Statement by an IMF Mission to Costa Rica

Press Release No. 09/288
August 24, 2009

A staff team from the International Monetary Fund (IMF) visited Costa Rica on August 10-21, 2009 to conduct the 2009 Article IV consultation and the first review of the Stand-By Arrangement approved last April (see Press Release No. 09/124). The mission met with Minister of Finance Jenny Phillips; Central Bank President Francisco de Paula Gutiérrez; other government officials, and representatives of the private sector and the academia.

After the conclusion of the discussions, Mr. Andreas Bauer, the IMF mission chief for Costa Rica, made the following statement:

“The Costa Rican economy has withstood the impact of the global economic and financial crisis relatively well. The strategy to shield the economy from external shocks through fiscal stimulus and the mobilization of contingent external financing has helped preserve confidence and financial stability, and mitigated the decline of the economy.

“Near term prospects have improved. Recent signs of a turnaround in economic activity and somewhat more favorable perspectives for external demand point to a gradual recovery of the Costa Rican economy going forward. The mission now expects real GDP to decline by 1.5 percent in 2009, before returning to positive growth of 2.3 percent in 2010. Inflation should continue to decline, reaching 5 percent by end-year.

“The external position has evolved favorably. During the first half of 2009, the external current account deficit was almost balanced and external short-term debt declined as banks and corporations repaid credit lines. Net international reserves have increased slightly since end-December 2008 and will be further supplemented in the coming weeks by an allocation of 132.8 million SDRs (equivalent to about US$205 million).1 In addition, the mission’s analysis suggests that the current level of the real effective exchange rate is broadly in equilibrium.

“Performance under the Stand-By Arrangement has been commendable. The authorities have met all quantitative performance criteria and structural benchmarks for the first program review. However, lower growth and inflation will generate a revenue shortfall compared to the original program projections for the central government. The authorities and the mission have agreed to pass on part of the revenue shortfall to the deficit of 2009, which is now expected to reach 4.1 percent of GDP. This will allow to protect higher social spending and support domestic demand, while keeping the increases in the domestic borrowing requirement and the debt-to-GDP ratio within reasonable margins.

“The medium-term prospects for the Costa Rican economy remain generally promising. Strong institutions and higher public investments in human and physical capital should provide a solid basis for the resumption of high, well-balanced economic growth. A key objective for the authorities should be to consolidate recent gains in domestic and external stability, boost the credibility of fiscal and monetary policies, and further strengthen the economy’s resilience to external shocks.

“After large expenditure increases in 2008-10, which are providing countercyclical support to domestic demand, the fiscal deficit will need to be reduced to contain vulnerabilities and allow for a gradual reduction in the debt burden. Achieving this—while maintaining higher levels of social spending and investment—will require a tax reform to increase revenues by at least 2 percent of GDP. Fostering an early consensus on the need to increase revenues would be desirable to ensure a swift debate and passage of tax reform.

“With inflation at historical lows, the central bank has an opportunity to achieve price stability faster than previously expected. The mission supports the gradual increase in exchange rate flexibility and transition to an inflation targeting framework that the Central Bank of Costa Rica is pursuing. During this transition, the room for additional interest rate cuts will depend on further declines in inflation and devaluation expectations. To support this process, the mission encourages the Central Bank of Costa Rica to clarify its role in the foreign exchange market and streamline its liquidity instruments. The mission also notes that achieving price stability will require a strengthening of the Central Bank’s balance sheet through recapitalization.

“The banking sector remains sound. The authorities should continue to monitor developments closely and implement their well-focused agenda to strengthen supervision and the financial sector safety net. In this context, the mission welcomes the SUGEF’s ambitious strategic plan to implement risk-based supervision and urges swift approval of the law to establish consolidated supervision in line with best international practices. To further strengthen market discipline, legal provisions that prohibit the publication of certain prudential indicators for individual banks (e.g., the risk-adjusted capital asset ratio) should be removed.

“The mission expects that the IMF Executive Board will conclude Costa Rica’s 2009 Article IV consultation and the first review of the Stand-By Arrangement by end-September. The authorities have indicated that they will continue to treat the Stand-By Arrangement as precautionary.”

1 The Board of Governors of the International Monetary Fund (IMF) approved on August 7, 2009 a general allocation of Special Drawing Rights (SDRs) equivalent to US$250 billion to provide liquidity to the global economic system by supplementing Fund’s member countries’ foreign exchange reserves. The general SDR allocation will be made on August 28, 2009 to IMF members in proportion to their existing quotas in the Fund. Separately, the Fourth Amendment to the IMF Articles of Agreement providing for a special one-time allocation of 21.5 billion SDRs has now entered into force. The special allocation will be made to IMF members on September 9, 2009 (for more information see http://www.imf.org/external/np/tre/sdr/proposal/2009/0709.htm).



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