IMF Staff Statement at the Conclusion of a Visit to Costa Rica

Press Release No. 07/27
February 20, 2007

An International Monetary Fund (IMF) staff mission led by Mr. Dominique Desruelle, Division Chief for Central America, in the Western Hemisphere Department, today issued the following statement in San Jose:

"An IMF mission visited San José during February 13-16, 2007 to review macroeconomic developments and ongoing reform efforts. The mission met with the Minister of the Presidency Rodrigo Arias, Central Bank Governor Francisco de Paula Gutiérrez, Finance Minister Guillermo Zúñiga, Financial Sector Superintendent Oscar Rodríguez, President of the Congressional Finance Committee Silvia Charpentier, and other officials. The mission thanks the authorities for their hospitality and fruitful and open discussions.

"Supported by a favorable global environment and the pursuit of sound macroecononomic policies, Costa Rica's economic performance continued to be strong in 2006. With economic growth reaching close to 8 percent, the country was among the top performers in the region. Furthermore, inflation fell below 10 percent for the first time in three years, the public sector deficit declined further, and the current account deficit remained broadly unchanged.

"The near-term outlook is favorable. Against the backdrop of a slight slowdown in global activity and lower oil prices, growth is expected to moderate somewhat while inflation would fall further. The external current account deficit, which may widen marginally, would be fully financed by foreign direct investment and other private capital flows. The main risks to this positive outlook are delays in key reforms, which could adversely affect confidence, or a sharper-than-expected slowdown of the U.S. economy.

"The mission concurred with the priority placed on seeking ratification of the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR). At the same time, while noting the strong revenue performance in 2006, the mission reiterated that passage of a comprehensive tax reform remains critical. Such a reform would be the foundation for a sustained increase in social and capital spending and a lasting improvement in the country's debt dynamics. To support monetary policy, it will be important to avoid any fiscal slippages in 2007.

"The mission agreed with the authorities on the merit of seeking a double taxation treaty with the United States in partnership with other countries of the region, and of identifying areas where further fiscal coordination might be warranted, including in the context of the planned Central American Customs Union. These steps would strengthen the climate for investment in Costa Rica and avoid a further erosion of the tax base.

"The central bank's recent modification to the exchange rate band is a welcome further step in achieving greater exchange rate flexibility, which will facilitate a permanent reduction in inflation and make the economy more resilient to shocks. The mission encouraged the authorities to move expeditiously toward the recapitalization of the central bank, and discussed possible avenues to enhance the effectiveness of monetary policy instruments.

"The mission agreed with the authorities about the need to press forward with their plans to further strengthen financial sector supervision and regulation. In particular, it encouraged the authorities to expedite passage of legislation to bolster supervision of off-shore banking activities.

"The IMF will maintain a close policy dialogue with the authorities in the period ahead. The next Article IV consultation is expected to take place in the second half of 2007."



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