rate flexibility, but generally recommended increasing exchange rate flexibility as it would allow greater use of exchange rate as a shock absorber. In general, Directors also saw merit in establishing an inflation target as the anchor of monetary policy to protect macroeconomic stability. Directors were generally of the view that appropriate fiscal and monetary policies could be complemented, for a limited period, by capital flow management measures and that these should not be a substitute for needed macroeconomic adjustment.

Directors recommended further strengthening of the supervision and prudential regulations of the financial system, and stressed the importance of implementing pending recommendations of the 2008 Financial System Assessment Program’s update. They also underlined that full implementation of risk-based supervision and gradual adoption of Basel III capital and liquidity standards would further buttress financial sector stability.

Directors encouraged the authorities to continue advancing their structural reform agenda to raise potential growth and bolster competitiveness. In this regard, addressing infrastructure bottlenecks and streamlining business regulation should be key priorities.

Costa Rica: Selected Economic Indicators

Population (2011, millions)


Poverty (2010, percent of population)


Per capita GDP (2011, U.S. dollars)


Life expectancy (2009, years)


Unemployment (2011, percent of labor force)


Literacy rate (2009, percent of people ages > 15)















  2008 2009 2010 2011 2012 2013









(Annual percentage change, unless otherwise indicated)

Output and Prices







Real GDP growth

2.7 -1.0 4.7 4.2 5.0 4.2

GDP deflator

12.4 8.4 8.0 4.1 4.5 5.1

Consumer prices (end of period)

13.9 4.0 5.8 4.7 4.6 5.0








Money and Credit


Monetary base

11.9 5.1 11.2 11.6 10.1 9.9

Broad money

16.1 9.7 1.2 6.4 11.1 11.7

Credit to private sector

31.8 4.5 4.4 13.7 12.7 12.6









(In percent of GDP, unless otherwise indicated)

Savings and Investment







Gross domestic investment

27.6 16.3 20.1 20.6 20.8 20.5

Gross domestic savings

18.2 14.3 16.6 15.3 15.3 15.0








External Sector







Current account balance

-9.3 -2.0 -3.5 -5.3 -5.5 -5.5

Of which: Trade balance

-16.8 -6.9 -9.5 -12.6 -12.6 -12.6

Financial and capital account balance

8.3 1.7 5.5 6.3 10.1 8.5

Of which: Foreign direct investment

6.9 4.6 4.0 5.1 5.0 4.8

Change in net international reserves (increase -)

348 -51 -561 -132 -2,101 -1,500

Net international reserves (millions of U.S. dollars)

3,799 4,066 4,627 4,756 6,857 8,357








Public Finances





Central government overall balance

-0.3 -3.6 -5.4 -4.3 -4.6 -4.9

Consolidated public sector overall balance 1/

0.2 -4.0 -5.5 -4.3 -4.4 -4.9






Central government debt

24.8 27.2 29.2 30.9 34.8 35.9

Consolidated public sector debt 2/

27.3 29.2 30.6 33.2 38.1 39.5
















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


1/ The consolidated public sector balance comprises the central government, decentralized government entities, public

enterprises, and the central bank, but excludes the Instituto Costarricense de Electricidad (ICE).

2/ The consolidated public debt nets out central government and central bank debt held by the Caja

Costarricense del Seguro Social (social security agency) and other entities of the nonfinancial public sector.

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 summing ups can be found here:


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