## 1criea2020001 ## Source details **Canonical URL:** [1criea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1criea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1criea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1criea2020001.pdf.json) --- ### Context and request for Fund support - Costa Rica is a highly open economy with large exposures to trade, tourism, foreign direct investment, and global supply chains; tourism exports account for over 6 percent of GDP and 19 percent of exports. - Confirmed Covid-19 cases rose to 669 in just over six weeks (by March/April 2020), prompting large domestic labor restrictions and widespread disruptions to economic activity, the balance of payments, and fiscal accounts. - Authorities requested financial assistance under the Fund’s Rapid Financing Instrument (RFI) for about US$508 million, or 100 percent of quota (SDR 369.4 million). Staff supports this request. ### Pre-COVID-19 macroeconomic position - Growth and inflation: - Real GDP: 2.1 percent in 2019; projected 2.5 percent in 2020 prior to the shock. - Inflation: below the 2-4 percent target range since November 2019; average inflation rate of 1.8 percent (pre-shock). - BCCR cut key policy rate in 8 steps from 5¼ - 2¼ percent from March 2019. - External and reserve position: - Current account deficit narrowed to 2.5 percent in 2019; fully financed by FDI. - Reserves at 6 months of imports, or 115 percent of the Fund’s ARA float metric (reserves equivalent to 14.5 percent of GDP in 2019). - Banking and fiscal vulnerabilities: - Banking system entered the crisis with reported adequate capital and liquidity buffers; nonperforming loans low but rising since 2017; household indebtedness high; loan dollarization around 37 percent (2/3 to unhedged borrowers). - Overall deficit rose to 7.0 percent of GDP in 2019; debt-to-GDP jumped to 58½ percent from 53 percent in 2018 and was projected to exceed 60 percent in 2020 pre-shock. ### Impact of Covid-19, immediate policy response, and estimated financing needs - Health and containment measures: - National emergency, mandatory quarantines, school closures, travel bans, specialized hospital setup, and flexible work-hour policies. - By April 23, country had 687 cases and 6 deaths (fatality rate 0.9 percent). - External effects and BOP pressures: - Tourism receipts expected to fall by 60 percent for 2020 as a whole. - FDI inflows expected to drop significantly in 2020. - EMBI spreads about 500 basis points higher compared to last year. - Immediate BOP financing need estimated at about US$1.6 billion, or 2.5 percent of GDP. - Without Fund and other IFI support, reserves would fall to 3.5 months of imports (80 percent of the ARA metric); current reserves at 6 months of imports (115 percent of ARA). - Policy measures adopted (high-level): - Fiscal: interest-free 3-month moratorium on VAT, business income taxes, and customs duties; deferred social security contributions proportional to time worked; subsidies/transfers for three months to vulnerable families; targeted support to SMEs; extraordinary budget (pending Congress approval) of ¢225 bn to provide a subsidy of ¢100-200,000 per month for 3 months to about 375,000 families. - Monetary/regulatory: 100-basis points cut in the key policy rate to 1¼ percent; reduction of gross interest on overnight deposits from 0.62% to 0.01%; relaxation of loan restructuring regulation; possible targeted moratorium on loan principal and/or interest for most affected sectors for at least 8 weeks. - Liquidity and financial support: emergency funding of ¢8 billion to SMEs; allow BCCR to purchase government and other liquid securities in secondary markets; authorize OPCs to disburse Labor Capitalization Fund (FCL) benefits. ### Fiscal quantification of the shock (passive scenario; no compensatory measures) - Key fiscal ratios (pre-shock to after-shock): - Tax revenue: 14.3 percent of GDP to 13.0 percent of GDP. - Total revenue: 14.7 percent of GDP to 13.5 percent of GDP. - Total expenditure: 20.9 percent of GDP to 23.3 percent of GDP. - Current expenditure: 19.1 percent of GDP to 21.5 percent of GDP. - Primary balance: -1.4 percent of GDP to -4.8 percent of GDP. - Overall balance: -6.1 percent of GDP to -9.8 percent of GDP. - Debt: 61.1 percent of GDP to 67.9 percent of GDP. - Gross Financing Needs (in billion colones): 4,273 to 5,038. - GDP growth: 2.5 percent to -3.3 percent. - Aggregate fiscal effects: - Tax revenue projected to drop by about 1.3 percent of GDP from lower activity and tax relief. - Total spending expected to increase by about 2.4 percent of GDP (social transfers ~1 percent of GDP; medical spending ~0.3 percent of GDP). - Primary deficit for 2020 would widen to 4.8 percent of GDP and overall deficit to 9.8 percent of GDP absent compensatory measures; public debt about 68 percent of GDP (compared with 58.5 percent in 2019 and pre-shock ratio of 61 percent). ### Economic outlook, projections, and risks - Staff central outlook: - Real GDP: contraction of -3.3 percent in 2020; rebound of 3.0 percent in 2021 and continued growth through 2025 (3.1 in 2022; 3.2 in 2023; 3.3 in 2024; 3.5 in 2025). - Expected substantial job losses and an expected drop in incomes of roughly 40 percent of the formal sector. - Informal sector constitutes 46 percent of employed and is not part of the social safety system. - Selected macro projections (exact figures): - Real GDP (annual percent changes): 2015 3.6; 2016 4.2; 2017 3.9; 2018 2.7; 2019 2.1; 2020 -3.3; 2021 3.0; 2022 3.1; 2023 3.2; 2024 3.3; 2025 3.5. - Consumer prices (period average, percent change): 2015 0.8; 2016 0.0; 2017 1.6; 2018 2.2; 2019 2.1; 2020 1.5; 2021 2.3; 2022 2.8; 2023 3.0; 2024 3.0; 2025 3.0. - Central government overall balance (percent of GDP): 2019 -7.0; 2020 -8.7; 2021 -6.7; 2022 -5.2; 2023 -4.0; 2024 -2.8; 2025 -2.0. - Central government debt (percent of GDP): 2019 58.4; 2020 67.2; 2021 69.1; 2022 69.9; 2023 70.0; 2024 68.9; 2025 67.0. - Current account balance (percent of GDP): 2019 -2.5; 2020 -4.8; 2021 -2.9; 2022 -3.0; 2023 -3.1; 2024 -3.2; 2025 -3.3. - Net international reserves (millions of U.S. dollars): 2019 8,962; 2020 7,016; 2021 8,016; 2022 8,816; 2023 8,716; 2024 9,416; 2025 8,816. - Risks to outlook: - Major downside risks from a prolonged Covid-19 outbreak and global contraction. - Staff projections assume containment at relatively moderate levels and activity resuming likely from Q3 2020; a longer global contraction or prolonged local outbreak would worsen outcomes. - Additional downside risks: higher spending, delays in fiscal consolidation, sharper rise in risk premia, reduced financing sources leading to excessively high debt levels. ### Fiscal policy guidance and recommended measures - Overall guidance: - Preserve fiscal sustainability as the key priority; temporary deterioration in 2020 is warranted. - Activate the fiscal rule emergency escape clause when needed (clause allows suspension when higher current expenditure is at least 0.3 percent of GDP). - Reapply the fiscal rule from 2021 and pursue fiscal consolidation once the economy recovers. - Quantified recommendations: - Implement additional measures of at least 2 percent of GDP over 2021-24 and asset sales of about 1.4 percent of GDP to reduce debt to 67 percent of GDP by 2025 and further to 50 percent by 2034. - A more ambitious and front-loaded fiscal adjustment would allow faster debt reduction and build buffers. - Potential measure options: - Revenue-side: - Implement tax administration and exemptions reforms announced in early February to reduce compliance gaps estimated around 1.9-2.7 percent of GDP. - Opportunity to raise excise duties on petrol and diesel given lower oil prices; consider property and environmental taxes and higher consumption tax rates (VAT or excises). - Spending-side: - Reduce the wage bill (currently 35 percent of total spending) via continued public sector wage freeze or nominal wage cuts to the upper quartile of the salary scale; swift implementation of planned civil service reform; cuts in goods and services via centralized procurement. - Protect the vulnerable with targeted transfers subject to ex-post accountability; complement consolidation with asset sales. - Efficiency and governance: - Efficiency gains through governance and operational reforms of public enterprises, particularly those with below-market returns in commercial sectors. ### Monetary, exchange rate, and financial stability advice - Monetary and FX policy: - BCCR’s accommodative stance appropriate; further reductions in the policy rate possible as activity contracts and inflation expectations anchor. - Continue to support exchange rate flexibility; limit FX interventions to disorderly market conditions. - Enhance transparency of monetary policy and reduce dollarization to strengthen transmission. - Avoid ceilings on lending rates due to adverse effects on financial inclusion and monetary policy transmission. - Liquidity and liquidity tools: - Staff supports BCCR readiness to provide liquidity and to purchase government and other liquid securities in the secondary market under transparent modalities (transparency, duration, amounts, triggers, exit strategies, eligible securities). - Financial sector measures and safeguards: - Support regulatory easing (targeted, temporary, transparent) for loan restructuring and moratoria to prevent widespread collapse while avoiding moral hazard. - Strengthen risk-based supervision, enhanced monitoring, and stress testing; avoid relaxation of prudential rules. - Differentiate reserve requirements on domestic and FX deposits; plan to fully restore higher provisioning requirements for FX loans to unhedged borrowers in June. ### Debt sustainability, stress tests, and program modalities - Debt projections and DSA conclusions: - Central government debt projected to peak at 70 percent of GDP in 2023 and decline to 67 percent of GDP over the projection horizon. - Baseline: debt sustainable; gross financing needs high and projected to average around 10 percent of GDP; neither debt nor gross financing needs breach MAC DSA thresholds under the baseline. - Baseline assumes implementation of fiscal rule from 2021, additional measures of about 2.0 percent of GDP, and asset sales. - Stress test outcomes: - Debt exceeds the high-risk threshold under the primary balance, exchange rate, and contingent liability shock. - Gross financing needs remain below the high-risk threshold except under the contingent liability shock scenario. - Fund support modalities: - Proposed RFI support: 100 percent of quota (SDR 369.4 million or about US$508 million). - Access of 100 percent of quota is within applicable GRA limits; Costa Rica meets RFI eligibility (urgent BOP need and assessed sustainable debt/repayment capacity). - Proposed RFI access covers about 33 percent of the estimated financing gap; authorities are seeking further support from WB, IDB, CAF, CABEI, and ADF. - Use of RFI requested as direct budget support; BCCR and Ministry of Finance to agree on a Memorandum of Understanding to maintain IMF funds in a government account at the central bank pending use, require government to hold FX balances only with BCCR, and clarify repayment responsibilities. - BCCR commits to undergo a safeguards assessment before Executive Board approval of any subsequent arrangement. ### Annex: Policy measures and 2020 spending quantification - Containment measures and targeted social support (selected items): - State of yellow alert and national emergency; school closures from March 20; ban on nonresidents entering country starting March 18 through May 15 the earliest; vehicle restrictions and beach/park closures; authorization to reduce working days up to 50-75%. - Fiscal and monetary measures (selected items): - Interest-free 3-month moratorium on VAT, business income taxes, and customs duties; firms in tourism granted 4-month moratorium to Costa Rican Tourism Institute; suspension of salary increase for public employees (except police); extraordinary budget of ¢225 bn for subsidies; policy rate reduced by 100 bps to 1.25%; temporary reduction of countercyclical provisions to 0%; allow loan renegotiations without penalizing credit scores up to twice within 24 months. - Spending measures to address COVID-19 in 2020 (exact figures): - Capital spending: 10,597 million colones; 0.03 percent of GDP. - Construction of hospital (CENARE to CEACO): 10,597; 0.03. - Current spending: 440,509 million colones; 1.23 percent of GDP. - Central Government spending: 362,509; 1.02. - 3-month transfers to households: 334,350; 0.94. - Medical spending: 28,159; 0.08. - Public agencies outside Central Government: 78,000; 0.22. - 3-month transfers to households: 21,597; 0.06. - Medical spending: 56,403; 0.16. - Total spending measures: 451,106 million colones; 1.26 percent of GDP. - Annex II DSA selected indicators (exact figures): - Nominal gross public debt (percent of GDP): 2019 58.4; 2020 67.2; 2021 69.1; 2022 69.9; 2023 70.0; 2024 68.9; 2025 67.0. - Public gross financing needs (percent of GDP): 2020 13.0; 2021 14.2; 2022 12.9; 2023 11.2; 2024 10.3; 2025 7.4; 2026 6.1. - Real GDP growth (percent): 2019 2.1; 2020 -3.3; 2021 3.0; 2022 3.1; 2023 3.2; 2024 3.4; 2025 3.5. - Inflation (GDP deflator, percent): 2019 1.7; 2020 1.3; 2021 2.6; 2022 2.8; 2023 2.9; 2024 2.8; 2025 2.7. - Effective interest rate (percent): 2019 8.3; 2020 8.4; 2021 8.4; 2022 8.0; 2023 7.8; 2024 7.7; 2025 6.4. ### Staff appraisal and commitments - Staff recommends Board approval of the RFI request; RFI financing of 100 percent of quota is justified by the scale and severity of the Covid-19 shock and its impact on the balance of payments. - Authorities commit to: - Use RFI resources transparently and through established governance mechanisms. - Return to the fiscal consolidation path anchored by the 2018 fiscal reform and reapply the fiscal rule from 2021. - Engage with the IMF on longer-duration programs (Stand-By Arrangement or Extended Fund Facility) as warranted. - Undergo a safeguards assessment and provide central bank external audit reports to IMF staff. *IMF staff report — EXECUTIVE SUMMARY (Costa Rica), April 23, 2020; Annexes and Appendix I (Letter of Intent, April 22, 2020).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Costa Rica has been hit hard by the Covid-19 pandemic due to a highly open economy with large exposures to trade, tourism, foreign direct investment, and global supply chains. - Tourism exports account for over 6 percent of GDP and 19 percent of exports and have collapsed with border closures. - A severe local outbreak saw confirmed Covid-19 cases jump to 669 in just over six weeks, prompting large domestic labor restrictions and widespread disruptions to economic activity, the balance of payments (BOP), and fiscal accounts at a time when fiscal space is very limited. ### Request for Fund support - Authorities requested financial assistance under the Fund’s Rapid Financing Instrument (RFI) for about US$508 million, or 100 percent of quota, under a policy framework to ensure an adequate response while strengthening medium-term fiscal sustainability. - Staff supports this request. ### Policies (authorities’ stance) - Prior to the pandemic, Costa Rica was on a path of fiscal consolidation with a major fiscal reform bill passed at end-2018 and a fiscal rule that ties spending growth from 2020. - In response to the pandemic, authorities are accommodating health care spending and anticipate increased spending for social protection to protect the most vulnerable. - They are committed to returning to fiscal consolidation with strict implementation of the fiscal rule and revenue-enhancing measures once the crisis moderates. - Plan to maintain an accommodative monetary policy stance and exchange rate flexibility, and safeguard financial system stability. - Committed to implementing broad structural reforms underpinned by OECD accession to support competitiveness and boost potential growth and resilience. ### Pre-COVID-19 developments - Growth: After consecutive falls in growth during 2017-19, the economy expanded by 2.1 percent in 2019 and was projected to grow 2.5 percent in 2020 prior to the shock. - Inflation: Inflation pressures remained low, falling below the 2-4 percent target range since November 2019; BCCR lowered its key policy rate in 8 steps from 5¼ - 2¼ percent from March 2019. - External position: Current account deficit narrowed to 2.5 percent in 2019, fully financed by FDI inflows. Reserves were at 6 months of imports, or 115 percent of the Fund’s ARA float metric. - Banking system: Entered the crisis with reported adequate capital and liquidity buffers and low, but rising, nonperforming loans since 2017; vulnerabilities include high household indebtedness, sizable net foreign liabilities, large sovereign exposures, and high loan dollarization (around 37 percent, 2/3 of which were extended to unhedged borrowers). - Fiscal vulnerability: Overall deficit rose to 7.0 percent of GDP in 2019; debt-to-GDP jumped to 58½ percent from 53 percent in 2018 and was projected to exceed 60 percent in 2020 before the shock. Government announced additional fiscal measures in early February to improve tax administration, replace expensive debt, consolidate public institutions, streamline public wage scales, and reduce debt through asset sales and financial surpluses of decentralized public entities. ### Impact of COVID-19 and policy responses - Health and containment measures: Confirmed cases at 669, mortality rate 0.91 percent. Government declared a national emergency, mandatory quarantines, closures of schools and public offices, travel restrictions for residents, ban on nonresidents entering the country, setup of a specialized hospital, and more flexible work hours including reduced working days. - External effects and BOP: - Tourism receipts expected to fall by 60 percent for 2020 as a whole. - FDI inflows, largely from the US, expected to drop significantly in 2020. - EMBI spreads 500bp higher compared to last year, making market borrowing costs prohibitive. - Immediate BOP financing need estimated at about US$1.6 billion, or 2.5 percent of GDP. - Without Fund financing and other IFI support, reserves would fall to 3.5 months of imports (80 percent of the ARA metric); with current reserves at 6 months of imports (115 percent of ARA). - Economic outlook: - Staff expects the economy to contract by 3.3 percent in 2020, compared with the 2.5 percent growth projected prior to the Covid-19 shock. - Expected substantial job losses and an expected drop in incomes of roughly 40 percent of the formal sector. - Informal sector constitutes 46 percent of employed and is not part of the social safety system. - Policy measures adopted (high-level): - Fiscal: 3-month moratorium on tax payments; deferred payment of social security contributions and making them proportional to time worked; subsidies and transfers for three months to the most vulnerable families; targeted support to SMEs. - Monetary/regulatory: 100-basis points cut in the key policy rate to a record low of 1¼ percent; relaxation of loan restructuring regulation; possible targeted moratorium on loan principal and/or interest for most affected sectors for at least 8 weeks (applicable to personal, housing, vehicle, consumer, and education loans, and to debtors who suffered layoffs, suspension of employment contract or cuts in working hours). - Fiscal quantification of the shock (passive scenario, assuming no compensatory policy adjustments): - Tax revenue: 14.3 percent of GDP pre-shock to 13.0 percent after-shock. - Total revenue: 14.7 to 13.5 percent of GDP. - Total expenditure: 20.9 to 23.3 percent of GDP. - Current expenditure: 19.1 to 21.5 percent of GDP. - Primary balance: -1.4 to -4.8 percent of GDP. - Overall balance: -6.1 to -9.8 percent of GDP. - Debt: 61.1 to 67.9 percent of GDP. - Gross Financing Needs (in billion colones): (Baseline) 4,273 to 5,038. - GDP growth: 2.5 to -3.3 percent. - Aggregate fiscal effects: - Tax revenue projected to drop by about 1.3 percent of GDP from lower activity and tax relief. - Additional health-related spending could increase further as confirmed cases grow. - Total spending expected to increase by about 2.4 percent of GDP, driven by social transfers (~1 percent of GDP), medical spending (~0.3 percent of GDP), and the impact of lower growth. - Primary deficit for 2020 would widen to 4.8 percent of GDP and overall deficit to 9.8 percent of GDP in the absence of compensatory measures, bringing public debt to about 68 percent of GDP (compared with 58.5 percent in 2019 and pre-shock ratio of 61 percent). ### Risks to outlook - Major downside risks from a prolonged Covid-19 outbreak and global economic contraction. - Staff projections assume containment at relatively moderate levels and activity resuming likely from the third quarter of 2020; a longer global contraction or prolonged local outbreak would worsen outcomes. - Additional downside risks include higher spending, delays in fiscal consolidation, sharper rise in risk premia, and reduced financing sources leading to excessively high debt levels. ### Policy discussions — A. Fiscal Policy: Safeguarding Debt Sustainability - Debt projections: - Public debt projected to peak at 70 percent in 2023 under the authorities’ expected fiscal policy path and decline gradually to 67 percent toward the end of the projection horizon 2021-25. - The pandemic is expected to increase the public debt-to-GDP ratio by about 6 percent of GDP in 2020 compared to pre-shock projections. - Policy guidance: - Preserve fiscal sustainability as the key priority; additional fiscal measures should help safeguard fiscal sustainability. - Temporary deterioration in 2020 is warranted, including activation of the fiscal rule emergency escape clause when needed (the clause allows suspension of the fiscal rule temporarily in exceptional circumstances that require a higher current expenditure of at least 0.3 percent of GDP). - Staff welcomes authorities’ commitment to fiscal consolidation and immediate reprioritization of spending, including announced public wage freeze for 2020 and contemplated compensatory measures. - From 2021, once the economy recovers, staff recommends ending emergency spending measures and reapplying the fiscal rule. - Recommended accompanying measures: additional measures of at least 2 percent of GDP over 2021-24 and asset sales of about 1.4 percent of GDP to reduce debt to 67 percent of GDP by 2025 and further to 50 percent by 2034. - A more ambitious and front-loaded fiscal adjustment would allow faster debt reduction and build buffers against future shocks. - Potential measure options: - Revenue side: implement tax administration and exemptions reforms announced in early February to reduce compliance gaps estimated around 1.9-2.7 percent of GDP; opportunity to raise excise duties on petrol and diesel given lower oil prices; consider property and environmental taxes and higher consumption tax rates (VAT or excises). - Spending side: reduce the wage bill (currently 35 percent of total spending) via continued public sector wage freeze or nominal wage cuts to the upper quartile of the salary scale; swift implementation of planned civil service reform; cuts in goods and services via centralized procurement. - Protect the vulnerable with targeted transfers subject to ex-post accountability; complement consolidation with asset sales to reduce debt and mitigate adverse distributional effects. - Efficiency gains through governance and operational reforms of public enterprises, particularly those with below-market returns in commercial sectors. *IMF staff report — EXECUTIVE SUMMARY (Costa Rica), April 23, 2020.* ### 14. Fiscal risks may arise from a permanent deterioration in the fiscal position if the ### 1criea2020001 - 14. Fiscal risks may arise from a permanent deterioration in the fiscal position if the ### Fiscal risks and fiscal policy - Spending caused by pandemic-related measures could become larger or permanent, creating fiscal risks from a permanent deterioration in the fiscal position. - The government created a contingency fund for the COVID-19 emergency of about 3.2 percent of GDP for higher-than-expected emergency spending needs. - Policy recommendations: - Reallocate spending away from non-essential expenditures toward priority areas, such as social assistance or capital spending to close infrastructure gaps, to help save scarce resources. - Implement the fiscal rule in the context of a medium-term fiscal framework (MTFF), backed by necessary institutions and close coordination between the relevant fiscal authorities, to help fiscal management and generate fiscal space. - Note: The authorities requested TA to establish a MTFF and finalized the arrangements for the Fiscal Council. ### Monetary and exchange rate policy (BCCR) - Assessment: - The BCCR’s accommodative monetary policy stance remains appropriate in a substantially weaker growth environment but will continue to face challenges. - Contraction of economic activity and anchoring of inflation expectations should allow further reductions in the policy rate to support growth. - Challenges include conducting monetary policy in a highly-dollarized economy, incomplete pass-through from policy to retail rates, and potential impact of falling interest rate differentials on the exchange rate with adverse balance sheet effects. - Recommendations: - Continue to support exchange rate flexibility, backed by appropriate macroprudential tools, to help restore external balance and absorb future shocks. - Limit FX interventions to addressing disorderly market conditions. - Enhance transparency of monetary policy and reduce dollarization to strengthen monetary policy transmission and anchor inflation expectations. - Avoid introducing ceilings on lending rates owing to adverse effects on financial inclusion, financial intermediation, and monetary policy transmission. - Focus on addressing underlying causes of high interest rates, including those related to existing distortions in the operation of banks. - Liquidity support tools: - Staff supports the BCCR’s efforts to stand ready to provide liquidity to the financial system, including with additional tools. - To support workers affected by the Covid-19 crisis, Congress passed a Bill allowing early withdrawal of benefits from the complementary pension operators (OPCs). - Allowing the BCCR to purchase government and other liquid securities in the secondary market could meet extraordinary liquidity needs by OPCs and help protect financial stability and smooth market functioning under systemic stress, especially if room for further policy rate cuts becomes constrained. - Such purchases should be conducted in open and transparent ways and with due considerations for liquidity and price implications by properly scaling and timing the transactions. - Staff supports proper modalities for such operations (e.g., transparency, duration, amounts, triggers, and exit strategies and eligible securities). ### Safeguarding financial stability and sustainable growth - Financial sector resilience and risks: - The financial sector appears to be resilient, with adequate capital and liquidity buffers, but the expected economic disruption from the health crisis could expose existing pockets of vulnerability. - Highly-indebted household and corporate sectors, widespread job losses, and business closures could cause many borrowers to face difficulties repaying loans and significantly deteriorate banks’ asset quality. - High level of unhedged FX-borrowing, especially in tourism and construction, means downward pressure on the currency could add to difficulties in servicing debts. - Support for regulatory easing: - Staff supports recent regulatory actions to ease credit and liquidity conditions for households and businesses to prevent a widespread collapse. - For loan restructuring and temporary moratoria on loan principal and/or interest payments, any approved changes should be transparent, targeted to the most affected sectors, and temporary to avoid moral hazard and poor credit-risk management. - Continue strengthening the risk-based supervisory framework, enhanced monitoring, and stress testing of risk exposures; avoid relaxation of prudential rules. - Staff welcomes differentiation of reserve requirements on domestic and FX-denominated deposits and the plan to fully restore in June higher provisioning requirements for FX loans to unhedged borrowers to help build buffers. - Recent policy change (as of June 2019): - The authorities reduced the reserve requirement for domestic currency deposits from 15 to 12 percent, while maintaining that for foreign currency deposits unchanged at 15 percent, and partially restored the additional provisions for unhedged borrowers from 1 to1.25 percent. - Structural reforms and growth: - Authorities have made significant progress implementing a broad array of structural reforms underpinned by the OECD accession process. - Authorities completed all 22 of the OECD accession review committees, with accession expected to be achieved by mid-2020. - Speedy implementation of reforms, streamlining business and labor market regulations, closing infrastructure gaps, and enhancing competition in the electricity and financial sectors should support competitiveness, improve the business environment and financial stability, attract FDI, and support medium-term potential growth. - Reforms would help enhance resilience to future shocks, facilitate recovery from the Covid-19 shock, and boost capacity to address informality, inequality, and unemployment. ### Modalities of IMF support (RFI) - Proposed support: - Staff proposes support equivalent to 100 percent of quota (SDR 369.4 million or about US$ 508 million) under the RFI. - Access of 100 percent of quota is within applicable limits under the GRA. - Costa Rica meets eligibility requirements for the RFI: it has an urgent balance of payments need that, if not addressed, will result in immediate and severe economic disruption. - The country is assessed to have sustainable debt and adequate capacity to repay the Fund. - Program considerations: - It is not feasible at this stage to put in place an upper-credit-tranche (UCT) Fund-supported program due to urgent needs and high uncertainty regarding the duration and scale of the pandemic. - If the negative impact amplifies, authorities may consider the RFI disbursement as a bridge to a longer-duration UCT program (e.g., Stand-By Arrangement or Extended Fund Facility), for which the authorities have expressed interest. - Authorities indicated intention to cooperate with the Fund and pursue policies appropriate for addressing Covid-19 impacts on the balance of payments. - Financing gap and additional support: - The proposed access of 100 percent of quota is about 33 percent of the estimated financing gap and is insufficient to cover the full financing gap. - The authorities are actively seeking further support from bilateral and multilateral sources and have reasonable assurances to obtain funds from the WB, IDB, CAF, CABEI, and ADF through emergency financing and/or budget support. - Use and safeguards: - Authorities requested the RFI purchase for direct budget support to reduce the financing gap and soften the hit on the budget, while avoiding concerns about BCCR on-lending given central bank independence. - BCCR and the Ministry of Finance will agree on a Memorandum of Understanding to: (i) commit to maintaining funds received from the IMF in a government account at the central bank, pending their use; (ii) require the government to hold foreign exchange balances only with the BCCR; and (iii) clarify responsibilities for repaying Fund resources. - The BCCR commits to undergo a safeguards assessment, to be completed before Executive Board approval of any subsequent arrangement, and to provide access to the most recent external audit reports and authorize the central bank’s external auditors to hold discussions with staff. - Repayment capacity risks: - Risks to Costa Rica’s capacity to repay are mitigated by the authorities’ good track record of implementing Fund recommendations, resolve to achieve fiscal consolidation in the medium term, and commitment to continued close dialogue with the Fund. ### Staff appraisal - Staff views the authorities’ request for Fund financing under the RFI to be justified and recommends Board approval. - Costa Rica does not currently have an IMF arrangement. - Rationale: - The request for financing of 100 percent of quota is justified by the scale and severity of the Covid-19 shock and its impact on the balance of payments. - Even after the pandemic recedes, tourism and export sectors may take a long time to recover to pre-pandemic levels. - Costa Rica may be negatively affected by diminished availability of external financing sources given ongoing disruption to global financial markets. *Source: 1criea2020001 - 14. Fiscal risks may arise from a permanent deterioration in the fiscal position if the (IMF).* ### 25. While the authorities have pressing healthcare and humanitarian needs to cope with ### 25. While the authorities have pressing healthcare and humanitarian needs to cope with ### Fiscal stance, spending priorities, and governance - Authorities’ proposals for additional spending are: - justified by the need to respond to the pandemic, - consistent with medium-term economic sustainability, - necessary to maintain social cohesion and to protect the most vulnerable during the crisis. - The authorities will need to prioritize spending and keep spending beyond those needed for health and social needs contained. - Commitments by the authorities: - use the funds transparently and through established governance mechanisms to ensure the funds are used to address the Covid-19 related shocks, - maintain macroeconomic stability, - return to their fiscal consolidation path with strict implementation of the fiscal rule underpinned by the 2018 fiscal reform after the shock has dissipated. - Authorities stand ready to act, once the immediate health crisis moderates, to take measures as needed to return the deficit to a path that lowers debt and ensures that debt remains on a downward trajectory. ### Key macroeconomic projections (selected indicators and exact figures) - Real GDP (annual percent changes): 2015 3.6; 2016 4.2; 2017 3.9; 2018 2.7; 2019 2.1; 2020 -3. 3; 2021 3.0; 2022 3.1; 2023 3.2; 2024 3.3; 2025 3.5 - Domestic demand (annual percent changes): 2015 4.2; 2016 4.3; 2017 3.7; 2018 1.0; 2019 1.2; 2020 -1. 9; 2021 1.6; 2022 2.4; 2023 3.0; 2024 3.3; 2025 3.4 - Consumer prices (period average, percent change): 2015 0.8; 2016 0.0; 2017 1.6; 2018 2.2; 2019 2.1; 2020 1.5; 2021 2.3; 2022 2.8; 2023 3.0; 2024 3.0; 2025 3.0 - Central government overall balance (percent of GDP): 2015 -5.6; 2016 -5.3; 2017 -6.2; 2018 -5.9; 2019 -7.0; 2020 -8.7; 2021 -6.7; 2022 -5.2; 2023 -4.0; 2024 -2.8; 2025 -2.0 - Central government debt (percent of GDP): 2015 40.9; 2016 44.9; 2017 48.3; 2018 53.1; 2019 58.4; 2020 67.2; 2021 69.1; 2022 69.9; 2023 70.0; 2024 68.9; 2025 67.0 - Consolidated public sector debt (percent of GDP): 2015 45.4; 2016 49.8; 2017 50.5; 2018 55.5; 2019 58.9; 2020 66.8; 2021 67.9; 2022 67.9; 2023 67.9; 2024 67.1; 2025 65.2 - Current account balance (percent of GDP): 2015 -3.5; 2016 -2.2; 2017 -3.3; 2018 -3.3; 2019 -2.5; 2020 -4.8; 2021 -2.9; 2022 -3.0; 2023 -3.1; 2024 -3.2; 2025 -3.3 - Net international reserves (millions of U.S. dollars): 2015 7,834; 2016 7,574; 2017 7,150; 2018 7,507; 2019 8,962; 2020 7,016; 2021 8,016; 2022 8,816; 2023 8,716; 2024 9,416; 2025 8,816 - Nominal GDP (billions of colones): 2015 29,281; 2016 31,136; 2017 33,189; 2018 34,938; 2019 36,280; 2020 35,529; 2021 37,534; 2022 39,758; 2023 42,212; 2024 44,863; 2025 47,695 - Output gap (as percent of potential GDP): 2015 -0.2; 2016 0.6; 2017 1.1; 2018 0.5; 2019 -0.6; 2020 -6.9; 2021 -7.1; 2022 -7.3; 2023 -7.4; 2024 -7.4; 2025 -7.4 ### Balance of payments and external sector (selected exact figures) - Current account (millions of U.S. dollars): 2015 -1,921; 2016 -1,257; 2017 -1,961; 2018 -1,999; 2019 -1,545; 2020 -2,976; 2021 -1,913; 2022 -2,068; 2023 -2,237; 2024 -2,433; 2025 -2,638 - Exports of goods (f.o.b., millions of U.S. dollars): 2015 9,452; 2016 10,100; 2017 10,808; 2018 11,474; 2019 11,623; 2020 10,899; 2021 11,507; 2022 12,221; 2023 12,922; 2024 13,591; 2025 14,321 - Imports of goods (f.o.b., millions of U.S. dollars): 2015 14,059; 2016 14,526; 2017 15,178; 2018 15,863; 2019 15,427; 2020 14,525; 2021 15,206; 2022 16,111; 2023 17,174; 2024 18,405; 2025 19,650 - Services balance (millions of U.S. dollars): 2015 4,609; 2016 5,110; 2017 4,797; 2018 5,189; 2019 5,337; 2020 3,386; 2021 4,761; 2022 5,059; 2023 5,378; 2024 5,726; 2025 6,109 - Foreign direct investment, net (millions of U.S. dollars): 2015 -2,541; 2016 -2,127; 2017 -2,583; 2018 -2,183; 2019 -2,418; 2020 -1,434; 2021 -2,152; 2022 -2,349; 2023 -2,588; 2024 -2,871; 2025 -3,185 - External debt (percent of GDP): 2015 42.5; 2016 44.2; 2017 46.1; 2018 47.7; 2019 49.4; 2020 48.0; 2021 49.4; 2022 49.5; 2023 47.8; 2024 46.7; 2025 43.6 ### Central government budget and financing (selected exact figures) - Central government revenue (billions of colones): 2015 3,994; 2016 4,379; 2017 4,560; 2018 4,767; 2019 5,164; 2020 5,185; 2021 6,180; 2022 6,700; 2023 7,297; 2024 7,891; 2025 8,437 - Tax revenue (billions of colones): 2015 3,862; 2016 4,168; 2017 4,390; 2018 4,567; 2019 4,890; 2020 4,951; 2021 5,666; 2022 6,156; 2023 6,719; 2024 7,276; 2025 7,781 - Expenditure (billions of colones): 2015 5,647; 2016 6,024; 2017 6,610; 2018 6,829; 2019 7,707; 2020 8,279; 2021 8,711; 2022 8,785; 2023 8,966; 2024 9,161; 2025 9,383 - Interest (billions of colones): 2015 787; 2016 886; 2017 1,054; 2018 1,254; 2019 1,535; 2020 1,769; 2021 2,009; 2022 2,076; 2023 2,168; 2024 2,261; 2025 1,980 - Central government debt (in billions of colones): 2015 11,969; 2016 13,987; 2017 16,042; 2018 18,544; 2019 21,189; 2020 23,866; 2021 25,933; 2022 27,794; 2023 29,548; 2024 30,907; 2025 31,943 - Total financing (billions of colones): 2015 1,659; 2016 1,733; 2017 2,066; 2018 1,997; 2019 2,486; 2020 2,199; 2021 2,531; 2022 2,085; 2023 1,669; 2024 1,270; 2025 946 ### Fund-related obligations and capacity to repay (selected exact figures) - Outstanding Fund credit based on existing and prospective drawings (end-of-period, in millions of SDRs): 2020 369.40; 2021 369.40; 2022 369.40; 2023 277.05; 2024 92.35; 2025 0.00 - Outstanding Fund credit based on existing and prospective drawings (end-of-period, in millions of U.S. dollars): 2020 506.29; 2021 506.29; 2022 506.29; 2023 379.72; 2024 126.57; 2025 0.00 - Obligations to the Fund from existing and prospective credit (in millions of U.S. dollars): 2020 6.02; 2021 6.15; 2022 6.15; 2023 132.47; 2024 256.52; 2025 127.23 - Obligations to the Fund from existing and prospective credit (In percent of gross international reserves): 2020 0.09; 2021 0.08; 2022 0.07; 2023 1.52; 2024 2.72; 2025 1.44 - Memorandum items: - Nominal GDP (in millions of U.S. dollars): 2020 61,945; 2021 65,027; 2022 68,626; 2023 72,355; 2024 76,336; 2025 80,552 - Exports of goods and services (in millions of U.S. dollars): 2020 17,668; 2021 19,955; 2022 21,172; 2023 22,403; 2024 23,646; 2025 24,999 - Gross international reserves (in millions of U.S. dollars): 2020 7,016; 2021 8,016; 2022 8,816; 2023 8,716; 2024 9,416; 2025 8,816 *Source: IMF staff estimates and national authorities, as presented in the chapter.* ### Annex I. Policy Measures in Response to Covid-19 Crisis ### 1criea2020001 - Annex I. Policy Measures in Response to Covid-19 Crisis ### Containment measures - Declaration of a state of yellow alert and a national emergency. - Closures of public and private schools from March 20 until further notice. - Cancellation of large public events; total closure of bars, clubs and casinos from March 15, with an executive agreement between President Alvarado and the Minister of Health to grant the health authority resources for surveillance and control. - Ban on nonresidents and non-nationals entering the country starting March 18 through May 15 the earliest, and mandatory quarantines for those who have close contacts with the infected and those who enter the country from abroad. - Closure of all national parks, effective from March 20 until 13 April the earliest; and starting March 24, closure of beaches and churches, and vehicle restrictions, including a ban on non-essential private and public vehicle circulation starting April 8 (subject to a traffic fine of just over ¢110,000). - Allow more flexible work hours for the private sector, including authorization to reduce working days up to 50-75% to support virus containment while keeping firms afloat. ### Fiscal measures - Congress approved a package including an interest-free 3-month moratorium on the payment of VAT, business income taxes, and customs duties, payable by end-year, making social security contributions proportional to the time actually worked and deferral of their payment. - Firms in the tourism sector facing liquidity constraints were granted a 4-month moratorium on taxes to be paid to the Costa Rican Tourism Institute. - Suspension of the salary increase for public employees (except for the police) for 2020. - Extraordinary budget (pending Congress approval) of ¢225 bn to provide a subsidy of ¢100-200,000 per month for 3 months to about 375,000 families economically affected by the crisis. - Eligibility and delivery details for the 3-month subsidy: - Granted to individuals temporarily or permanently laid off or facing reduced working hours as a result of the pandemic. - Had a monthly income of less than ¢750,000 prior to COVID-19. - Older than 15. - Eligible individuals must be the household head or the person financially sustaining the household. - Authorities set up a dedicated website to allow individuals to apply for the subsidy online, with transfers to be distributed directly to their bank accounts. - Unbanked individuals will be able to open a bank account with their subsidy application, and those without internet access can apply by phone. ### Monetary and financial measures - Reduction of the policy rate by 100 bps to 1.25% to improve credit conditions. - Reduction of the gross interest rate on overnight deposits from 0.62% to 0.01%. - Reduction of the interest rates of Permanent Credit Facility and the Permanent Deposit Facility of the Integrated Liquidity Market from 2.75% and 0.75% to 2.00% and 0.01%, resp. - Temporary reduction of the minimum accumulation of countercyclical provisions for financial entities to 0%. - Allow debtors to renegotiate the terms of their loans without penalizing their credit scores for up to twice within a 24-month period. - At the discretion of financial entities, exempt borrowers from the presentation of information usually required for purposes of analyzing the payment capacity, and allow the establishment of grace periods. - Suspend for 12 months the application of provisioning rules for entities that enter category “irregularity 2” when they record losses for at least six out of the past 12 months. - Provide emergency funding of ¢8 billion to SMEs that are in need (“Programa de Primer Impacto” by the Banking System for Development (SBD)). - Approve loan moratorium (on both the principal and interest) for cooperatives and SMEs affected by coronavirus. Also, provide a special rescue credit line. - Allow the BCCR to purchase government and other liquid securities (both in domestic and foreign currencies) in the secondary market under market stress and to offer liquidity to OPCs. - Authorize the complementary pension operators (OPC) to give out benefits under the Labor Capitalization Fund (FCL) to employees who are affected by Covid-19. ### Other measures being considered - Allow the government to obtain ¢75,000 million from the National Insurance Institute (INS) to assist families economically affected by the new coronavirus. - “Solidarity contributions” to be levied on “salaries and pensions” above ¢1 million. - Moratorium of payments on loans and interests for at least 8 weeks for the most affected sectors, granted by all financial entities, subject to proof of the extent of impact. ### Spending measures to address COVID-19 in 2020 (Table AI.2) - Units: Millions of colones; Percent of GDP - Capital spending: 10,597 ; 0.03 - Construction of hospital (CENARE to CEACO): 10,597 ; 0.03 - Current spending: 440,509 ; 1.23 - of which (Central Government spending): 362,509 ; 1.02 - 3-month transfers to households: 334,350 ; 0.94 - Medical spending: 28,159 ; 0.08 - of which (public agencies outside Central Government): 78,000 ; 0.22 - 3-month transfers to households: 21,597 ; 0.06 - Medical spending: 56,403 ; 0.16 - Total spending measures: 451,106 ; 1.26 - Note: Authorities and IMF estimates. ### Annex II — Public Debt Sustainability Analysis: Bottomline and Baseline - Bottomline: Debt is sustainable. - Baseline projections and features: - Central government debt projected to peak at 70 percent of GDP in 2023 and decline to 67 percent of GDP over the projection horizon. - Gross financing needs are high and projected to average around 10 percent of GDP. - Neither debt nor gross financing needs breach the MAC DSA thresholds under the baseline. - Baseline reflects implementation of a strong fiscal consolidation strategy that includes: - Implementation of the fiscal rule from 2021. - Additional measures on the revenue and spending side for about 2.0 percent of GDP. - Asset sales and some compensatory measures already adopted to contain the additional fiscal burden of emergency measures. - A stable investor base is an important mitigating factor: more than half of total domestic debt is held by captive local institutional investors, including the social security system, nonfinancial public-sector institutions, and banks. - Authorities’ COVID-19 response financing: - Additional temporary spending financed by re-prioritization of expenditures, additional tax measures and loans from multilaterals. - Risks: - The medium-term fiscal consolidation path is realistic but subject to risks from policy slippages or a more prolonged and severe health crisis. - Debt would be vulnerable if the authorities delay their fiscal consolidation plan, which could also endanger exchange rate stability. ### Stress tests, scenarios, and key macro assumptions - Stress test outcomes: - Debt exceeds the high-risk threshold under the primary balance, exchange rate, and contingent liability shock. - Gross financing needs would remain below the high-risk threshold in all standardized macro-fiscal stress tests, except for the contingent liability shock scenario. - A depreciation would be a risk but a manageable one based on the stress test. - Key macro assumptions: - COVID-19 pandemic expected to reduce Costa Rica’s real GDP growth rate to -3.3 percent in 2020, from the earlier IMF staff projection of 2.5 percent. - In 2021, growth projected to rebound to 3 percent in a V-shaped scenario, although adverse effects may continue due to hysteresis effects. - Baseline assumes the spread of the disease will be contained at moderate levels and activity will resume in one year; a more protracted shock could further weaken GDP growth, reduce tax revenues and further deteriorate fiscal and external current account deficits. - Coverage and contingent liabilities: - DSA considers a restricted coverage of the public sector at the central government level due to data availability and reliability. - The rest of the consolidated public sector has been broadly in balance in recent years as the cash surplus of the social security system and other decentralized government entities broadly offset the small central bank deficit—resulting from its liquidity management operations. ### Selected numerical indicators and projections (as presented) - Nominal gross public debt: 58.4 (2019), 67.2 (2020), 69.1 (2021), 69.9 (2022), 70.0 (2023), 68.9 (2024), 67.0 (2025) — (in percent of GDP, table header context). - Public gross financing needs: 13.0 (2020), 14.2 (2021), 12.9 (2022), 11.2 (2023), 10.3 (2024), 7.4 (2025), 6.1 (2026) — (in percent of GDP). - Real GDP growth: 2.1 (2019), -3.3 (2020), 3.0 (2021), 3.1 (2022), 3.2 (2023), 3.4 (2024), 3.5 (2025) — (in percent). - Inflation (GDP deflator, in percent): 1.7 (2019), 1.3 (2020), 2.6 (2021), 2.8 (2022), 2.9 (2023), 2.8 (2024), 2.7 (2025). - Effective interest rate (in percent): 8.3 (2019), 8.4 (2020), 8.4 (2021), 8.0 (2022), 7.8 (2023), 7.7 (2024), 6.4 (2025). - Identified debt-creating flows, primary deficit and revenue/expenditure shares presented in DSA tables (see annex figures and tables for full series and footnotes). *Source: IMF staff (Annex I and Annex II).* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Background and health response - First confirmed case reported on March 6. - By just more than six weeks the number of confirmed cases reached 669, with six deaths. - By April 23, the country had reached 687 cases with only 6 deaths, one of the lowest fatality rates from the epidemic in Latin America (0.9 percent). - Measures taken to contain the spread and protect public health: - Declaration of a national emergency. - Mandatory quarantines and closures of schools and most public spaces. - Travel restrictions for residents and a ban on nonresidents from entering the country. - Establishment of a specialized hospital center targeted for Covid-19 treatment. - Adoption of more flexible private sector work hours, including authorization to reduce working days up to 50-75 percent. ### Economic impact and projections - Costa Rica is a highly open economy with large exposures to trade, tourism revenues, and foreign direct investment. - Tourism revenues account for more than 6 percent of GDP and 19 percent of exports; tourism has collapsed with border closures and restricted travel. - The pandemic and containment measures are expected to: - Reverse the turnaround witnessed from the second half of 2019 and cause growth in 2020 to drop sharply. - Create a large balance of payments need estimated to be around 2.5 percent of GDP. - Cause a large fiscal cost from containment and mitigation measures, adding 2.0 percentage points of GDP to the fiscal deficit. - Together with lower economic activity on tax revenues, result in an overall deficit of about 8.6 percent of GDP. - Lead to an economic contraction in Q2 2020, a more moderate recession in Q3 2020, and a recovery thereafter. - Imply a drop of around 6 percentage points in the GDP growth rate compared to the pre-pandemic forecast. ### Fiscal and external position prior to and during the shock - Macroeconomic indicators (pre-shock / recent averages): - Average inflation rate of 1.8 percent. - Current account deficit of 2.9 percent. - Average economic growth of 3.4 percent in the last six years. - Reserves equivalent to 14.5 percent of GDP in 2019 (more than 6 months of imports). - Remittances less than 1.0 percent of GDP. - Tourism accounts for around 6 percent of GDP. - Fiscal vulnerabilities: - Central government average deficit of 5.9 percent of GDP during the last six years. - Debt reaching 58.5 percent of GDP in 2019. - 2018 fiscal reform was expected to yield around 3.5 percent of GDP between 2019-2023 and includes VAT base broadening, higher income taxes, overhaul of public sector compensation, and a fiscal rule tying down spending growth. - External financing conditions have deteriorated: EMBI spreads are now almost 500 basis points higher compared to last year. ### Request for IMF support - The government requests emergency financing under the Rapid Financing Instrument (RFI): - A purchase of 100 percent of quota equivalent to SDR 369.4 million (or about US$508 million). - Rationale for RFI support: - To meet part of the urgent balance of payments need and defray costs associated with increased health spending and social assistance. - To help catalyze additional financing from multilateral institutions (CABEI, World Bank, IDB, CAF). ### Policy measures implemented and proposed - Immediate containment and mitigation measures: - 3-month moratorium on tax payments (interest-free moratorium on payments of value-added taxes, business income taxes and customs duties). - Deferred payment of social security contributions and making them proportional to the time worked. - Subsidies and transfers to the most vulnerable, including a monthly subsidy to about 375,000 households affected by the crisis. - Monetary and regulatory measures to ease credit and liquidity conditions, including prudential measures to facilitate credit restructurings (moratoria on principal and interest). - Central Bank actions: - Reduced monetary policy rate by 100 basis points to its lowest level since the rate was created. - Injected liquidity into trading markets and will provide more liquidity by purchasing securities (including government bonds) in secondary markets. - Compensatory fiscal measures (implemented or proposed) due to vulnerable fiscal situation: - Suspension of salary increases for public employees (except health workers and the police). - A temporary surcharge on income taxes. - Use of retained earnings from public sector entities to reduce central government debt. - Governance and use of RFI resources: - Commitment to use RFI resources transparently and through established governance mechanisms, including ex-post accountability and controls. ### Commitments, conditionality, and safeguards - Fiscal rule and consolidation: - Activated the emergency escape clause in the fiscal rule in 2020. - Commitment to return to the pre-COVID fiscal consolidation path anchored by the 2018 fiscal reform and to reapply the fiscal rule from 2021 once the economy recovers. - Commitment to take additional income and expenditure measures to resume fiscal consolidation with the goal of reaching a primary balance of 2.2 percent of GDP in 2024 and to reduce debt to 50 percent of GDP by 2034. - Monetary and exchange rate stance: - Intend to maintain exchange rate flexibility and an accommodative monetary policy stance. - Stand ready to continue providing liquidity to the financial system as needed. - Structural reforms and recovery strategy: - Speedy implementation of a range of structural reforms anchored by the OECD accession process covering environmental, fiscal, health, education, governance, labor and social policy, and financial sector reforms. - Streamlining business and labor market regulations, closing infrastructure gaps, and enhancing competition in the electricity and financial sectors. - Safeguards and collaboration with IMF: - Commit to undergo a safeguards assessment in line with IMF safeguards policy. - Provide IMF staff with the Central Bank of Costa Rica’s most recently completed external audit reports and authorize Fund staff to hold discussions with the central bank’s external auditors. - Collaborating to establish a Memorandum of Understanding between the Central Bank of Costa Rica and the Ministry of Finance to clarify responsibilities for timely servicing of financial obligations to the IMF. - Policy stance on external restrictions: - Authorities will abstain from adopting measures or policies that would further deteriorate the external and public debt sustainability position. - Do not intend to introduce exchange or trade restrictions or other measures that would compound balance of payments difficulties. ### Key commitments and intended engagements - Use RFI resources transparently and through established governance mechanisms. - Return to fiscal consolidation and reapply the fiscal rule starting 2021. - Engage with the IMF on longer-duration programs (Stand-by Arrangement or Extended Fund Facility) as warranted. - Maintain close policy dialogue with the IMF to explore solutions to balance of payments difficulties and to avoid policies that would worsen external or debt sustainability. *Appendix I. Letter of Intent (Costa Rica, April 22, 2020)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1criea2020001.pdf_