## 1criea2021001

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### Executive summary and program request
- Authorities requested a 36-month Extended Arrangement under the Extended Fund Facility (EFF).
  - Proposed access: SDR 1,237.49 million (about US$1,750 million or 335 percent of quota).
- Program objectives:
  - Support recovery from the COVID-19 shock.
  - Secure macroeconomic stability.
  - Advance reforms to promote inclusive, green, and sustainable growth.
- Program pillars:
  - (i) Gradually implement equitable fiscal reforms to ensure debt sustainability while protecting the most vulnerable.
  - (ii) Maintain monetary and financial stability; strengthen the central bank’s operational autonomy and governance; address structural financial vulnerabilities.
  - (iii) Advance structural reforms to promote inclusive, green, and sustainable growth.
- Key risks:
  - Sizable risks from pandemic uncertainty, global outlook, and potential delays in implementing the fiscal strategy and supporting reforms.

### Economic developments, outlook, and financing needs
- Pre-COVID-19:
  - Current account deficit: 2.3 percent of GDP in 2019; fully financed by FDI.
  - Reserves coverage: 6 months of imports or 131 percent of the Fund’s ARA metric as of end-2019.
  - Eurobond: tapped for US$1.5 billion in November 2019.
- COVID-19 impact (selected figures):
  - Cases as of end-January: 194,280; deaths: 2,627.
  - Real activity: contracted by 8.8 percent (2020Q2 y-o-y) and 6.7 percent (2020Q3 y-o-y).
  - Inflation: averaged 0.7 percent in 2020; average core inflation 1.1 percent in 2020.
  - Unemployment: 12.5 percent in 2020Q1 to 22.0 percent in 2020Q3.
  - Poverty: increased to 26.2 percent in July 2020 from 21 percent a year earlier.
  - Private sector credit: increased 2.8 percent (y-o-y) in November 2020 (up from -0.9 percent in April).
  - Reserves decline: US$1.7 billion in 2020; colón-dollar depreciation 7.1 percent.
  - EMBI spread: peaked over 900 bps in April 2020; about 550 bps as of end-January 2021.
- Outlook:
  - Real GDP projected: recover by 2.6 percent in 2021; reach pre-COVID output levels only in late 2022.
  - Medium-term growth: converge to potential of about 3 percent.
  - Inflation: remain around lower end of BCCR target near term, converge to midpoint over medium term.
  - Current account: widen to 3.2 percent of GDP in 2021 from 2.6 percent in 2020; stabilize around 2.7 percent over medium term.
  - Balance-of-payments financing gap: projected 6.4 percent of GDP over 2021-2023.
- Program financing (selected, In millions of U.S. dollars):
  - Financing need: 2020: 1,431; 2021: 2,678; 2022: 1,746.
  - Reserve accumulation: 2020: -1,706; 2021: 773; 2022: 952.
  - Underlying BOP need1/: 2020: 3,137; 2021: 1,906; 2022: 794.
  - IMF financing: RFI 2020: 522; IMF EFF planned purchases: 2021: 58; 2022: 1,581.
  - Gross international reserves (millions of U.S. dollars): 2020: 7,232; 2021: 8,004; 2022: 8,956.
  - Reserves as percent of ARA metric: 2020: 108; 2021: 112; 2022: 114.
  - Memorandum items: Capital market access 2022: 001,000.  
  - Source note: 1/ Net of private sector and bilateral financing.

### Fiscal position, 2018 reform, COVID response, and 2021–23 package
- Pre-pandemic fiscal context:
  - Fiscal deficit and debt-to-GDP more than doubled since the Global Financial Crisis.
  - December 2018 fiscal reform expected to reduce primary deficit from 2.6 percent in 2019 to 1.3 percent of GDP in 2020 (BCCR January 2020 Macro Program projection).
- COVID-19 emergency fiscal measures (selected):
  - Tax moratoria: 3-month moratorium for VAT, business income taxes, and customs duties (interest-free, payable by end-year or deferred into 2021).
  - Temporary measures: 25 percent temporary reduction (six months) in minimum tax base for health and pension contributions.
  - Transfers and spending: transfer of CRC 75 billion from INS to CG; transfer of CRC 74 billion to CCSS; COVID-19 vaccine downpayment CRC 7.2 billion; Bono Proteger monthly subsidy CRC 125,000 for three months to about 375 thousand families.
  - Wage policy: freeze in public sector wage (except police and healthcare); freeze of 4,953 vacancies; elimination of 2,194 positions.
- Fiscal outcomes 2020:
  - COVID-related spending: about 0.8 percent of GDP (central government), 1.3 percent of GDP (general government).
  - Tax revenues fell by 11 percent in 2020.
  - Primary deficit for CG including newly consolidated public entities: expected 3.9 percent of GDP.
  - Debt: about 68 percent of GDP.
  - Gross financing needs: will remain elevated, peaking at nearly 14 percent of GDP in 2021.
- 2021–23 fiscal package targets and composition (cumulative change from 2020, in percent of GDP):
  - Revenue measures: +0.4 (2021), +0.8 (2022), +1.4 (2023).
    - 2018 tax reform yields: +0.1, +0.1, +0.3.
    - Reduce tax exemptions: +0.2, +0.4, +0.5.
    - Globalize PIT (territorial): +0.4 (year shown).
    - Raise property tax: +0.1, +0.1.
    - SOE dividends: +0.1, +0.2, +0.2.
  - Expenditure measures: -1.3 (2021), -1.8 (2022), -2.3 (2023).
    - Wage bill: -0.6, -0.8, -1.0.
    - Purchases of G&S: -0.1, -0.2, -0.3.
    - Current transfers: 0.0, -0.5, -0.8 (o.w. Social assistance: +0.1, +0.1, +0.1).
    - Capital spending: -0.5, -0.3, -0.1.
  - Total structural measures: +1.7 (2021), +2.5 (2022), +3.7 (2023).
  - One-off measures: +0.6, +0.7, +0.6.
  - Cyclical impact: +0.1, +0.4, +0.6.
  - Primary balance (cumulative change): +2.3, +3.6, +4.9.
  - Primary balance (% of GDP): -1.7 (2020), -0.3 (2021), 1.0 (2023).
  - Total revenue package expected yield by 2023: 1.4 percent of GDP.
  - Tax expenditure estimated at 4.9 percent of GDP in 2020; reduction target 0.5 percent of GDP by 2023.
- Central Government selected operations (percent of GDP):
  - Total Revenue: 15.1 (2019), 14.3 (2020), 14.7 (2021 proj.).
  - Tax Revenue: 13.2, 12.2, 12.7.
  - Total Expenditure: 21.9, 22.9, 21.7.
  - Wage bill: 7.0, 7.5, 6.9.
  - Capital Expenditure: 2.3, 1.9, 1.5.
  - Primary Balance: -2.6, -3.9, -1.7.
  - Overall Balance: -6.8, -8.7, -7.0.
  - Structural Primary Balance: -2.7 (2019), -2.4 (2020), -0.8 (2021).
  - Nominal GDP (CRC bn): 375,613 (2019), 359,443 (2020), 373,888 (2021 proj.).
- Contingency and fiscal rule:
  - Program adjustor allows additional COVID-related spending up to 0.3 percent of GDP in 2021 (capped at CRC 112 billion in TMU).
  - Authorities will reprioritize non-critical spending or propose temporary tax measures if revenues underperform; revenue over-performance locked in to accelerate debt reduction.
- Social assistance and distributional effects:
  - Structural increase in selected social assistance of 0.1 percent of GDP starting 2021 to expand coverage for poorest deciles.
  - World Bank model estimates: planned increase would reduce income inequality by 0.4 Gini percentage points and lift more than 12 thousand people out of poverty.
- Public employment reform:
  - Public Employment Bill expected approval by Legislative Assembly by end-May 2021; single pay spine; eliminate annuities, bonuses, incentives within twelve months; average annual savings first 10 years ~0.5 percent of GDP (central government) and 0.1 percent for rest of public sector.
- Revenue administration and SOE governance:
  - Revenue administration improvements potential yields 0.3 percent of GDP (not yet in baseline).
  - Accelerate full adoption of IFRS reporting by SOEs; publish 2020 financial statements for ICE, AyA, CNP by end-December 2021 (structural benchmark).
  - SOE dividends policy to generate about 0.2 percent of GDP and efficiency gains.

### Debt outlook, DSA, and financing assumptions
- Baseline central government debt:
  - Projected to peak at about 76 percent of GDP in 2023; authorities’ target 50 percent by 2035.
  - Debt vulnerabilities: exchange rate, interest rate, contingent liabilities.
- Gross financing needs:
  - Peak nearly 14 percent of GDP in 2021.
  - Average gross financing needs ~12 percent of GDP in 2021-24; decline below 10 percent in 2025.
- Financing composition:
  - About one third of financing expected externally through multilateral credit, including Fund resources, and US$4 billion in Eurobond issuances over 2022-26.
  - Domestic debt: three quarters reflects rollovers; investor base includes pension funds and banks.
- DSA stress scenarios (selected outcomes):
  - If primary balance fails to strengthen beyond historical level (-2.7 percent of GDP), debt-to-GDP would rise to about 94 percent by 2026.
  - Combined standardized shocks: debt-to-GDP could reach 92.6 percent in 2026 and gross financing needs remain around 15 percent of GDP until 2023.
  - Foreign-currency denominated debt: about 42 percent of total in 2020; a 30 percent real depreciation could increase external debt-to-GDP to 90 percent by 2024.
- External debt projections (public and private):
  - Total external debt to GDP: 2021: 59.1 percent; peak in 2024: 61.9 percent; 2026: 58.7 percent.
- Policy priorities from DSA:
  - Implement fiscal consolidation (structural measures ~5¼ percent of GDP over 2021-25).
  - Secure external financing consistent with baseline (official financing and US$4 billion Eurobonds).
  - Manage exchange rate and currency risks; reduce gross financing needs over time.

### Monetary policy, reserves, and central bank governance
- Monetary policy actions and stance:
  - Policy rate cuts: from 2¼ percent in early March to ¾ percent in June 2020.
  - BCCR’s stance: data-dependent and forward-looking within inflation-targeting framework (3 percent ±1 percentage point).
  - Monetary Policy Consultation Clause (MPCC): outer consultation band ±3 percentage points; inner band ±1.5 percentage points around interim targets.
- FX and reserves:
  - BCCR FX intervention focused on episodes of excessive volatility; intervention in fall 2020: about US$260 million.
  - BCCR absorbed non-financial public sector FX needs ~US$371 million in 2020.
  - Gross international reserves: fell by about US$1.7 billion in 2020 to US$7,232 million (108 percent of ARA metric).
  - Program NIR baseline at end-2020: US$3,712 million (TMU convention).
- Liquidity facilities and market operations:
  - Law authorized BCCR since April 2020 to purchase sovereign and other liquid securities in secondary market under systemic liquidity stress.
  - Repo facility: introduced September 2020 (CRC700 billion), expanded January 2021 by CRC143 billion; as of end-December 2020 secondary market purchases < CRC 1.7 billion; CRC 575 billion approved for repo facility.
- Safeguards and governance:
  - Updated safeguards assessment of BCCR finalized October 2020; improvements since 2009 but further steps needed to strengthen operational autonomy and governance.
  - 2019 amendments tightened dismissal rules for Governor, delinked term from political cycle, removed Minister of Finance’s voting rights on Board.
  - Structural benchmark: draft amendments to BCCR law to strengthen operational autonomy and governance (target date end-August 2021).

### Financial sector resilience, supervision, and stress tests
- Banking system indicative metrics (end-2020 / stress test base):
  - Capital adequacy ratio: remained above 10-percent required threshold; CAR 13½ percent as of end-May 2020 (stress test base).
  - Liquidity-to-short-term-liabilities ratio: nearly 1.
  - Regulatory NPLs: below 3 percent (Dec 2020: 2.5 percent).
  - Forward-looking loan loss provisions: increased from 3.5 percent in 2019 to 4.2 percent in 2020.
  - Banking profitability (ROE): declined from 6.8 percent in 2019 to 4.6 percent in 2020.
- Temporary relief measures (2020):
  - Reduced to zero minimum accumulation of countercyclical provisions.
  - Relaxed regulations for loan restructuring and moratoria at creditors’ discretion.
  - Emergency funding to SMEs; by end-November 2020 almost half of loan portfolio restructured.
- Stress test results (top-down combined adverse scenario):
  - Pre-shock CAR: All Banks 13.5; Public 13.3; Domestic Private 14.1; Foreign Private 13.6.
  - Key shocks:
    - NPL increase: All Banks impact -1.8 percentage points of RWA.
    - Sovereign bond yield increase 300 bps: All Banks impact -0.9 percentage points.
    - Colón depreciation 10 percent: All Banks impact -0.6 percentage points (direct and indirect).
  - Combined change in CAR: All Banks -3.4; Public -3.3; Domestic Private -2.5; Foreign Private -3.5.
  - Post-shock CAR: All Banks 10.1; Public 10.0; Domestic Private 11.5; Foreign Private 10.1.
  - Five banks (collectively <30 percent market share) would fall below 10-percent CAR; combined capital shortfalls amount to 0.24 percent of GDP.
- Policy implications:
  - Proactive supervision and monitoring of credit portfolios as restructuring measures unwind.
  - Phased adoption of Basel III over next two years.
  - Implement banking resolution and deposit guarantee fund regulations; roadmap for strengthened legal framework by end-June 2021.

### Structural reforms, labor market, inclusion, and climate agenda
- Structural constraints:
  - Skill mismatches, infrastructure gaps (transport, telecommunication), limited technological innovation, excessive red tape.
  - Informality: about 40 percent of employment concentrated in informal sector.
  - Female labor force participation low; unemployment and informality disproportionately affect women and low-skilled workers.
- Policy priorities to boost potential growth and inclusion:
  - Strengthen education quality and vocational training; integrate universities and firms.
  - Close physical and digital infrastructure gaps; facilitate firm registration and licenses.
  - Revamp bankruptcy law (expected approval 2021) to facilitate restructuring.
  - Promote formalization: make social security more job-friendly, expand childcare, launch long-term care, promote female education in STEM, streamline minimum wage structure.
- Climate and decarbonization:
  - National Decarbonization Plan: transition to zero net emission economy by 2050.
  - Key targets (selected):
    - Public transport zero-emissions: 30% by 2030; 85% by 2035.
    - Private transport: 30% of vehicle fleet electric by 2030; 95% zero-emissions by 2035.
    - National electricity mix 100% renewable by 2035.
    - Increase national forest coverage to 60% by 2030.
  - Economic cost-benefit evidence:
    - IDB net benefits over 2020-2050: US$40.9 billion (discounted to 2015 at 5 percent); US$54.7 billion when discounted to 2020 under preferred scenario.
    - World Bank integrated assessment: cumulative net benefits US$54.5 billion over 2020-2050.
  - Fiscal considerations:
    - Fuel taxes currently account for about 10.7 percent of fiscal revenues; transitioning implies need to reform taxation on fuels, vehicles, and trucks.
  - Structural benchmark: develop roadmap to enhance infrastructure resilience to climate change, including cost assessment and financing options (target date end-September 2022).

### Program design, conditionality, and monitoring
- Arrangement design:
  - 36-month EFF with semi-annual reviews; phasing intended to bridge general elections in early 2022 and support policy continuity.
- Quantitative conditionality (selected):
  - Performance criteria (PCs) for end-July and end-December 2021; indicative targets for end-September 2021 and end-March 2022.
  - Continuous PCs listed in TMU (no new external payment arrears; limits on accumulation of new external arrears).
  - Floors on BCCR net international reserves to keep gross reserves above 100 percent of ARA metric.
  - Floor on central government primary balance consistent with fiscal reform plan; adjustor to augment COVID-related spending up to 0.3 percent of GDP in 2021 (capped at CRC 112 billion).
  - Indicative target on central government debt stock; coverage to be adjusted in future reviews per TMU.
- MPCC:
  - Interim center points and bands for end-of-period inflation: End-Jul center 1.4 percent; End-Sep center 1.4 percent; End-Dec center 1.3 percent; End-Mar center 1.1 percent.
  - Outer band limits (3 percentage points above center): 4.4, 4.4, 4.3, 4.1.
  - Inner band limits (1.5 percentage points above center): 2.9, 2.9, 2.8, 2.6.
- EFF phasing and purchases (SDR and quota percent):
  - March 1, 2021: 206.34 millions of SDR, 55.86 percent of Quota.
  - Five subsequent semi-annual purchases each ~206.23 millions of SDR (55.83 percent of Quota).
  - Total: 1,237.49 millions of SDR, 335 percent of Quota. Memorandum item: Quota 369.40.
- TMU technical definitions and data reporting:
  - Program exchange rates (as of December 31, 2020): Colones to U.S. dollar 613.915; U.S. dollar to the SDR 1.45; Gold price per troy ounce US$1,891.10.
  - Program NIR definition and adjustors specified; program NIR end-2020 evaluated at market rates stood at US$3,712 million.
  - Central government definition expanded to include 51 entities required to be consolidated under Law 9524 (listed verbatim in TMU).
  - Data reporting timelines: fiscal monthly (within three weeks), external targets monthly (within three weeks), weekly reserve data (within one week), social safety net quarterly (within four weeks).
- Structural benchmarks (selected and target dates):
  - Legislative Assembly to approve Public Employment Bill. Target date: End-May 2021.
  - Tax Commissioner to approve Tax Compliance Improvement Plan. Target date: End-December 2021.
  - Publication of IFRS financial statements for three SOEs (ICE, AyA, CNP). Target date: End-December 2021.
  - MOF National Treasury to centralize and digitalize payment system for cash transfer programs. Target date: End-December 2021.
  - BCCR to submit draft amendments to BCCR Law. Target date: End-August 2021.
  - Cabinet to approve and publish MTFF and MTDS for 2023-2026. Target date: End-April 2022.
  - Roadmap to enhance infrastructure resilience to climate change. Target date: End-September 2022.

### Safeguards, capacity to repay, and staff appraisal
- Safeguards:
  - Updated safeguards assessment of BCCR finalized October 2020; further improvements needed in operational autonomy and governance.
  - Authorities plan amendments to BCCR Law and steps to fill Board vacancy.
- Capacity to repay:
  - Fund credit outstanding, including RFI and projected EFF purchases, will peak in 2023 at 3.3 percent of GDP, equivalent to around 9.3 percent of exports of goods and services and 24.6 percent of gross international reserves.
  - Total debt service to the Fund peaks at 1.2 percent of exports of goods and services and 3.1 percent of gross international reserves in 2024.
- Staff appraisal:
  - Staff supports authorities’ home-grown reform program and achieving a primary surplus by 2023 to place debt on a downward path.
  - Fiscal policy guidance: balanced mix of expenditure rationalization and revenue mobilization, protect pandemic-related needs in 2021 and critical social and capital spending over medium term.
  - Monetary and financial guidance: keep accommodative, data-dependent stance; strengthen BCCR law and governance; closely monitor banking sector and credit portfolios.
  - Structural guidance: advance education, formalization, digitalization, competition, and climate resilience measures.
  - Overall endorsement: staff supports 36-month EFF given adequate repayment capacity and financing assurances, while noting elevated risks and the need for legislative ratification and implementation resolve.

*Source: IMF staff report (Costa Rica), selected sections as provided.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Costa Rica was hit hard by the COVID-19 pandemic despite proactive policy response and a well-established universal healthcare system.
- The pandemic exacerbated pre-existing imbalances, dealt a significant toll on economic activity and unemployment—especially among women and the young—and weakened the fiscal position, undermining expected yields from the 2018 fiscal reform.
- Financial assistance through the Fund’s Rapid Financing Instrument (RFI) in 2020 provided temporary relief and helped catalyze financial assistance from other official partners, but financing needs remain sizable over the medium term.

### Request for an Extended Arrangement under the Extended Fund Facility (EFF)
- Authorities requested a 36-month extended arrangement under the EFF to support pandemic response, gradual economic recovery, and anchor policy and reform efforts.
- Proposed access: SDR 1,237.49 million (about US$1,  750 million or 335 percent of quota) to meet sizable balance-of-payments and budget-support needs and to catalyze financial support from other official lenders and international capital markets.

### Policy priorities
- Program reform pillars, informed by broad-based political and social dialogue, emphasize:
  - Gradually implementing equitable fiscal reforms to ensure debt sustainability while protecting the most vulnerable.
  - Maintaining monetary and financial stability, strengthening the central bank’s operational autonomy and governance, and addressing structural financial vulnerabilities.
  - Advancing key structural reforms to promote inclusive, green, and sustainable growth.

### Key Risks
- Risks remain sizable, stemming from uncertainty around the COVID-19 crisis and the global outlook and potential delays in implementing the fiscal strategy and other supporting reforms.

### Economic developments and outlook

A. The Pre-COVID-19 Landscape
- Economic activity had slowed in 2017-2019 amid a challenging external environment, market stress from widening fiscal imbalances, and climate-related natural disasters.
- Growth was expected to remain moderate below 3 percent in 2019-20 due to fiscal consolidation and tight financial conditions.
- Current account deficit was 2.3 percent of GDP in 2019, fully financed by FDI; reserves coverage was 6 months of imports or 131 percent of the Fund’s ARA metric as of end-2019.
- Costa Rica tapped the Eurobond market for US$1.5 billion in November 2019.

B. The Impact of the COVID-19 Shock
- Containment measures and a second wave of infections delayed full reopening; as of end-January there were 194,280 COVID-19 cases and 2,627 deaths.
- Economic activity contracted sharply in 2020Q2-Q3 by 8.8 and 6.7 percent (y-o-y), respectively; hardest hit sectors included hotels and restaurants, transportation, wholesale and retail, and construction.
- Inflation averaged 0.7 percent in 2020; average core inflation was 1.1 percent in 2020.
- Unemployment rose from 12.5 percent in 2020Q1 to 22.0 percent in 2020Q3; poverty increased to 26.2 percent in July 2020 from 21 percent a year earlier.
- Private sector credit increased 2.8 percent (y-o-y) in November 2020 (up from -0.9 percent in April), partly due to the impact of exchange rate depreciation on FX-denominated loans.
- Current account recorded an annualized deficit of 2.5 percent of GDP through 2020Q3; tourism arrivals were near standstill in 2020Q2-Q3 with gradual recovery in 2020Q4.
- Reserves declined by US$1.7 billion in 2020; the colón-dollar exchange rate depreciated by 7.1 percent.
- EMBI spread peaked over 900 bps in April 2020 and remained about 550 bps as of end-January 2021.

C. Outlook and Risks to the Recovery
- Real GDP projected to recover modestly in 2021 by 2.6 percent and reach pre-COVID output levels only in late 2022.
- Over the medium term, growth will converge to potential of about 3 percent, supported by recovery in credit growth and structural reforms.
- Inflation expected to remain around the lower end of the BCCR’s target range near term before gradually converging to the midpoint over the medium term.
- Current account projected to widen to 3.2 percent of GDP in 2021 from 2.6 percent in 2020, and stabilize around 2.7 percent over the medium term.
- A balance-of-payments financing gap of 6.4 percent of GDP is projected over 2021-2023, amid twin deficits, tight financial conditions, and a slow recovery in FDI.
- Downside risks: more severe/protracted pandemic (including vaccine distribution delays), delayed fiscal consolidation, higher COVID-19-related spending, worsening private sector distress and scarring, greater debt and financing pressures.
- Upside scenarios: quick resolution of the pandemic, stronger external demand and rebound in tourism, faster-than-expected fiscal consolidation and structural reforms raising investment and potential growth.

### External position assessment
- In 2020 the REER and NEER depreciated by 8.5 and 8.3 percent, respectively.
- EBA-based current account gap of 2.3 percent of GDP in 2020 (compared to 1 percent in 2019) suggests the external position in 2020 was stronger than implied by fundamentals and desirable policies, driven by larger deterioration in EBA-model global comparator group fundamentals and sharp import compression plus resilient free trade zone exports.
- Assessment subject to high uncertainty; as the crisis recedes, fiscal consolidation consistent with the fiscal rule should resume to prevent deterioration in external sustainability.

### Program design and rationale
- An EFF arrangement of 36 months with phased access is proposed to address structural program objectives and the time needed to achieve durable solutions amid gradual recovery.
- The arrangement’s duration and phasing are intended to help bridge general elections in early 2022 and support policy continuity throughout the electoral cycle.

*Costa Rica — Executive Summary; February 12, 2021*

### 10.      A major fiscal reform was approved in December 2018 to tackle the large imbalances

### 10.      A major fiscal reform was approved in December 2018 to tackle the large imbalances

### Fiscal context and the 2018 reform
- Costa Rica entered the COVID-19 crisis with an already weak fiscal position: the fiscal deficit and debt-to-GDP ratio had more than doubled since the Global Financial Crisis.
- The weakening fiscal account was largely driven by a growing public sector wage bill, which led to a widening wage premium and rising inequality between public and private sector employees.
- In December 2018 the authorities approved a comprehensive fiscal reform including a mix of tax reforms and spending measures and the introduction of a new fiscal rule with spending ceilings.
- The full implementation of the reform, including the new fiscal rule, was expected to reduce the primary deficit from 2.6 percent in 2019 to 1.3 percent of GDP in 2020 (as projected in the BCCR’s January 2020 Macro Program).

### COVID-19 fiscal impact and emergency measures (2020)
- Immediate fiscal measures and timeline:
  - 3-month moratorium for VAT, business income taxes, and customs duties (interest-free, payable by end-year and with the possibility to arrange for payment plan to defer tax payment until 2021).
  - 25 percent temporary reduction (for six months) in the minimum tax base for health and pension contributions.
  - Deferral of the roll-out of the VAT on construction and tourism services.
  - One-off tax relief on car registration tax in 2020, with the revenue loss to be compensated by the PAGAR bill (a one-off revenue collection from public entities in 2021).
  - Transfer of CRC 75 billion excess capital from INS to CG.
  - Freeze in domestic retail price for premium petroleum and transfer of CRC 16 billion from RECOPE to CG.
- Spending measures:
  - Activation of the escape clause under the fiscal rule to allow higher COVID-related spending by four relevant public institutions.
  - Increase in public health spending, including construction of a specialized hospital and a COVID-19 vaccine downpayment of CRC 7.2 billion financed by National Emergency Fund.
  - Transfer of CRC 74 billion to CCSS to compensate for lower social security contribution.
  - Launch of the Bono Proteger program: monthly subsidy of CRC 125,000 (≈US$205) for three months to about 375 thousand families with monthly income of less than CRC 750,000 (≈US$1,230) prior to COVID-19.
  - Freeze in public sector wage (except police and healthcare), freeze of 4,953 public vacancies, elimination of 2,194 positions.
  - Cuts in non-critical spending on goods and services and capital.
- Fiscal outcomes and magnitudes:
  - COVID-related spending in 2020 amounted to about 0.8 percent of GDP at the central government (CG) level and 1.3 percent of GDP at the general government level.
  - Tax revenues fell by 11 percent in 2020.
  - Despite mitigation efforts, the 2020 primary deficit for the CG, including newly consolidated public entities, is expected to have reached 3.9 percent of GDP, bringing debt to about 68 percent of GDP.
  - Gross financing needs will remain elevated, peaking at nearly 14 percent of GDP in 2021.

### 2021–23 fiscal package, targets, and composition
- Program target: achieve a primary surplus of 1 percent of GDP by 2023 to place debt on a downward path while maintaining space for pandemic-related spending in 2021.
- Targeted primary adjustment: nearly 5 percent of GDP over 2021-23 or 3.7 percent of GDP in structural terms (net of cyclical impact and one-off measures).
- Authorities’ fiscal package (cumulative change from 2020 in percent of GDP):
  - Revenue measures: +0.4 (2021), +0.8 (2022), +1.4 (2023)
    - 2018 tax reform yields: +0.1, +0.1, +0.3
    - Reduce tax exemptions: +0.2, +0.4, +0.5
    - Globalize PIT (territorial): +0.4 (year shown in table)
    - Raise property tax: +0.1, +0.1
    - SOE dividends: +0.1, +0.2, +0.2
  - Expenditure measures: -1.3 (2021), -1.8 (2022), -2.3 (2023)
    - Wage bill: -0.6, -0.8, -1.0
    - Purchases of G&S: -0.1, -0.2, -0.3
    - Current transfers: 0.0, -0.5, -0.8
      - o.w. Social assistance: +0.1, +0.1, +0.1
    - Capital spending: -0.5, -0.3, -0.1
  - Total structural measures: +1.7 (2021), +2.5 (2022), +3.7 (2023)
  - One-off measures: +0.6, +0.7, +0.6
  - Cyclical impact: +0.1, +0.4, +0.6
  - Primary balance (cumulative change): +2.3, +3.6, +4.9
  - Primary balance (% of GDP): -1.7 (2020), -0.3 (2021), 1.0 (2023)
- Expected yields and composition:
  - Total revenue package, including yields from the 2018 reform and net of COVID-related tax deferrals, is expected to yield 1.4 percent of GDP by 2023.
  - Measures include reducing tax expenditure (estimated at 4.9 percent of GDP in 2020) by 0.5 percent of GDP by 2023, removing the tax exemption on the 14th monthly salary for public employees, introducing a more progressive luxury property tax, and further globalization of the PIT by reducing the tax-exempt threshold.
  - New policy to allow distribution of dividends by SOEs to the CG (about 0.2 percent of GDP) is expected to generate efficiency gains by replacing SOEs’ bond purchases and related interest costs.
- Central Government Operations (In percent of GDP) — selected figures from table:
  - Total Revenue: 15.1 (2019), 14.3 (2020), 14.7 (2021 proj.)
  - o.w. Tax Revenue: 13.2, 12.2, 12.7
  - Total Expenditure: 21.9, 22.9, 21.7
  - o.w. Wage bill: 7.0, 7.5, 6.9
  - Capital Expenditure: 2.3, 1.9, 1.5
  - Primary Balance: -2.6, -3.9, -1.7
  - Overall Balance: -6.8, -8.7, -7.0
  - Structural Primary Balance: -2.7 (2019), -2.4 (2020), -0.8 (2021)
  - Nominal GDP (CRC bn): 375,613 (2019), 359,443 (2020), 373,888 (2021 proj.)

### Contingency, flexibility, and fiscal rule
- The program includes an adjustor to the fiscal primary target allowing additional COVID-related spending of up to 0.3 percent of GDP in 2021 for health services, targeted support to households and businesses, or additional social assistance allocations.
- Authorities stand ready to reprioritize non-critical spending or propose temporary tax measures if needed; revenue over-performance would be locked in to accelerate debt reduction.

### Social assistance, targeting, and distributional effects
- Planned structural increase in selected social assistance spending by 0.1 percent of GDP (about 5 percent of existing programs) starting in 2021 to expand coverage for the poorest deciles.
- World Bank model estimates: the planned increase would reduce income inequality by 0.4 Gini percentage points and lift more than 12 thousand people out of poverty.
- Reforms to transfers’ delivery: digitalization and centralization at the MOF’s National Treasury with IMF TA support; upgrade of SINIRUBE with WB and IDB support to improve targeting accuracy.

### Public employment reform and wage bill rationalization
- Public Employment Bill (expected approval by Legislative Assembly by end-May) will introduce a single pay spine and eliminate annuities, bonuses, and incentives within twelve months, covering central government, decentralized institutions, non-competing SOEs, public universities, autonomous and semi-autonomous institutions, and municipalities.
- Reform aims at gradual rationalization of the wage bill over the medium to long term and supports fiscal rule implementation.

### Revenue administration, SOEs, governance, and transparency
- Revenue administration improvements (potential yields of 0.3 percent of GDP during the program period, not yet in the baseline) based on the 2019 Tax Administration Diagnostic Assessment Tool: enhance compliance risk management, revamp taxpayer services, overhaul information cross-matching, improve collection of tax arrears.
- MOF digital transformation plan (Hacienda Digital para el Bicentenario) supported by the WB expected to improve revenue administration efficiency.
- SOEs:
  - Full adoption of IFRS reporting standards by SOEs is being accelerated; more SOEs to publish financial statements according to IFRS.
  - Efficiency strategy underway for ICE to reduce operative costs and restructure debt to achieve lower tariffs; tariff reductions in generation, distribution, and transmission as of January 2021.
- Anti-corruption and fiscal risk measures:
  - New Public Procurement Law contains provisions for collection and publication of beneficial ownership information.
  - Commitment to fully transparent public procurement for COVID-related assistance and planned revamp of the Transparency Portal by end-December 2021 with IDB support.
  - Plan to fully adopt 2014 GFSM accrual accounting standards and international standards for non-financial public sector debt data by end-2022.

### Debt outlook, financing needs, and debt-management reforms
- Debt trajectory and risks:
  - Baseline: central government debt projected to peak at about 76 percent of GDP in 2023—above the 70-percent debt distress threshold for emerging economies—before gradually adjusting to reach the authorities’ 50-percent target by 2035.
  - Debt vulnerabilities remain elevated; risks include exchange rate, interest rate, and contingent liability shocks.
- Financing needs and composition:
  - Gross financing needs will remain elevated, peaking at nearly 14 percent of GDP in 2021.
  - Over the projection period, about one third of financing needs expected to be financed externally through multilateral credit, including Fund resources, as well as US$4 billion in Eurobond issuances.
  - Domestic debt: three quarters reflects rollovers of existing liabilities; continued placement with a stable investor base including pension funds and banks.
- Institutional strengthening:
  - Preparation of a Medium-Term Fiscal Framework (MTFF) for the central government with support from IMF TA; MTFF coverage to expand by April 2022 to the entire non-financial public sector.
  - Enhanced debt management practices to be underpinned by a Medium-Term Debt Strategy (MTDS) and annual borrowing plans with IMF and WB TA support; measures to develop domestic debt market and facilitate non-resident participation.

*1criea2021001 - 10.      A major fiscal reform was approved in December 2018 to tackle the large imbalances*

### 22.      The BCCR has taken swift actions to mitigate the impact of the COVID-19 shock. Since

### 22.      The BCCR has taken swift actions to mitigate the impact of the COVID-19 shock. Since

### Monetary policy, inflation, and FX actions
- Policy rate cuts:
  - Cut twice from 2¼ percent in early March to a record low of ¾ percent in June 2020.
- Inflation:
  - Inflation has continued to hover below the BCCR’s tolerance band (±1 percentage point) around the mid-point target of 3 percent.
- Interest rates and liquidity facilities:
  - Deposit and lending rates have fallen gradually in response to the policy rate cut.
  - Since April 2020, the BCCR has been authorized by law to purchase sovereign and other liquid securities in the secondary market in the event of systemic liquidity stress.
  - The BCCR expanded in January 2021 the long-term repo facility introduced last September.
  - As of end-December 2020, secondary market purchases by the BCCR stood at less than CRC 1.7 billion, while CRC 575 billion had been approved for the repo facility.
- FX intervention:
  - Focused on episodes of excessive volatility; direct FX sales have been contained since the onset of the COVID-19 shock.
  - Intervention during fall 2020 amid high volatility: about US$260 million.
  - BCCR absorbed FX needs by the non-financial public sector for about US$371 million in 2020.
- Guidance:
  - BCCR’s monetary policy stance should continue to be data-dependent and forward-looking, in line with the inflation targeting framework.
  - FX intervention by the BCCR should continue to be limited to periods of excessive volatility, in line with its mandate.

### Banking sector performance, vulnerabilities, and supervisory measures
- System-wide indicators (as of end-2020):
  - Capital adequacy ratio remained above the 10-percent required threshold.
  - Liquidity-to-short-term-liabilities ratio of nearly 1.
  - Regulatory NPLs remain below 3 percent.
  - Forward-looking loan loss provisions increased from 3.5 percent in 2019 to 4.2 percent in 2020.
  - Banking system profitability (return on equity) declined from 6.8 percent in 2019 to 4.6 percent in 2020.
- Risks and monitoring:
  - Credit quality could worsen and banks’ profitability could be further compressed as loan restructuring measures expire and lagged effects of the crisis kick in.
  - The financial system appears resilient to a range of sizable yet realistic shocks (Annex VIII), but proactive supervision and monitoring of credit portfolios should continue.
- Temporary relief measures introduced in 2020:
  - Reduced to zero the minimum accumulation of countercyclical provisions for financial entities.
  - Relaxation of regulations to support loan restructuring and offering moratoria, at the discretion of the creditor.
  - Provision of emergency funding to SMEs.
  - By end-November 2020, almost half of the loan portfolio had been restructured.
- Unwinding and targeted continuation of measures:
  - Starting in December 2020, banks required to update credit ratings of borrowers for new restructured loans.
  - Banks increasingly adopt targeted restructuring and proactive provisioning, using accumulated countercyclical buffers.
  - Legislative Assembly considering establishment of a US$300 million fund to provide guarantees to companies and individuals affected by the pandemic, with limited contingent liabilities for the government.
- Regulatory strengthening and Basel III:
  - Authorities’ phased-in adoption of Basel III over the next two years, including for specific risks and overall capital adequacy.

### Governance, macroprudential framework, and implementation of FSSR recommendations
- Governance improvements:
  - 2019 amendments to the BCCR Law tightened dismissal rules for the BCCR Governor, delinked the Governor’s term from the political cycle, and removed the Minister of Finance’s voting rights in the BCCR Board.
  - Release of the calendar of monetary policy meetings starting in January 2020 and publication of the Financial Stability Report in July 2020.
  - 2020 Safeguards Assessment identified scope to further strengthen the BCCR’s operational autonomy and governance, with support from IMF TA.
- Financial Sector Stability Review (FSSR) follow-up and planned actions:
  - Consolidated supervision:
    - Relevant regulations to implement the new law on consolidated supervision will be issued by end-2022, with support from IMF TA.
    - Consider expanding supervisor’s scope to financial companies linked by common foreign ownership to facilitate cross-border supervision.
  - Financial safety net:
    - Implementing regulations for banking resolution and deposit guarantee fund are under preparation.
    - Further strengthen legal framework on bank resolution and deposit insurance, including institutional arrangements for the Deposit Guarantee Fund and the resolution authority, safeguards for resolution, and clear resolution triggers, with support from IMF TA.
  - Macroprudential framework:
    - Establishment of a new coordination group under the Financial Stability Committee to monitor macro-financial risks.
    - Plan to develop a responsibility matrix between BCCR, CONASSIF, and Superintendencies, with support from IMF TA.
  - Financial inclusion:
    - National strategy for financial education being implemented.

### Structural challenges, labor market, and green growth
- Structural constraints and competitiveness:
  - Important skill mismatches and infrastructure gaps (notably in transport and telecommunication), limited technological innovation, and excessive red tape.
  - Costa Rica has lost some ground in recent years in the World Economic Forum’s Global Competitiveness Index.
- Labor market and informality:
  - About 40 percent of employment remains concentrated in the informal sector.
  - Informality particularly prevalent among low-skilled workers and women; female labor force participation and job opportunities are low compared to most OECD countries and regional peers.
- Policies to boost potential growth and inclusion:
  - Strengthen education quality (updated curricula, teaching quality assurance, especially in scientific and digital fields); promote dual vocational training.
  - Strengthen integration between universities and firms to foster innovation and knowledge transfer.
  - Close physical and digital infrastructure gaps, and facilitate firm registration and business license applications.
  - Revamped bankruptcy law expected to be approved by the Legislative Assembly in 2021 to facilitate liquidation and restructuring of distressed enterprises.
  - Promote formalization through making the social security system more job-friendly (including targeted reductions in contributions), expand childcare services, launch a long-term care system, promote female education in STEM, and promote parental leave.
  - Plans to streamline the minimum wage structure to allow greater flexibility and support the National Strategy to Transition to a Formal Economy.
- Climate change and the green economy:
  - Costa Rica is a primary “hot spot” for climate change in the tropics and prone to tropical storms, floods, and droughts, whose frequency and severity have increased.
  - Costa Rica stopped and reversed deforestation and achieved significant growth in sustainable tourism and zero-emission electricity supply.
  - National Decarbonization Plan aims to transition to a zero net emission economy by 2050.
  - Authorities’ cost-benefit evaluation of the plan, in collaboration with the IDB and WB, suggests substantial net benefits from transitioning to a zero net emission economy.
  - Adaptation efforts guided by the National Policy on Adaptation to Climate Change; creation of climate change risk maps and a roadmap to enhance infrastructure resilience to climate change with support from the WB.
  - Staff welcomes measures to preserve forests (with support from the WB) and measures under evaluation to integrate climate change considerations into monetary and financial sector policies.

*Source: BCCR; and IMF staff estimates.*

### 39.      The authorities are requesting financial support from the Fund to anchor their policy

### Costa Rica: Policy Pillars of the IMF-Supported Program

### Program objectives and main pillars
- Authorities request financial support from the Fund to anchor their policy and reform program, building on the Article IV discussions, to:
  - support the recovery from the COVID-19 shock;
  - secure macroeconomic stability; and
  - advance the authorities’ reform agenda.
- The authorities’ policy and reform efforts are anchored around three main pillars:
  - (i) gradually implementing equitable fiscal reforms to ensure debt sustainability, while strengthening social protection;
  - (ii) maintaining monetary and financial stability, while continuing to strengthen the central bank’s autonomy and governance and addressing structural financial vulnerabilities; and
  - (iii) advancing key structural reforms to promote inclusive, green, and sustainable growth.

### Program design, duration, and conditionality
- Duration and instrument:
  - Staff proposes a 36-month extended arrangement under the EFF, with semi-annual reviews.
  - The 36-month duration aims to provide a policy anchor to achieve a primary surplus and place debt on a downward path, and to help ensure policy continuity across the electoral cycle given general elections in early 2022.
- Quantitative conditionality:
  - Performance criteria (PCs) for end-July and end-December 2021.
  - Indicative targets (ITs) for end-September 2021 and end-March 2022.
  - Continuous PCs listed in the TMU.
  - Floors on the BCCR’s net international reserves to ensure gross reserves remain comfortably above 100 percent of the ARA metric throughout the program period.
  - Floor on the central government primary balance, consistent with the authorities’ fiscal reform plan that anchors debt sustainability (¶13).
  - Adjustor to the primary balance target to augment COVID-related spending by up to 0.3 percent of GDP in 2021.
  - Indicative target on the debt stock of the central government; program coverage of fiscal and debt indicators to be adjusted in future reviews and reflected in the TMU.
- Monetary Policy Consultation Clause (MPCC):
  - Align conditionality with the BCCR’s inflation-targeting framework.
  - Progress monitored through an outer consultation band of ±3 percentage points and an inner consultation band of ±1.5 percentage points around interim targets (as defined in the TMU).
  - If actual inflation falls outside the outer band, the BCCR will consult with the IMF Board; if outside the inner band, the BCCR will consult with IMF staff.
- Structural conditionality:
  - Structural benchmarks (SBs) calibrated and phased in line with authorities’ plans and implementation capacity, including to alleviate pressure amid the COVID-19 pandemic.
  - Fiscal SBs: preparation and implementation of a MTFF; enhancements to the MTDS (¶19); revenue administration measures (¶17).
  - Social protection SBs: improve targeting and delivery of social assistance programs; centralization and digitalization of all social program payment systems, with IMF TA (¶15).
  - SOE governance SBs: publication of the 2020 financial statements according to IFRS standards starting with three non-compliant SOEs (¶20).
  - BCCR governance SB: draft amendments to the BCCR law to strengthen operational autonomy and governance (per 2020 safeguards assessment recommendations, ¶43).
  - Climate resilience SB: development of a roadmap to enhance infrastructure resilience to climate change (¶38).
  - MEFP commitments to safeguard financial stability, address pending FSSR recommendations, and advance macro-structural agenda with development partners.

### Program financing
- Proposed access under the 36-month EFF arrangement:
  - SDR 1,237.49 million (about US$1,750 million or 335 percent of quota).
- Role of Fund financing:
  - Fund would represent about one-third of total official financing over the program period.
  - Authorities intend to use Fund assistance for direct budget support while fiscal consolidation advances.
  - Updated Memorandum of Understanding between the BCCR and MOF clarifies responsibilities for timely servicing of financial obligations to the Fund.
  - Proposed access within normal annual and cumulative access limits (benefiting from temporary increase of the annual access limit approved by the IMF’s Executive Board in July, given approval of the RFI for 100 percent of quota in April 2020).
  - Access proposed to be evenly spread over the program period; initial purchase expected after Legislative Assembly approval of Fund assistance (¶44).
- Program financing table (Costa Rica: Program Financing) — selected figures (In millions of U.S. dollars):
  - Financing need: 2020: 1,431; 2021: 2,678; 2022: 1,746
  - Reserve accumulation: 2020: -1,706; 2021: 773; 2022: 952
  - Underlying BOP need 1/: 2020: 3,137; 2021: 1,906; 2022: 794
  - Official multilateral financing: 2020: 1,431; 2021: 2,678; 2022: 1,746
  - IMF: 2020: 522; 2021: 581; 2022: 581
  - RFI: 2020: 522; 2021: 200; 2022: 0
  - EFF: 2020: 0; 2021: 58; 2022: 1581
  - Other multilateral creditors: 2020: 910; 2021: 2,098; 2022: 1,165
  - World Bank: 2020: 105; 2021: 584; 2022: 305
  - Inter-American Development Bank (IDB): 2020: 282; 2021: 597; 2022: 457
  - CAF: 2020: 500; 2021: 550; 2022: 0
  - Central American Bank for Economic Integration (CABEI): 2020: 233; 2021: 674; 2022: 403
  - Unidentified financing: 2020: 0; 2021: 0; 2022: 0
  - Memorandum items: Capital market access 2022: 001,000
  - Gross international reserves: 2020: 7,232; 2021: 8,004; 2022: 8,956
  - In percent of the ARA metric: 2020: 108; 2021: 112; 2022: 114
  - Source: IMF staff estimates
  - 1/ Net of private sector and bilateral financing.
- Financing assurances and contingency:
  - Financing assurances in place with firm commitments by other multilaterals over next twelve months and good prospects thereafter.
  - In the event downside shocks materialize, additional financing could be mobilized, including contingency lines from CAF (US$500 million) and CABEI (footnote 12).

### Safeguards and capacity to repay
- Safeguards assessment:
  - Updated safeguards assessment of the BCCR finalized in October 2020.
  - Since 2009, enhancements in external audit mechanism and financial reporting.
  - 2019 amendments to BCCR Law improved personal autonomy by tightening dismissal rules for the governor and removing the Minister of Finance’s voting rights in the BCCR Board; some areas remain for improvement, particularly operational autonomy and governance.
  - Authorities plan further amendments to the BCCR Law and steps to fill current vacancy in the BCCR Board.
  - BCCR intends to develop a roadmap to strengthen its negative equity position over the medium to long term.
- Capacity to repay and program risks:
  - Capacity to repay assessed to be adequate, although program risks are elevated amid high global and domestic uncertainty.
  - Fund credit outstanding, including the RFI purchase and projected purchases under the proposed arrangement, will peak in 2023 at 3.3 percent of GDP, equivalent to around 9.3 percent of exports of goods and services and 24.6 percent of gross international reserves.
  - Total debt service to the Fund will peak at 1.2 percent of exports of goods and services and 3.1 percent of gross international reserves in 2024 (Table 7).
  - A more protracted pandemic could hinder fiscal consolidation and exacerbate balance-of-payments pressure and macro-financial vulnerabilities (¶8).
  - Program built-in flexibility to allow recalibration in response to COVID-19 through additional fiscal space and contingency measures, while preserving program objectives and capacity to repay (¶14).
  - Program’s success depends on legislative ratification (expected by May or June) and implementation resolve by legislators; implementation risks remain significant.

### Staff appraisal: key findings and policy recommendations
- Economic and social impact:
  - The pandemic inflicted significant social and economic costs and exacerbated existing imbalances (¶45).
  - Economic recovery expected to be protracted despite authorities’ prompt response and universal healthcare system.
  - The shock weakened the fiscal position, undermining expected yields from the ambitious 2018 fiscal reform and generating a large financing gap.
- Support for authorities’ reform program:
  - Staff supports the authorities’ home-grown reform program that aims to support recovery, secure macroeconomic stability, and advance reforms (¶46).
  - Staff supports achieving a primary surplus by 2023 to place debt on a downward path (¶47).
- Fiscal policy guidance:
  - Fiscal reform plan based on a balanced mix of expenditure rationalization underpinned by a prudent fiscal rule and revenue mobilization, while maintaining space for pandemic-related needs in 2021 and critical social and capital spending over the medium term.
  - Strengthen coverage and targeting of social assistance programs to limit economic fallout and improve equity and efficiency of government spending.
  - Further structural reforms to enhance medium-term fiscal planning and debt management, strengthen revenue administration, and enhance SOE governance and transparency.
- Monetary and financial sector guidance:
  - BCCR’s monetary policy stance should remain appropriately accommodative, data-dependent, and forward-looking (¶48).
  - Greater development of the foreign exchange market can facilitate risk management and support increased intermediation in colones.
  - Plans to strengthen the central bank law can enhance BCCR’s operational autonomy and governance.
  - Banking sector entered the crisis relatively well but requires continued close monitoring, stepped-up supervision of credit portfolios given large share of restructured loans, and measures to ensure adequate capitalization (¶49).
  - Further strengthen regulatory and supervisory framework, financial safety net, and financial inclusion.
- Structural and growth recommendations:
  - Support ambitious structural agenda to lift potential growth and address inequality, while advancing climate change mitigation and resilience (¶50).
  - Policies to strengthen education, promote innovation, cut red tape, leverage digitalization, prompt formalization, and support female labor force participation.
- Overall endorsement:
  - Staff supports the authorities’ request for a 36-month arrangement under the EFF, noting adequate repayment capacity, secured financing assurances, but large risks due to pandemic uncertainty. Program includes flexibility via fiscal buffers and contingency measures and is underpinned by authorities’ ownership and progress on fiscal reform (¶51).

*Source: IMF staff report (Costa Rica), selected sections as provided.*

### 52.      It is proposed that the next Article IV consultation with Costa Rica takes place on a 24-

### 1criea2021001 - 52.      It is proposed that the next Article IV consultation with Costa Rica takes place on a 24-

### Article IV consultation cycle
- It is proposed that the next Article IV consultation with Costa Rica takes place on a 24-month cycle in accordance with the Decision on Article IV Consultation Cycles for members with Fund arrangements.

### Real sector developments
- Real GDP (annual percent change): 2016: 4.2; 2017: 4.2; 2018: 2.1; 2019: 2.2; 2020: -4.8; 2021: 2.6; 2022: 3.3; 2023: 3.1; 2024: 3.1; 2025: 3.2; 2026: 3.3.
- Domestic demand (annual percent change): 2016: 4.1; 2017: 3.5; 2018: 0.6; 2019: 1.0; 2020: -3.5; 2021: 2.4; 2022: 2.7; 2023: 2.7; 2024: 2.9; 2025: 3.0; 2026: 3.0.
- Consumer prices (period average, annual percent change): 2016: 0.0; 2017: 1.6; 2018: 2.2; 2019: 2.1; 2020: 0.7; 2021: 1.2; 2022: 1.1; 2023: 1.4; 2024: 2.1; 2025: 2.5; 2026: 2.9.
- Consumer prices (end of period, percent): 2016: 0.8; 2017: 2.6; 2018: 2.0; 2019: 1.5; 2020: 0.9; 2021: 1.2; 2022: 0.9; 2023: 1.7; 2024: 2.3; 2025: 2.7; 2026: 3.1.
- Output gap (as percent of potential GDP): 2016: 0.6; 2017: 1.1; 2018: 0.5; 2019: -0.6; 2020: -4.7; 2021: -3.0; 2022: -1.4; 2023: -0.7; 2024: -0.4; 2025: -0.2; 2026: 0.0.

### External sector developments
- Current account balance (percent of GDP): 2016: -2.1; 2017: -3.6; 2018: -3.2; 2019: -2.3; 2020: -2.6; 2021: -3.2; 2022: -3.0; 2023: -2.9; 2024: -2.7; 2025: -2.7; 2026: -2.7.
- Gross international reserves (millions of U.S. dollars): 2016: 7,574; 2017: 7,150; 2018: 7,501; 2019: 8,937; 2020: 7,232; 2021: 8,004; 2022: 8,956; 2023: 9,123; 2024: 9,984; 2025: 10,012; 2026: 10,621.
- Gross international reserves (as percent of ARA metric): 2016: 129.9; 2017: 118.4; 2018: 117.6; 2019: 131.2; 2020: 108.3; 2021: 111.7; 2022: 114.3; 2023: 114.0; 2024: 117.1; 2025: 113.9; 2026: 113.1.
- Exports of goods (f.o.b., millions of U.S. dollars): 2016: 10,100; 2017: 10,811; 2018: 11,474; 2019: 11,604; 2020: 11,708; 2021: 12,253; 2022: 12,896; 2023: 13,579; 2024: 14,386; 2025: 15,245; 2026: 16,195.
- Imports of goods (f.o.b., millions of U.S. dollars): 2016: 14,526; 2017: 15,178; 2018: 15,863; 2019: 15,347; 2020: 13,793; 2021: 15,185; 2022: 16,743; 2023: 17,955; 2024: 19,041; 2025: 20,150; 2026: 21,418.

### Fiscal sector developments (selected)
- Central government overall balance (percent of GDP): 2016: -5.1; 2017: -6.0; 2018: -5.7; 2019: -6.8; 2020: -8.7; 2021: -7.0; 2022: -5.9; 2023: -4.3; 2024: -3.4; 2025: -2.6; 2026: -2.0.
- Central government primary balance (percent of GDP): 2016: -2.4; 2017: -2.9; 2018: -2.2; 2019: -2.6; 2020: -3.9; 2021: -1.7; 2022: -0.3; 2023: 1.0; 2024: 1.7; 2025: 2.3; 2026: 2.8.
- Central government debt (percent of GDP): 2016: 44.1; 2017: 47.1; 2018: 51.9; 2019: 56.8; 2020: 68.3; 2021: 72.5; 2022: 75.0; 2023: 76.0; 2024: 75.6; 2025: 74.2; 2026: 71.9.
- Central government debt (levels, in billions of colones): 2016: 14,122; 2017: 16,163; 2018: 18,670; 2019: 21,347; 2020: 24,567; 2021: 27,100; 2022: 29,241; 2023: 30,926; 2024: 32,393; 2025: 33,588; 2026: 34,571.
- Central government revenue (levels, in billions of colones): 2016: 4,379; 2017: 4,560; 2018: 4,767; 2019: 5,676; 2020: 5,132; 2021: 5,486; 2022: 5,970; 2023: 6,531; 2024: 6,879; 2025: 7,262; 2026: 7,706.
- Central government expenditure (levels, in billions of colones): 2016: 6,024; 2017: 6,610; 2018: 6,829; 2019: 8,223; 2020: 8,245; 2021: 8,121; 2022: 8,268; 2023: 8,279; 2024: 8,346; 2025: 8,457; 2026: 8,688.

### Monetary and financial sector developments
- Credit to the private sector (percent change): 2016: 12.8; 2017: 8.5; 2018: 6.3; 2019: -1.9; 2020: 2.3; 2021: 6.1; 2022: 6.4; 2023: 6.9; 2024: 7.1; 2025: 7.4; 2026: 7.9.
- Dollarization rate of banking sector (percent of total deposits and credit): Deposits and credit indices show dollarization around the 35–53 range across earlier series; specific entries include Deposits and Credit indexes (2010–2020) and percent shares in tables.
- Non-performing loans to total gross loans (percent): 2011–2019 trend shown, with 2019: 2.0 (and later entries 2.5, 2.6 in other series).
- Banking sector profitability (ROE, ROA examples): ROE examples: 2011–2019 series; 2019 ROE reported in figures; ROA around 1.0 to 0.6 in 2016–2020 series as presented.

### Balance of Payments and external financing
- Current account (levels, millions of U.S. dollars): 2016: -1,257; 2017: -2,189; 2018: -1,990; 2019: -1,439; 2020: -1,580; 2021: -1,976; 2022: -1,915; 2023: -1,967; 2024: -1,968; 2025: -2,035; 2026: -2,153.
- Financial account (levels, millions of U.S. dollars): 2016: -1,547; 2017: -2,445; 2018: -1,967; 2019: -1,403; 2020: -1,546; 2021: -1,940; 2022: -1,875; 2023: -1,925; 2024: -1,924; 2025: -1,988; 2026: -2,104.
- Gross external financing needs (millions of U.S. dollars): 2018: -9,235; 2019: -9,091; 2020: -10,929; 2021: -10,245; 2022: -10,869; 2023: -11,986; 2024: -10,658; 2025: -10,872; 2026: -10,933.
- Gross external financing sources (millions of U.S. dollars): 2018: 8,934; 2019: 8,576; 2020: 9,497; 2021: 7,567; 2022: 9,124; 2023: 10,501; 2024: 10,264; 2025: 10,564; 2026: 10,817.
- Change in international reserves (increase +, millions of U.S. dollars): 2018: -351; 2019: -1,436; 2020: 1,706; 2021: -773; 2022: -952; 2023: -167; 2024: -861; 2025: -28; 2026: -609.

### Financial soundness indicators (selected)
- Risk-adjusted capital ratio (percent): series include 2016: 16.4; 2017: 16.8; 2018: 16.7; 2019: 17.5; 2020: 16.9; subsequent quarterly values up to 16.8.
- Nonperforming loans to total loans (percent): Dec 2016: 1.5; Dec 2017: 2.0; Dec 2018: 2.1; Dec 2019: 2.4; Dec 2020: 2.5; later quarterly entries 2.5–2.6.
- Return on assets (ROA, percent): Dec 2016: 1.2; Dec 2017: 0.9; Dec 2018: 0.9; Dec 2019: 1.0; Dec 2020: 1.0; quarterly values decline to 0.6.
- Return on equity (ROE, percent): Dec 2016: 8.8; Dec 2017: 6.5; Dec 2018: 6.8; Dec 2019: 6.8; Dec 2020: 6.9; quarterly values down to 4.6.

### IMF engagement: Extended Fund Facility (EFF) access, phasing, and program instruments
- Proposed EFF access and phasing (Table 8):
  - March 1, 2021: 206.34 millions of SDR, 55.86 percent of Quota — Board approval of the Extended Arrangement under the Extended Fund Facility.
  - October 15, 2021: 206.23 millions of SDR, 55.83 percent of Quota — First review and continuous and end-July 2021 performance criteria.
  - March 15, 2022: 206.23 millions of SDR, 55.83 percent of Quota — Second review and continuous and end-December 2021 performance criteria.
  - October 15, 2022: 206.23 millions of SDR, 55.83 percent of Quota — Third review and continuous and end-June 2022 performance criteria.
  - March 15, 2023: 206.23 millions of SDR, 55.83 percent of Quota — Fourth review and continuous and end-December 2022 performance criteria.
  - October 15, 2023: 206.23 millions of SDR, 55.83 percent of Quota — Fifth review and continuous and end-June 2023 performance criteria.
  - Total: 1,237.49 millions of SDR, 335 percent of Quota.
  - Memorandum item: Quota 369.40.
- Indicators of Fund credit and obligations (selected, Table 7):
  - Outstanding IMF credit based on existing and prospective drawings (millions of SDR): 2021: 782.0; 2022: 1,194.4; 2023: 1,560.7; 2024: 1,376.0; 2025: 1,220.3; 2026: 1,134.4; subsequent years show declining figures to 0.0 by 2034 in projections.
  - Fund obligations based on existing and prospective credit (millions of SDR, total obligations): 2021: 7.7; 2022: 16.6; 2023: 75.3; 2024: 217.3; 2025: 182.9; 2026: 112.6; series continues up to 2034.
  - Memorandum: Exports of goods and services (millions of U.S. dollars) 2021: 19,822.5; 2022: 22,075.0; 2023: 24,104.6; projections extend to 2034.

### Program conditionality and monitoring
- Quantitative performance criteria and indicative targets (selected):
  - Floor on cash primary balance of the central government (cumulative from beginning of year, in billions of colones): End-Jul: -390; End-Sep: -480; End-Dec: -640; End-Mar: -34.
  - Floor on net international reserves of the Central Bank (stock, in millions of U.S. dollars): End-Jul: 3,660; End-Sep: 4,336; End-Dec: 3,768; End-Mar: 4,123.
  - Monetary Policy Consultation Clause (MPCC) year-on-year inflation bands:
    - End-of-period inflation center point (percent): End-Jul: 1.4; End-Sep: 1.4; End-Dec: 1.3; End-Mar: 1.1.
    - Upper outer band limit (3 percent above center point): 4.4; 4.4; 4.3; 4.1.
    - Upper inner band limit (1.5 percent above center point): 2.9; 2.9; 2.8; 2.6.
    - Lower inner band limit (1.5 percent below center point): -0.1; -0.1; -0.2; -0.4.
    - Lower outer band limit (3 percent below center point): -1.6; -1.6; -1.7; -1.9.
  - Ceiling on debt stock of the central government (cumulative indicative target, in billions of colones): End-Jul: 26,625; End-Sep: 26,833; End-Dec: 27,100; End-Mar: 28,747.

### Structural benchmarks (Table 10)
- Efficiency of government spending:
  - Legislative Assembly to approve Public Employment Bill. Target date: End-May 2021.
- Revenue mobilization:
  - The Tax Commissioner to approve a new Tax Compliance Improvement Plan, in line with IMF staff recommendations. Target date: End-December 2021.
- Fiscal governance and transparency:
  - Publication of financial statement under IFRS standards for fiscal year 2020 for three SOEs (ICE, AyA, CNP). Target date: End-December 2021.
  - Cabinet to approve and publish a Medium-Term Fiscal Framework for the entire Non-Financial Public Sector for 2023-2026. Target date: End-April 2022.
  - Cabinet to approve and publish a Medium-Term Debt Strategy (MTDS) for 2023-2026. Target date: End-April 2022.
- Social safety nets:
  - MOF’s National Treasury to centralize and digitalize the payment system for all the cash transfer social assistance programs, in coordination with social assistance units. Target date: End-December 2021.
- Monetary and financial sector reforms:
  - The BCCR to submit to the Ministry of Finance draft amendments to the BCCR Law, prepared in consultation with IMF staff, to strengthen the central bank’s operational autonomy and governance framework. Target date: End-August 2021.
- Macro-structural reforms:
  - Authorities to develop a roadmap to enhance infrastructure resilience to climate change, including cost assessment and financing options. Target date: End-September 2022.

*Source: IMF staff estimates and projections as presented in the provided document content.*

### Annex I. Implementation of Past  Fund Policy  Advice

### Annex I. Implementation of Past Fund Policy Advice

### Fiscal Policy
- Full and timely implementation of the 2018 fiscal reform:
  - Before the COVID-19 shock, the fiscal reform implementation (e.g., conversion of sales taxes into VAT, higher income taxes, wage restraint, and the fiscal rule) was having a significant impact on fiscal finances, with a fiscal deficit half the size, as of end-February 2020, compared to the same period in 2019.
  - The fiscal rule was applied from January 2020. In April 2020, the emergency escape clause under the rule was activated in response to the pandemic.
  - In May 2020, the Legislative Assembly excluded municipalities from the fiscal rule.
- Further fiscal consolidation to reduce debt and ease financial pressures:
  - The government proposed additional fiscal measures to the Legislative Assembly in early February 2020, including to improve tax administration, consolidate public institutions, streamline public wage scales, and reduce debt through asset sales and financial surpluses of decentralized public entities. However, plans for 2020 were derailed by the urgent needs generated by the COVID-19 pandemic.
  - As the pandemic recedes and the recovery takes hold, the authorities plan to resume their fiscal consolidation efforts to reach a primary balance of 1 percent of GDP by end-2023.

### Monetary and Foreign Exchange Policy
- Data-dependent monetary policy, with enhanced transparency:
  - As inflation pressures remain low, with the headline inflation falling below the BCCR’s tolerance band since November 2019, the BCCR has lowered its policy rate in several steps, from 5.25 percent in March 2019 to 0.75 percent in June 2020.
  - Monetary policy transparency has been further improved since 2020 with the ex-ante publication of the calendar of monetary policy meetings.
- Exchange rate flexibility:
  - The BCCR has maintained a flexible exchange rate policy since 2019. FX intervention has focused on addressing episodes of excessive exchange rate volatility.

### Financial Sector Reforms
- Implementation of high- and medium-priority FSSR recommendations:
  - The law on consolidated supervision was approved in 2019, and the law on banking resolution and the creation of a deposit guarantee fund in February 2020. Further enhancements to the resolution framework are needed.
  - The risk-based supervisory framework continues to be strengthened with support from IMF’s capacity development.
  - To help reduce dollarization, the BCCR differentiated the reserve requirements by currency and reverted the provisioning rate applied to FX loans to unhedged borrowers from 1.0 percent back to 1.5 percent.
  - Progress in deepening debt markets and improving public debt management has been limited.

### Structural reforms
- Structural reforms to improve competitiveness and foster inclusive growth:
  - Costa Rica was invited to become an OECD member in May 2020. 14 new laws and/or administrative reforms were passed during the OECD accession, with recommendations implemented in a broad array of areas, including public finances, environment, education, customer protection, and competition.
  - A comprehensive package of measures is planned to further boost productivity and promote inclusive and green growth, including, among others, reforms that incentivize formalization and promote the decarbonization of the economy.

*International Monetary Fund — Annex I. Implementation of Past Fund Policy Advice*

### conclusion explained above that the current

### 1criea2021001 - conclusion explained above that the current

### Current Account and Cyclical Adjustments
- Actual current account (CA) values: 2019: -2.3; 2020: -2.6.
- Cyclical Contributions (from model): 2019: 0.3; 2020: 0.5.
- Temporary factors related to the pandemic: 2019: 0.0; 2020: -1.7.
- Adjusted CA: 2019: -2.7; 2020: -1.4.
- CA Norm (from model) 1/: 2019: -3.7; 2020: -3.7.
- Adjustments to the norm: 2019: 0.0; 2020: 0.0.
- Adjusted CA Norm: 2019: -3.7; 2020: -3.7.
- CA Gap: 2019: 1.0; 2020: 2.3.
  - o/w Policy gap: 2019: -1.1; 2020: 0.9.
- Elasticity: 2019: -0.26; 2020: -0.24.
- REER Gap (in percent): 2019: -4.0; 2020: -9.6.
- Note: 1/ Cyclically adjusted, including multilateral consistency adjustments.

### Capital and Financial Accounts: Flows and Assessment
- Background findings:
  - In 2020, net FDI (debit and credit) represented 113 percent of the current account.
  - Costa Rica maintains relatively low restrictions on FDI relative to OECD peers.
  - Portfolio capital flows constrained by low size and liquidity of the local currency bond market.
  - Projected portfolio and other net outflows in 2020 are mainly due to the pandemic shock.
  - Net inward debt portfolio flows represented 20 percent of net inward capital flows on average during 2013-17.
  - Total net debt portfolio flows accounted for 33 percent of net capital flows (2013-17 average).
- Assessment:
  - External financing structure is a source of resilience: FDI fully covers the current account deficit in normal years.

### FX Intervention and Reserves Level
- Gross international reserves (GIR):
  - Fell by about US$ 1.7 billion in 2020.
  - Year-end 2020 GIR: US$ 7,232 million.
  - GIR equals 108 percent of the IMF’s metric for Assessing Reserve Adequacy (ARA metric) for countries with floating exchange rates.
- FX intervention in 2020:
  - Net direct FX sales of US$ 650 million.
    - US$ 280 million to address volatility.
    - Net sales on behalf of SOEs of US$ 371 million.
- Other reserve-impacting events:
  - Early repayment in January of a US$ 625 million reserves loan by the Latin American Reserve Fund (FLAR) had a sizable impact on reserves.
  - A few external loans expected in 2020 did not receive approval by the Legislative Assembly and were rescheduled to 2021.
- Assessment:
  - GIR meets standard benchmark levels for a country with a floating exchange rate and an open capital account.
  - Factors suggesting an extra buffer above 100 percent of the ARA metric: still-high rate of dollarization, high fiscal financing needs amid market risks, and BCCR’s limited tolerance for large exchange rate swings.
- Costa Rica: Gross International Reserves, 2020 Adequacy Metrics (in percent of metric, unless noted otherwise)
  - Metric Level: Millions of US dollars 7,232.
  - ARA metric (floating): 108 (benchmark 100-150).
  - Short-term debt at remaining maturity: 139 (benchmark 100).
  - Broad money: 222 (benchmark 20).
  - Source: IMF staff estimates.

### Key Elements of the 2018 Fiscal Reform and Expected Savings
- The 2018 reform (law passed December 3, 2018) included a fiscal rule, creation of a fiscal council, and adoption of a Medium-Term Fiscal Framework; expected savings of about 4 percent of GDP over 2018-23 (as estimated in the 2019 Article IV Report).
- Projected revenue gains (tax reforms): additional revenue of 1.6 percent of GDP annually by 2023, including:
  - Conversion of the sale tax into a full-fledged VAT (full taxation of services and full deduction of taxes paid on imports and purchases from July 2019).
  - Strengthening income taxation: harmonizing capital income and gains at a 15 percent tax rate and adding additional brackets of 20 and 25 percent for employment income as of October 2019.
- Projected spending reductions:
  - New fiscal rule and wage restraints projected to lower spending by 2.4 percent of GDP by 2023.
  - Fiscal rule limits current expenditure growth to:
    - 100 percent of the average GDP growth over the previous four years when debt (t-2) is below 30 percent of GDP;
    - 85 percent when debt (t-2) is between 30 to 45 percent of GDP;
    - 75 percent when debt (t-2) is between 45 to 60 percent of GDP.
  - Total spending growth limited to 65 percent of the same benchmark when debt (t-2) is above 60 percent of GDP.
  - Reform mandates a freeze in the base wage when debt exceeds 60 percent of GDP and imposes caps on extra remunerations as of 2019.
  - Reallocation of legally mandated spending (except those mandated by the Constitution) envisaged if debt exceeds 50 percent of GDP.

### Inequality and Informality: Status and Drivers
- Inequality levels:
  - Gini coefficient in 2019: 0.48 (OECD average: 0.32).
  - Income inequality has increased slightly over the past decade and remains high compared to OECD and LAC standards.
- Macro-level root causes:
  - Unequal distribution of labor market opportunities, especially for informal workers and women.
  - High unemployment and informality; widening pay gap between informal and formal employment.
  - Disproportionally high social security minimum contributions for low-income and part-time workers and a complex minimum wage system deter formalization.
  - Female labor force participation remains particularly low; closing gender gaps could significantly boost economic growth (with cumulative losses estimated at over 20 percent for Costa Rica).
  - Wage premium for public sector employees and divides along educational dimensions exacerbate labor income inequality.
  - Well-targeted social spending and fiscal redistribution is limited; spending on social assistance and active labor market policies is in line with regional peers but low compared to OECD countries.
  - Delivery of social assistance improved (transition to bank payments), but coverage and targeting challenges remain for conditional cash transfers.
  - Targeting for in-kind transfers programs and social pensions is better in Costa Rica than average upper-middle-income country.
  - Redistribution through taxes and transfers plays a limited role due to low progressivity (OECD 2020 Economic Survey).
- Micro-level evidence:
  - Shapley estimates (household-level data) show labor income accounts for the largest share of income and contributed most to the increase in the Gini coefficient from 2010 to 2019.
  - Education, informality, hours worked, and the public sector wage premium together explain almost half of labor income variability (2010–2019).

### Impact of COVID-19 on Inequality and Labor Markets
- Labor market impacts:
  - Unemployment increased to 22 percent in 2020Q3 (29 percent for women).
  - Informal employment declined by 33.3 percent at the height of the pandemic in 2020Q2 relative to 2019Q4.
  - Formal employment declined by 10 percent over the same period.
  - Two out of three recipients of the Bono Proteger program have incomplete secondary or lower education, indicating low-skilled workers were disproportionately affected.
- Sectoral employment changes (2020Q2 relative to 2019Q4):
  - Informal workers experienced particularly sharp job losses relative to formal workers.
- Source references in analysis: Bottan, A.; Vera-Cossio, D. A.; Hoffmann, B. (2020).

### Distributional Effects of the Program and Fiscal Package
- Fiscal package and expanded social safety net (additional 0.1 percent of GDP) simulation results:
  - Direct tax relative incidence increases for higher deciles:
    - Eighth decile: from 8.0 to 8.2 percent.
    - Ninth decile: from 9.0 to 9.4 percent.
    - Tenth decile: from 12.5 to 13.5 percent.
  - Resulting reduction in income inequality: decrease by 0.26 Gini percentage points (from the tax changes described).
  - Additional allocation of 0.1 percent of GDP in social assistance—channeled via non-contributory pensions, REDCUDI, and CEN-CINAI—could:
    - Reduce income inequality by 0.4 Gini percentage points.
    - Reduce the poverty ratio by 0.25 percentage points, lifting at least 12,184 people out of poverty.
    - For the first decile, the share of cash transfers would increase from 108 to 112 percent and the share of cash and in-kind benefits would rise from 51 to 61 percent of market income plus pensions.
- Other simulation findings:
  - Reduction in the public sector wage bill (freeze base salaries, accrual of annuities, elimination of vacancies) would not have an impact on the poverty rate because public sector employment is concentrated in higher deciles.
- Microsimulation methodology:
  - Performed using the World Bank Poverty and Equity Team tool for Costa Rica, based on ENIGH 2018 microdata and official tax and benefit regimes.
  - Simulations focus on: removal of income tax exemption on school salary, anticipation in harmonization of taxation of all forms of financial returns to 15 percent, and integration of employment, professional and business income into a single PIT progressive rate structure.

### Debt Sustainability Analysis (DSA) — Key Findings and Risks
- Public debt dynamics and baseline projection:
  - Public debt rose from about 56¾ percent of GDP at end-2019 to about 68 percent of GDP at end-2020.
  - Public debt is projected to peak at 76 percent of GDP in 2023 and then start declining over the medium term under the baseline.
  - Under the baseline scenario, debt is assessed to remain sustainable assuming gradual recovery and fiscal consolidation under the program.
- Composition and exposures (as of end-2020 / end-2019 where noted):
  - Domestic debt (mostly bonds in colones or U.S. dollars): about 52 percent of GDP or about three quarters of total public debt (as of end-2020, based on preliminary disaggregated data).
  - External public debt:
    - Multilateral and bilateral loans: about 7 percent of GDP or 10 percent of total.
    - Eurobonds: 9.4 percent of GDP or 13.8 percent of total.
  - Foreign-currency denominated debt: about 42 percent of total.
  - As of end-2019, Costa Rica’s debt-to-GDP ratio stands higher than most peers and the emerging market (EMs) average (54 percent).
- DSA scope and data constraints:
  - DSA focuses on central government (CG) due to data constraints for the broader public sector.
  - CG expanded to include 51 public entities required to be consolidated under Law 9524 starting in 2021 (accounting for about 0.3 percent of GDP in debt as of end-2019).
  - CG accounts consolidated retroactively to 2019 for comparability.
  - Remaining public sector has been broadly in balance in recent years, but weak reporting of state-owned enterprises limits monitoring of the entire public sector.
- Risks to debt sustainability:
  - Weaker growth.
  - Slower-than-expected fiscal adjustment.
  - Materialization of contingent liabilities.
  - Interest rate and currency shocks.

*Source: IMF staff report content (1criea2021001).*

### 3.      The baseline scenario of the DSA reflects the medium-term  macroeconomic

### 3.      The baseline scenario of the DSA reflects the medium-term  macroeconomic

### Baseline macroeconomic outlook and fiscal trajectory
- The baseline reflects the medium-term macroeconomic projections and policies under the proposed extended arrangement under the EFF.
- Real GDP:
  - Contracted by 4.8 percent in 2020.
  - Projected to grow by 2.6 percent (next two years / near term).
  - Slowly converging to potential growth of about 3 percent.
- Inflation:
  - Weak demand and subdued import prices expected to keep inflation around the lower end of the BCCR target range in the near term.
  - Inflation is expected to gradually converge to the midpoint of the target range as recovery takes hold.
- Primary balance:
  - Projected to strengthen from a 3.9 percent of GDP deficit in 2020 to a surplus of around 2.8 percent of GDP in 2026, based on consistent implementation of the fiscal rule and further expenditure and revenue measures under the program.
- Interest payments:
  - Expected to remain sizable due to rising public debt.
  - Projections based on actual interest payments for existing debt and prevailing interest rates in the primary market for newly issued debt, adjusted in line with expected medium-term developments in domestic and global financial conditions.

### Public debt sustainability (central government / public sector)
- Fiscal consolidation and structural measures:
  - Authorities’ fiscal consolidation plans would help strengthen debt dynamics over the medium term.
  - Structural measures of about 5¼ percent of GDP over 2021-25, including sustained implementation of the fiscal rule over the medium term.
- Debt-to-GDP projections:
  - Central government debt is projected to peak at 76 percent of GDP in 2023.
  - Projected to decline to 71.9 percent of GDP by 2026.
  - The peak of 76 percent of GDP is above the 70-percent high risk of debt distress threshold for emerging economies.
- Gross financing needs:
  - Average gross financing needs will remain elevated, averaging about 12 percent of GDP in 2021-24.
  - Projected to decline below 10 percent of GDP in 2025.
- Financing assumptions:
  - Baseline assumes access to external financing in the form of official financing and US$4 billion in Eurobond issuances over 2022-26.
- Alternate scenarios if consolidation fails:
  - If primary balance fails to strengthen beyond its historical level (- 2.7 percent of GDP), the debt-to-GDP ratio would rise to about 94 percent by 2026.
  - When all standardized shocks are combined, debt-to-GDP would reach 92.6 percent in 2026 and gross financing needs would remain elevated at around 15 percent of GDP until 2023.
- Realism of baseline fiscal adjustment:
  - The envisaged maximum three-year improvement in the structurally adjusted primary balance by around 3.7 percent of GDP over 2020−23 is higher than in 83 percent of international experiences, highlighting the ambition of the fiscal consolidation plan.
- Debt profile vulnerabilities:
  - Moderate degree of vulnerabilities related to market perception, external financing requirement, debt held by non-residents, and debt denominated in foreign currency.
  - Foreign-currency denominated debt as share of total debt is estimated at about 42 percent in 2020 and to continue rising until 2024, reflecting Fund and other IFI financial assistance; share remains below the high-risk threshold of 60 percent.

### External debt sustainability
- Total external debt (public and private) to GDP:
  - Projected to increase by 6.5 percent in 2021 to 59.1 percent of GDP.
  - Projected to peak in 2024 at 61.9 percent of GDP.
  - Projected to decrease to around 58.7 percent of GDP by 2026 as GDP growth and the trade balance normalize.
- Main external risk:
  - A sharp depreciation of the exchange rate is the main risk to external debt sustainability; currency risks vis-à-vis the U.S. dollar are high.
  - Stress test: a 30 percent real depreciation in 2020 could increase the external debt-to-GDP ratio to 90 percent by 2024.
- Other risk factors:
  - Interest rates, growth, and the current account primary balance pose relatively low risk in stress tests.
  - Despite COVID-19 shock and fiscal challenges in 2020, exchange rate pressure abated by year-end and FDI more than covered the current account.
  - Further tightening in global liquidity conditions or country-specific shifts in investor confidence (for example weakening fiscal and debt trajectory) could raise rollover risks and interest costs.

### Stress tests, scenario results, and risk assessment
- Public DSA baseline key figures (selected from Figure AVII.1 table):
  - Nominal gross public debt: 38.5 (2019), 56.8 (2020), 68.3 (2021), 72.5 (2022), 75.0 (2023), 76.0 (2024), 75.6 (2025), 74.2 (2026), 71.9 (projection end).
  - Public gross financing needs (percent of GDP): 11.8 (2019), 12.6 (2020), 13.5 (2021), 13.9 (2022), 12.5 (2023), 11.2 (2024), 10.5 (2025), 8.8 (2026), 7.5 (projection).
  - Real GDP growth (in percent): 3.9 (2019), 2.2 (2020), -4.8 (2020 recorded contraction), 2.6 (2021), 3.3 (2022), 3.1 (2023), 3.1 (2024), 3.2 (2025), 3.3 (2026).
  - Inflation (GDP deflator, in percent): 4.2 (2019), 2.2 (2020), 0.5 (2021), 1.4 (2022), 1.0 (2023), 1.3 (2024), 2.0 (2025), 2.4 (2026), 2.8 (projection).
  - Effective interest rate (in percent): 8.3 (2019), 8.3 (2020), 8.0 (2021), 8.1 (2022), 8.0 (2023), 7.3 (2024), 7.0 (2025), 6.9 (2026).
- Stress test scenarios (summary of outcomes, from figures and text):
  - Primary balance shock, real GDP growth shock, real interest rate shock, real exchange rate shock, combined shock, and contingent liability shock were run.
  - When all shocks are combined, gross nominal public debt could reach about 92.6 percent of GDP in 2026 and public gross financing needs would remain elevated at around 15 percent of GDP until 2023.
  - Contingent liability shock can push gross financing needs above the 15 percent of GDP benchmark.
- Public DSA risk-assessment indicators and benchmarks:
  - Debt level exceeds the 70 percent of GDP threshold for EMs in 2021 and over the projection period under the baseline — indicating high risk to debt sustainability.
  - Gross financing needs exceed the 15 percent of GDP benchmark under specific stress scenarios (notably contingent liability shock and combined shocks).
  - Heat map and stress analyses flag high risk given debt levels, external financing requirements, and market-perception vulnerabilities (EMBIG spreads and other indicators presented).

### Key external-debt framework numbers (Table AVII.1 highlights)
- External debt (total) to GDP (selected years):
  - 2016: 43.4
  - 2019: 47.9
  - 2020: 52.6
  - 2021: 59.1
  - 2024 (peak): 61.5–61.9 (table and text indicate 61.9 in 2024)
  - 2026: 58.7
- Change in external debt (percent of GDP):
  - 2021: 6.5
  - 2022: 2.3
  - 2023: 0.1
  - 2024: 0.3
  - 2025: -2.0
  - 2026: -1.2
- Identified external debt-creating flows and components (selected):
  - Current account deficit, excluding interest payments: 0.8 (2020), 1.4 (2021), 1.1 (2022), 1.1 (2023), 1.1 (2024–2026).
  - Net non-debt creating capital inflows (negative): -3.3 (2019), -3.7 (2020), -3.0 (2021), -3.3 (2022), -3.8 (2023), -4.2 (2024-2026).
- Gross external financing need (in billions of US dollars):
  - 2019: 5.2
  - 2020: 6.3
  - 2021: 6.2
  - 2022: 6.8
  - 2023: 7.3
  - 2024: 7.1
  - 2025: 7.8
  - 2026: 9.2
  - In percent of GDP: 8.8 (2019), 10.4 (2020), 10.0 (2021), 10.6 (2022), 11.9 (2023), 10.7 (2024), 11.2 (2025), 13.5 (2026) — as presented in table rows.

### Policy-relevant implications and program priorities (from analysis)
- Continue and fully implement fiscal consolidation including:
  - Sustained implementation of the fiscal rule.
  - Delivery of structural measures totaling about 5¼ percent of GDP over 2021-25.
- Secure access to external financing consistent with baseline assumptions (official financing and US$4 billion in Eurobond issuances over 2022-26).
- Manage exchange rate and currency risks:
  - Monitor and address vulnerabilities from foreign-currency denominated debt (about 42 percent of total debt in 2020).
  - Prepare for potential depreciation scenarios (e.g., 30 percent real depreciation increases external debt-to-GDP markedly).
- Reduce gross financing needs over time to lower rollover and market risks, aiming for the projected decline below 10 percent of GDP in 2025.

*Source: IMF staff calculations and analysis as presented in the DSA chapter.*

### Annex VIII. Bank Stress Tests

### Annex VIII. Bank Stress Tests

### Top-line assessment
- The banking sector had an overall capital adequacy ratio (CAR) of 13½ percent as of end-May 2020 (the base for the stress tests given data availability), above the 10-percent minimum regulatory requirement.
- Staff’s top-down stress test results show the banking sector should be able to withstand a more severe shock under a downside scenario, with the overall CAR falling to 10.1 percent just above the regulatory minimum.

### Stress test design and assumptions
- Credit risk
  - An additional 5.8 percent of non-performing loans (NPLs) is assumed, with a provisioning rate of 40 percent, to bring post-shock NPLs to 8.5 percent of total loans.
  - The estimated shock is twice the size of the increase in extended NPLs (“mora ampliada”) observed during the 2008-09 global financial crisis, when real GDP growth fell by about 5 percentage points.
  - In the downside scenario, real GDP growth is estimated to fall by 10 percentage points over 2020-21 compared to the pre-COVID 2019 level.
- Interest rate risk
  - Sovereign bond yield is assumed to further increase by 300 bps, causing the repricing of banks’ sovereign bond holdings.
  - Note: potential loss from the flow impact of a positive interest rate shock is small because most banks have more short-term interest rate-sensitive assets than liabilities.
- Exchange rate risk
  - The colón is assumed to depreciate by an additional 10 percent in 2021.
  - Direct impact is positive for most banks (long net open FX position). Indirect channel: currency-induced credit risk of non-hedged borrowers leads to an additional 6.8 percent of FX loans becoming non-performing.

### Key quantitative results (system and bank groups)
- Summary of results (pre-shock CAR and impacts in percentage points of original RWA)
  - Pre-shock CAR
    - All Banks: 13.5
    - Public: 13.3
    - Domestic Private: 14.1
    - Foreign Private: 13.6
  - Impact of:
    - Increase in NPLs: All Banks -1.8; Public -1.8; Domestic Private -1.5; Foreign Private -1.8
    - Increase in sovereign bond yields: All Banks -0.9; Public -1.1; Domestic Private -0.6; Foreign Private -0.8
    - Exchange rate depreciation: All Banks -0.6; Public -0.4; Domestic Private -0.5; Foreign Private -0.9
      - o/w: direct impact on banks' net open FX positions: All Banks 0.4; Public 0.1; Domestic Private 1.2; Foreign Private 0.7
      - o/w: indirect impact on NPLs: All Banks -1.1; Public -0.6; Domestic Private -1.7; Foreign Private -1.6
  - Change in CAR (combining all shocks): All Banks -3.4; Public -3.3; Domestic Private -2.5; Foreign Private -3.5
  - Post-shock CAR (percent of post-shock RWA): All Banks 10.1; Public 10.0; Domestic Private 11.5; Foreign Private 10.1
- The NPL shock is the largest single contributor to losses: system-wide increase in NPLs estimated to cause a fall in CARs by 1.8 percentage points.
- Exchange rate depreciation impacts private banks more sharply due to higher share of FX-denominated loans (73 percent for private banks versus 24 percent for public banks).
- Increase in sovereign yields impacts public banks more due to higher share of sovereign bond holdings.

### Adverse combined scenario and fiscal-scale implications
- Under the combined adverse scenario where all shocks materialize:
  - System-wide CAR falls to just above the regulatory minimum (post-shock CAR 10.1 percent).
  - Five banks—collectively accounting for less than 30 percent of market share—would have their CARs fall below the 10-percent threshold, requiring some recapitalization.
  - Combined capital shortfalls amount to 0.24 percent of GDP.

*Sources: SUGEF and IMF staff estimates.*

---

### Annex IX. Costa Rica’s Climate Change Response

### Exposure and observed impacts
- Vulnerability and risk assessments
  - The UN Intergovernmental Panel on Climate Change identified Costa Rica as a hot spot for climate change with severe effects on ecosystems and livelihoods.
  - As of 2017, Costa Rica is the 21st country with the highest risks from climate change worldwide (Germanwatch).
- Historical disasters and economic impact
  - Natural disasters during 1969-2019 (especially floods, droughts, and storms) have led to significant fatalities and social and economic costs.
  - Annual losses from these events average 0.4 percent of GDP.
  - Total people affected average about 35,000 per year.
  - The Office of the Comptroller General estimated annual costs due to hydrometeorological and climate-induced events amounted to 0.3-1.7 percent of GDP over 1988-2010 and could reach up to 2.5 percent of GDP by 2025.
  - The National Commission of Risk Prevention and Emergencies (CNE) emphasized that 78.2 percent of losses from hydrometeorological and geotectonic events over 2005-2011 related to public infrastructure; road infrastructure is most affected, followed by electricity-generating infrastructure and agriculture.
- Long-run climate scenario
  - Staff estimates (ENVISAGE model calibrated for Costa Rica) suggest global warming of +3°C could reduce Costa Rica’s GDP by more than 6 percent, primarily through tourism, heat effects on labor productivity, and agriculture.

### Adaptation, disaster risk management, and ongoing actions
- Institutional frameworks and measures
  - National Adaptation Policy 2018-2030 and Institutional Strategic Plan 2018-2022 aim to improve resilience in infrastructure, tourism, and water resources.
  - Authorities are developing a roadmap to strengthen infrastructure resilience and disaster risk management jointly with the World Bank.
  - Agricultural insurance scheme launched to insure harvests against climate risks with lower premia for producers implementing adaptation measures.
  - Collaboration with the World Bank to increase forest biomass to enhance resilience to tropical storms.
  - Opportunities for strengthening financial risk protection, disaster recovery planning, and risk identification are noted.

### Mitigation profile and decarbonization agenda
- Current emissions and sectoral drivers
  - Costa Rica’s annual greenhouse gas emissions are low by international standards: 2.6 tons per capita.
  - Almost 100 percent of electricity stems from renewable sources.
  - Costa Rica has stopped and reversed deforestation; over half of landmass is covered by forest.
  - The transport sector is responsible for over 40 percent of the country’s gross greenhouse gas emissions (MINAE).
  - The vehicle fleet has an average age of 15 years.
- National Decarbonization Plan 2018-2050
  - Costa Rica’s National Decarbonization Plan sets a path to transition to a zero net emission economy by 2050 and is structured along ten lines of action and eight cross-cutting strategies with detailed short-, medium-, and long-term targets.
  - Key targets (selected highlights from Table AIX.1)
    - Public transport: 30% of public transport is zero-emissions by 2030; 85% by 2035; public transport replaces private vehicles as principal mobility option by 2050.
    - Private transport: 30% of vehicle fleet is electric by 2030; 95% of vehicle fleet is zero-emissions by 2035; extensive network of electric charging and hydrogen fueling stations by 2050.
    - Cargo transport: 20% of cargo fleet operates with liquified petroleum gas (by 2025); cargo transport reduces emissions by 20% compared to 2018 by 2035.
    - Electric energy: Develop 2 sectoral electrification strategies by 2022; national electricity mix 100% renewable by 2035; electricity is primary energy source for transport, residential, commercial, and industrial sectors by 2050.
    - Construction: 100% of new buildings comply with emission standards and are climate-resilient by 2035.
    - Biodiversity and ecosystems: Increase national forest coverage to 60% by 2030; 4,500 hectares of green areas function as recreational parks in the GAM by 2035.
  - The plan was recognized internationally; in 2019 Costa Rica was named “Champion of the Earth” by the United Nations for its leadership and the National Decarbonization Plan.

### Economic costs and benefits of decarbonization
- Cost-benefit findings
  - IDB cost-benefit evaluation (3,000 scenarios): net economic benefits amount to US$40.9 billion over 2020-2050 (discounted to 2015 at an annual rate of 5 percent). If discounted back to 2020, net benefits would amount to $54.7 billion (note: preferred scenario assumes high and increasing forest decarbonization).
  - Transport sector: estimated financial net benefits over 2020-2050 amount to US$2.9 billion and to US$20.6 billion when positive effects in reduced congestion, accidents, and local air pollution are included.
  - World Bank integrated assessment: decarbonization target is achievable and generates cumulative net economic benefits of US$54.5 billion over 2020-2050.
  - Decarbonizing agriculture, livestock, and forestry estimated net benefits of US$21.9 billion.
- Fiscal and policy considerations
  - To maintain fiscal sustainability and compensate for loss of tax revenues related to reduced gasoline and diesel consumption—currently accounting for about 10.7 percent of fiscal revenues—reforms of taxation on fuels, vehicles and trucks could play an important role.

### Integration of climate into trade, finance, and policy
- Trade and green growth initiatives
  - Costa Rica is negotiating an Agreement on Climate Change, Trade and Sustainability (ACCTS) with Fiji, Iceland, New Zealand, Norway, and Switzerland to cover market access for environmental goods and services, commitments to eliminate harmful fossil fuel subsidies, and eco-labelling guidance.
  - Costa Rica launched a Green Growth Platform in 2018 to promote sustainable export practices; it received the “Best Initiative for Inclusive and Sustainable Trade” award from the International Trade Centre.
- Financial sector greening
  - In 2016 Costa Rica issued its first green bond to finance climate-friendly infrastructure.
  - In 2019 the BCCR joined the Network for Greening the Financial System.
  - The BCCR is exploring greening international reserves, evaluating financial sector exposure to climate risks, and supporting the transition to a decarbonized economy.

*Sources: EM-DAT; Germanwatch; SUGEF and IMF staff estimates; National Decarbonization Plan; MINAE; IDB; World Bank.*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Program request and objectives
- Request for a 36-month Extended Arrangement under the Extended Fund Facility (EFF) totaling SDR 1,237.49 million (335 percent of quota and equivalent to about US$1,750 million) to be provided for direct budget support.
- Program anchored on three pillars:
  - (i) Gradually implementing equitable fiscal reforms to ensure debt sustainability, while protecting the most vulnerable.
  - (ii) Maintaining monetary and financial stability, while strengthening the central bank’s autonomy and governance and addressing structural financial vulnerabilities.
  - (iii) Advancing structural reforms to promote inclusive, green, and sustainable growth.
- Program monitoring:
  - Implementation monitored through semi-annual quantitative performance criteria and structural benchmarks and quarterly indicative targets, as described in the MEFP and the attached Technical Memorandum of Understanding (TMU).
  - Five semi-annual reviews of the arrangement by the Fund.
- Safeguards and governance:
  - A safeguards assessment was completed in October 2020 and the government is committed to implementing the associated recommendations as specified in the MEFP.
  - Updated Memorandum of Understanding between the BCCR and Ministry of Finance clarifies responsibilities for timely servicing of IMF financial obligations.
- Authorization to publish this letter and its attachments as well as the associated staff report.

### Macroeconomic outlook and impact of COVID-19
- Pre-pandemic context:
  - Economy transformed from agricultural-based to knowledge-intensive service-oriented economy; wide-ranging structural reforms (including those under OECD accession) and commitment to fighting climate change.
- COVID-19 impact and recovery expectations:
  - Real GDP projected to grow by 2.6 percent in 2021 and return to its pre-COVID level only in late 2022.
  - Over the medium term, economic growth expected to reach its potential of around 3 percent.
  - Inflation expected to remain at the lower end of the target band in the near term.
  - Tourism receipts expected to recover only slowly, widening the current account deficit amid weak foreign direct investment.
- Prior IMF support:
  - Rapid Financing Instrument support of SDR 369.4 million (100 percent of quota) approved on April 29, 2020.

### Fiscal policy stance and targets
- Medium-term targets:
  - Aim to reach a primary balance of 1 percent of GDP by end-2023.
  - Aim to reach a debt-to-GDP ratio of 50 percent by 2035.
- 2020 fiscal outcomes and measures:
  - Fiscal deficit deteriorated to 6.8 percent of GDP (calculated using the rebased GDP) prior to pandemic shock and further affected by COVID-19.
  - 2020 budget (adopted November 2019) envisaged a central government (CG) deficit of 7.8 percent of GDP; updated projection of 5.9 percent of GDP in BCCR’s January 2020 Macro Program.
  - 2020 fiscal developments:
    - Initial fiscal deficit more than halved in February 2020 compared to the same period in 2019 due to early phase of fiscal reform implementation.
    - First supplementary budget (April 2020) measures included:
      - Three-month moratorium on payment of VAT, business income taxes, and customs duties.
      - Temporary reduction (for six months) of 25 percent in the minimum tax base for health and pension contributions.
      - Triggering of the escape clause under the fiscal rule to allow higher spending by IMAS, MTSS, INCIENSA, police and firefighters corps.
      - Launch of Bono Proteger: monthly subsidy of CRC 125,000 (about US$205) for three months to about 375 thousand families with monthly income of less than CRC 750,000 prior to COVID-19.
      - Deferred roll-out of VAT on construction and tourism services.
      - Freezing of the basic wage for public employees in 2020 (except law enforcement and healthcare workers).
    - These measures implied a fiscal deficit of 8.1 percent of GDP at the time.
    - Second, third, and fourth supplementary budgets (July and November 2020) included offsetting revenue and spending measures:
      - Freezing domestic retail price for premium gasoline as of March 4, 2020 and transferring higher proceeds of CRC 16 billion from RECOPE to the CG.
      - Transferring about CRC 75 billion of excess capital from INS to the budget.
      - Freezing 4,953 public sector vacancies and eliminating 2,194 positions; initiation of new public investment projects halted.
      - Transferring CRC 74 billion to the Social Security Fund to compensate lower contributions and higher expenses (about CRC 31 billion delayed to 2021).
      - Paying a COVID-19 vaccine down payment of CRC 7.2 billion.
      - Spending cuts in goods and services and capital.
      - Temporary reduction of up to 50 percent in the ownership tax on transport vehicles (expected revenue loss of CRC 52 billion in 2020 and CRC 18 billion in 2021).
    - Consolidated CG revenue collection declined by 11 percent (or 1.6 percent of GDP, using rebased GDP).
    - CG spending compression of 2.5 percent (or 0.6 percent of GDP) compared to 2019.
    - Primary deficit estimated at 3.9 percent of GDP and headline fiscal deficit at 8.7 percent of GDP in 2020 for the consolidated CG, including public entities consolidated under CG from 2021 onwards as required by Law 9524.
- 2021 fiscal stance and measures:
  - 2021 budget (approved November) with commitment to a 94 percent execution rate of current non-interest expenditure implies a CG primary deficit of 2.2 percent of GDP.
  - Authorities target a primary deficit of 1.7 percent of GDP in 2021 (program consolidation target).
  - Two comprehensive fiscal reform packages submitted to the Legislative Assembly in December 2020 and January 2021 to support debt sustainability and underpin 2021–23 program targets.
  - Revenue measures (expected cumulative annual yields of 0.5 percent of GDP by end-2023 from December package):
    - Half-year impact of the 4 percent VAT on construction-related and tourism services (implementation postponed from mid-2020 to mid-2021).
    - Full-year impact of the new 1 percent VAT on the basic food basket and of the 13 percent VAT on cross-border digital services.
    - First CIT annual return under new anti-avoidance rules.
    - Scheduled rate increase in the capital income/gains tax for interests from Banco Popular y de Desarrollo Comunal, yields from Cooperatives' securities and profit distributions from Cooperatives.
    - Removing income tax exemption for prizes from the national lottery and the 14th month salaries for public sector employees.
    - Bringing forward harmonization of capital gains and income tax at 15 percent.
    - Increasing withholding tax rates on non-resident incomes by 5 percentage points (family and personal remittances exempted).
  - Additional fiscal measures (submitted late January/early February) with cumulative annual yields of 0.7 percent of GDP by end-2023:
    - Amending legislation to allow distribution of dividends by SOEs to the CG.
    - Further globalizing personal income tax by reducing the tax-exempt threshold from CRC 10 million to CRC 8.2 million.
    - Replacing the current solidarity property tax (0.25-0.55 percent on properties with value over CRC 133 million) with a new luxury immovable property tax (single rate of 0.5 percent on properties with value over CRC 150 million).
    - Compensatory social transfers to the poorest deciles of the population.
  - Spending measures to contain expenditure envelope in 2021:
    - Expected annual growth of current spending of 4.1 percent (against the 2020 spending base after excluding emergency spending), in line with fiscal rule requirements.
    - Savings in non-interest expenditures estimated at 1.3 percent of GDP in 2021, net of additional allocations to social programs, to be applied over 2021–25:
      - Continued wage constraints from the 2018 fiscal reform: freeze in base salaries, annuities, and new hiring; elimination of all vacancies.
      - Annual nominal reduction of temporary wage components by 8.5 percent.
      - Freeze in pensions of public sector retirees and current transfers to the public sector excluding CCSS transfers.
      - Cuts in non-pension private transfers, non-CCSS public transfers, and transfers with external resources.
      - Annual nominal reduction in spending on goods and services by 7.5 percent.
      - Temporary cuts in capital spending due to delays and reprioritization of capital projects.
    - Given debt-to-GDP exceeded 60 percent in 2020, expenditure projections consider bringing forward the freeze in basic wage and accrual of annuities foreseen beyond 2021.

### Policy framework and commitments
- Continued commitment to:
  - Protecting the most vulnerable while securing debt sustainability.
  - Strengthening monetary and financial stability and central bank autonomy and governance.
  - Advancing structural reforms to promote inclusion, boost labor productivity, and combat climate change.
- Program contingency and cooperation:
  - Authorities stand ready to take additional measures as appropriate and will consult in advance with the Fund on new measures or policy revisions per Fund policies.
  - The government and BCCR will provide the Fund with data and information necessary to monitor program performance, including those specified in the TMU.

*Letter of Intent dated San José, February 10, 2021 (Appendix I to the Memorandum of Economic and Financial Policies).*

### 2025. Moreover, the Legislative Assembly approved in January resource allocations for the one-

### 1criea2021001 - 2025. Moreover, the Legislative Assembly approved in January resource allocations for the one-

### Fiscal measures and 2021 budget actions
- Legislative Assembly approved resource allocations for the one-off purchase and distribution of a COVID-19 vaccine for 0.1 percent of GDP.
- Compensatory measures proposed to avoid the budgeted decline in social assistance spending in 2021 due to lower earmarked revenue (0.1 percent of GDP) and to support the poorest and most vulnerable for an additional 0.1 percent of GDP, with this latter amount to be channeled through the social assistance programs with the best targeting: non-contributory pensions, childcare network, and CENCINAI.
- The 2021 compensatory transfer to social programs will be financed by a one-off reduction in election spending (about 0.1 percent of GDP).
- Commitment to staying current on all payment obligations and not accumulating any spending arrears.

### Program flexibility and contingency planning for COVID-19
- Ongoing improvements in tax and customs administration expected to support revenue yields in the course of 2021.
- If revenues underperform, plan to propose to the Legislative Assembly temporary tax measures and reprioritize non-critical spending to ensure the primary target remains within reach.
- President’s order envisages a prudent level of spending execution, with a maximum annual growth limit of 0.51 percent of CG current transfers, net of COVID-19 emergency spending.
- Program targets allow for an adjustor to accommodate increased COVID-19 emergency spending for up to 0.3 percent of GDP in 2021 for health services, targeted support to households and businesses, or enhanced social assistance.
- Commitment to lock in any revenue over-performance to accelerate debt reduction plans.

### Medium-term fiscal consolidation and structural measures
- Full-year impact of new revenue measures in fiscal reform packages submitted in December and January, and continued yields of approved expenditure measures, underpin medium-term adjustment consistent with the fiscal rule.
- Public-sector employment reform (MEFP ¶11) expected to keep nominal spending growth low while modernizing and strengthening the social safety net.
- Expected efficiency gains and greater revenue mobilization from modernization of tax and customs administration (MEFP ¶10) and PFM reforms (MEFP ¶12), together with planned asset sale program, provide upsides to tackle current debt and financing challenges.

### Climate-related revenue instruments and mitigation targets
- Costa Rica pledged to reduce greenhouse gas emissions to a net absolute maximum of 9.11 million tons of carbon dioxide equivalent (CO2e) for 2030, and a maximum net emissions budget in the period 2021 to 2030 of 106.3 million tons of carbon dioxide equivalent (CO2e).
- Pledged to achieve zero net emissions by 2050 (MEFP ¶32).
- Plans to develop a revenue-neutral feebate scheme to promote low-emission vehicles: sliding scale of fees for above-average emission vehicles and rebates for below-average emission vehicles; re-structuring annual taxes on used vehicles to include a revenue-neutral feebate component related to local air emission rates (excluding farm vehicles), in conjunction with the current tax on vehicle value.
- Plans to update and expand the current Payment for Environmental Services scheme to support more types of carbon sequestration (including blue carbon and organic carbon in soils) and to launch the Costa Rican Offset Mechanism (MCCR) to replace the existing “Mercado Doméstico de Carbono.”

### Revenue administration strengthening
- Since 2018: enforced electronic invoicing, deployed new audit programs, improved tax information exchange framework.
- Building on the 2019 TADAT assessment: adopt a compliance risk management approach, revamp taxpayer services, improve collection of tax arrears.
- Aim to reduce VAT and CIT compliance gap levels below 30 and 60 percent of potential collections, respectively, by refocusing anti-tax evasion efforts toward enforcement of recently approved tax reforms.
- Tax Commissioner to approve a new Compliance Improvement Plan by end-December 2021 (structural benchmark), with strategies including large-scale automated-information cross-matching and revamped audit programs focused on VAT on services and BEPS-related erosion of CIT bases.
- Enhance information-driven enforcement capabilities by end-December 2022 through a tax and customs coordinated risk management approach and effective use of corporation shareholders and beneficial owners’ registers, automatic exchange of information on financial accounts (CRS) and Country-by-Country (CbC) reports.
- MOF’s digital transformation plan “Hacienda Digital para el Bicentenario”, supported by the WB, will upgrade tax and customs procedures and information systems.

### Spending rationalization, public employment reform, and social assistance
- Scope to further rationalize the public wage bill after excessive expansion over the last 15 years.
- Reallocate spending away from legally mandated destinations (except Constitutional mandates) if debt-to-GDP ratio is above 50 percent of GDP.
- Public Employment Bill (expected approval by end-May 2021; structural benchmark) will:
  - Modernize and streamline public administration; replace current salary system with a single pay spine with eight job families.
  - Consolidate annuities, bonuses, incentives into the single salary; apply across central government, decentralized institutions, SOEs that do not compete in private markets, public universities, municipalities, autonomous and semi-autonomous institutions.
  - Apply directly to new hires; mandatory transitional rule for existing workers with salaries below their job family’s salaries to converge gradually.
  - Average annual savings during the first 10 years estimated at around 0.5 percent of GDP for the central government and at 0.1 for the rest of the public sector.
  - New hiring under the new rules to start no later than twelve months after entry into force.
  - Introduces a limit of 20 days for vacations and principles for separation and non-salary incentives for good performance.
- Social assistance delivery is fragmented with weak coverage and targeting; measures to improve:
  - Centralize and digitalize the payment system for all cash transfer social assistance programs at the MOF’s National Treasury by end-December 2021 (structural benchmark) to reduce payment processing time from 3-5 days to 24 hours.
  - Strengthen by end-December 2021 the role of SINIRUBE as the main instrument to target social protection benefits and services, with WB support.

### Public financial management, MTFF, and fiscal council
- Publish by April 2021 a first Medium-Term Fiscal Framework (MTFF) covering initially only the CG, providing macro-fiscal forecasts for 2022-2025.
- Publish a MTFF covering the entire Non-Financial Public Sector by end-April 2022 (structural benchmark), one year ahead of the Fiscal Responsibility Law deadline; will include robust fiscal risks analysis (public debt, SOEs, guarantees, contingent liabilities, concession contracts, natural disaster risks, financial institutions, municipal governments, social security and health).
- MOF and Comptroller’s Office to continue coordination across the budget cycle to ensure compliance with the fiscal rule.
- New Fiscal Council (competences established by Executive Decree N. 41937-H in August 2019) to become fully operational, publishing the first public assessment of the government’s fiscal strategy in 2022.
- Consolidation under the CG budget from 2021 of all public entities as required by Law 9524 of April 2018.
- Additional PFM efficiencies from “Hacienda Digital para el Bicentenario” to modernize and integrate PFM information systems.

### Procurement, transparency, and COVID-related spending oversight
- Enforce use by all procuring entities of the electronic platform SICOP to generate fiscal savings via better prices, lower transaction costs, improved capacity and expertise.
- Public Procurement Bill (submitted to Legislative Assembly) introduces framework for umbrella contracts, eliminates exceptions to public bidding, increases competition, and contains provisions for collection and publication of beneficial ownership information.
- Plan to update administrative regulations by end-December 2021 to require bidders to disclose beneficial owners when submitting certified shareholder composition.
- Comptroller’s Office developed a Fiscal Transparency Portal for COVID-19 with information on public purchases and audit results.
- Ministry of Labor and Social Security manages a transparency portal on the Bono Proteger program with beneficiary lists and reports.
- MIDEPLAN to launch by end-December 2021, with IDB support, a revamped Transparency Portal disseminating CG’s COVID-related spending including SICOP purchases by IMAS, MTSS, CNE, SINIRUBE, etc.; data to include vendors and beneficial owner information and final procurement amounts.
- Continue specific audits on emergency cash transfers and publish them in the Portal.
- Enhance SICOP functionalities to offer open data on public procurement beyond COVID-related spending.

### SOE governance, IFRS adoption, and electricity sector efficiency
- Accelerate full adoption of International Financial Reporting Standards (IFRS) by SOEs:
  - Publish 2020 financial statements of ICE, AyA and CNP according to IFRS by end-December 2021 (structural benchmark).
  - Publish IFRS financial statements for three additional non-financial SOEs by end-December 2022.
- Publish an aggregate annual report on SOE performance starting with FY2020 report to be published by December 2021, expanding coverage to state ownership policy, dividends policy, financial performance, employment, cost and funding of public policy objectives.
- With OECD and WB support, bring SOE procurement within SICOP, limit exceptions for direct procurement, and gradually eliminate regulations allowing withholding of confidential information.
- ICE implemented an efficiency strategy reflected in tariff reductions of 17.86 percent, 14.05 percent, and 1.48 percent in generation, distribution, and transmission, respectively; government committed to further debt restructuring and cost reduction to achieve lower tariffs.

### Debt management reform agenda
- Debt Policy for the Public Sector (Executive Decree 41935-H, 2019) establishes guidelines to put debt on a sustainable path.
- Reform agenda centers on institutional reforms, medium-term strategy, and domestic market development.
- Institutional debt management reforms:
  - Established a Debt Committee comprising the Treasury, the Public Credit Department (DCP), the Macroeconomic Analysis Unit of the Ministry of Finance, and the BCCR.
  - Plan to structure DCP and National Treasury operational responsibilities along front, middle, and back-office functions and improve transparency and reporting of public debt by end-June 2021.
  - Liaise with Legislative Assembly to seek a general authorization for external borrowing consistent with annual budgetary and borrowing limits and debt management strategy.
- Medium-term debt management strategy (MTDS):
  - Update and publish MTDS by end-April 2022 (structural benchmark) with IMF and WB support; first time to cover contingent liabilities, especially guarantees to state-owned companies.
  - Publish and adhere to Annual Borrowing Plans and Quarterly Issuance calendars consistent with the MTDS.
  - Strengthen accounting and budget execution processes of public debt payments at the MOF.
- Domestic market development:
  - Improve functioning of the primary market by focusing issuance on standard fixed-rate bullet bonds of select maturities; phase out open bond windows and bilateral bond sales.
  - Reform Treasury auction mechanism to be a price-taker; form a technical pricing committee for pricing methodologies.
  - Encourage non-resident participation by easing regulatory barriers and harmonizing tax regime for non-residents, subject to macroprudential considerations.
  - Use liability management operations to reduce rollover risks for debt maturing in the next 12-24 months and smooth maturing benchmark bonds, in line with MTDS.
  - Roll out a pilot market-making/primary dealer program by end-December 2021 with a small group of participants with well-defined rights and responsibilities.

*COSTA RICA — INTERNATIONAL MONETARY FUND (excerpt)*

### 17.      We will continue our efforts to improve data quality and transparency in fiscal

### 17. We will continue our efforts to improve data quality and transparency in fiscal reporting

### Fiscal data quality and transparency
- Commitment to improve the timeliness, quality, and comprehensiveness of public sector fiscal, financial and debt accounting, with support from IMF’s TA.
- Country meets basic requirements for fiscal risk disclosure under the new IMF’s fiscal transparency code, but the 2013 Fiscal Transparency Assessment identified areas for further improvement.
- Ongoing actions:
  - Reduce fragmentation and duality of the budgetary system (MEFP ¶12).
  - Strengthen analysis and reporting of fiscal risks (in the context of the MTFF), including contingent liabilities, guarantees, concession contracts, and the indebtedness of municipal governments and SOEs.
  - Resume efforts to fully adopt 2014 GFSM accrual accounting standards for fiscal and budgetary information, initially at the CG level by end-December 2021, and progressively extend to the rest of the public sector.
  - Fully adopt international standards for non-financial public sector debt data by end-December 2022.
  - Improvements to include comprehensive collection and reconciliation of financing (below-the-line) data, harmonization of methodology and data coverage among national accounts, government finance and public sector debt statistics, coordinated improvements on public sector accounting to guarantee stock-flow consistency, allow balance sheet enhanced analysis and provide improved data for decision making.
- Program coverage and definitions will be updated in line with progress and reflected in the attached TMU.

### Monetary and exchange rate policy — framework and objectives
- Monetary policy underpinned by a firm commitment to low inflation within an inflation targeting framework and a flexible exchange rate, consistent with the BCCR’s mandate.
- Recent policy moves:
  - Since March 2020 the BCCR cut the policy rate by 1.5 percentage points to a record low of 0.75 percent to respond to the impact of the pandemic.
  - The BCCR deepened its countercyclical monetary policy stance adopted in March 2019.
  - Gross interest rates on overnight deposits and on the permanent credit and deposit facility in the Integrated Liquidity Market (MIL) reduced to almost zero.
- Policy orientation:
  - Monetary policy will remain data dependent and forward looking.
  - Commitment to maintain inflation consistent with BCCR’s target of 3 percent, with a tolerance band of ±1 percentage point, over the medium term.
  - Progress monitored through a consultation band around interim quarterly targets (Table 1); if actual inflation falls outside the band, the BCCR will consult with IMF staff per the TMU.

### Liquidity support and credit facilities
- Legal reform passed in April 2020 allowed the BCCR to purchase capped amounts of sovereign securities in the secondary market under conditions: (i) only under liquidity stress; (ii) purchases at market prices and well-communicated, transparent, preserving BCCR independence.
- September 2020: introduced a four-year repo facility of CRC700 billion (around 2 percent of GDP) for financial intermediaries at the monetary policy rate plus 5 basis points, conditional on onlending at favorable conditions to debtors affected by the pandemic.
- January 2021: facility expanded by an additional CRC143 billion.
- Aim: support the economic recovery.

### Reducing financial dollarization and strengthening transmission
- Since 2018 allowed greater exchange rate flexibility to help agents internalize exchange rate risk.
- 2019: introduced reserve requirements differentiated by currency (higher rate for FX liabilities) to discourage financial intermediation in foreign currency.
- Considering adoption of an operation to facilitate conversion of dollar loans into domestic currency loans (colonization operation).
- In line with IMF TA recommendations, adopted and plan to deepen prudential measures to reduce dollarization (MEFP ¶27).
- Continue to foster availability of interest rate benchmarks reflecting current market conditions to strengthen monetary policy transmission.

### International reserves and FX risk management
- Commitment to maintain adequate international reserve buffers while allowing exchange rate to adjust in line with fundamentals and market conditions.
- Foreign-exchange reserve assets, bolstered by IMF’s RFI and credit lines from other IFIs, helped buffer pandemic impact on balance of payments.
- Aim to maintain reserves to cover short-term and maturing liabilities and the IMF’s Assessing Reserve Adequacy (ARA) metric, in line with the net international reserves floor set under the program (Table 1).
- Internal Audit Office of the BCCR to regularly review net international reserves and underlying data, reconcile with audited financial statements as of the end of the fiscal year, in line with TMU definition.
- With IMF TA support, will develop a policy roadmap for development of the FX derivative market to enhance FX risk management.

### BCCR independence, transparency, and governance
- 2019 amendments to the BCCR Law tightened dismissal rules for the Governor, delinked the Governor’s term from the political cycle, and removed the Minister of Finance’s voting rights in the BCCR Board—improving personal autonomy provisions.
- Further actions:
  - Prepare draft amendments to the BCCR law by end-August 2021 (structural benchmark), aiming to have them approved by the Ministry of Finance and the President and submitted to the Legislative Assembly by end-August 2022.
  - Executive Branch to take steps to fill the current vacancy in the BCCR Board.
  - Develop a long-term roadmap to strengthen the BCCR’s equity position.
- These steps respond to recommendations of the IMF’s 2020 Safeguards Assessment.

### Financial sector policies — recent progress and vulnerabilities
- Significant progress in financial sector reforms, building on IMF’s 2018 FSSR and OECD recommendations.
- Banking system entered the COVID-19 crisis with strong capital and liquidity buffers, as evidenced by stress test results in the 2019 Financial Stability Report.
- Key vulnerability: high levels of unhedged FX borrowing and indebtedness in household and corporate sectors.

### COVID-19 response — regulatory measures and credit relief
- March 2020: CONASSIF approved transitional measures to allow financial entities to restructure loans (temporary moratorium on loan servicing without affecting credit history) and reduced minimum accumulation of counter-cyclical provisions to zero, leading to comprehensive loan restructuring by banks.
- Emergency credit facilities to SMEs through public banks and the Development Banking System (SBD).
- BCCR introduced a special facility to support credit to the private sector (MEFP ¶19).

### Gradual unwinding and targeted support
- Starting December 2020, CONASSIF required banks to update credit ratings of borrowers for new restructured loans.
- Approved use of already accumulated countercyclical provisions and softened regulatory capital thresholds that define banks’ “irregularity” until December 2021.
- Proposal to Legislative Assembly for a 15-year government-funded US$300 million program to provide guarantees to businesses and individuals affected by the pandemic.
- Ensuring measures are transparent, temporary, targeted, and in line with regulatory best practices to avoid moral hazard.
- Any relaxation of regulations to be reversed once recovery is underway.

### Macroprudential framework and stress testing
- Financial Stability Committee (FSC) established in 2016 (President of the BCCR, President of CONASSIF, Minister of Finance).
- May 2019: FSC created the Monitoring and Coordination Group (MCG) comprising senior representatives of BCCR, CONASSIF, Superintendencies, and Ministry of Finance; MCG meets at least monthly.
- January 2020: FSC presidency changed from six-month rotation to permanent; BCCR President appointed FSC President.
- 2021 plans: develop a responsibility matrix between BCCR, CONASSIF and Superintendencies with IMF technical support.
- Enhanced communications: annual Financial Stability Report first published in July 2020.
- Strengthened stress testing: improved credit, market and liquidity risk stress test models and contagion risk tools; include bottom-up and top-down stress test results in Financial Stability Report.
- Going forward: update stress results annually and publish them in the Financial Stability Report, with an interim semiannual update of top-down results; continue strengthening stress testing capacity with IMF TA.

### Further measures to address dollarization risks
- SUGEF measures include:
  - Higher general provision requirement for loans to non-FX generators.
  - Calculating liquidity coverage requirements by currency.
  - Requiring banks to assess debtors’ payment capacity sensitivity to exchange rate changes.
- Planned actions (in line with IMF TA):
  - Review definition of an unhedged borrower.
  - Work to implement a debt-to-income reporting requirement.
  - Categorize as “high risk” non-FX generators with automobile loans or mortgages in FX and establish higher capital requirements for these loans.
- BCCR considering an operation to facilitate the colonization of loans by financial intermediaries (MEFP ¶20).

### Prudential regulation and supervision reforms
- 2019 reforms to laws on consolidated banking supervision and securities market regulation (Law no. 9768) strengthened supervisory powers.
- With IMF TA, SUGEF will introduce by October 2022 regulations to implement revamped legislation on supervising financial groups, including guidelines on regulatory provisions, information sharing, and updating solvency and capital requirements for financial groups.
- Consider expanding SUGEF’s scope to include financial companies linked by common foreign ownership to facilitate cross-border supervision.
- Advancing risk-based supervision and phased adoption of Basel III standards.
- Liquidity risk management improvements: enhanced monitoring of liquidity coverage ratio; planned introduction of the net stable funding ratio starting in August 2021.
- Revamping credit risk management: introduce forward-looking assessment of losses and provisioning requirements; new regulation and guidelines expected to be finalized in the first semester of 2021, to come into effect from January 2023.
- Revising banks’ capital adequacy requirements in line with Basel III; regulation to be finalized in the first semester of 2021, to come into effect from January 1, 2023.
- Effective dates may be revised depending on economic and financial conditions and combined regulatory effects.

### Financial safety net, resolution, and deposit insurance
- February 2020: Legislative Assembly approved law on banking resolution and creation of a deposit guarantee fund (DGF) (law no. 9816).
- Intend to have implementing regulations in place by end-February 2021.
- By end-June 2021, adopt a roadmap, with IMF staff support, to further strengthen legal framework on bank resolution and deposit insurance, including institutional arrangements for DGF and resolution authority, safeguards for resolution, and clear resolution triggers.
- Continuous monitoring of macro-financial risks by MCG, implementation of an early warnings system, FSC contingency plan for financial stress, and BCCR enhancement of LOLR mechanism have strengthened crisis preparedness.

### Financial inclusion, competition, and consumer information
- COVID-19 led to a sharp increase in electronic transactions and allocation of Bono Proteger (MEFP ¶6), significantly increasing bancarization and financial inclusion.
- Structural issues remain: limited banking competition and partial coverage of the credit registry, pushing up lending rates and hindering inclusion.
- National strategy for financial education developed and coordinated by MEIC; currently being implemented.
- Plan to require 4,000 non-regulated credit providers (in addition to 45 supervised entities) to report to the public credit registry, Centro de Información Crediticia (CIC).
- Committed to strengthening SBD operations and governance and developing alternative instruments to strengthen synergies between private banks and SMEs, including the proposed guaranteed fund (MEFP ¶29) to facilitate SME credit access.
- BCCR and MEIC launched a database comparing credit products across the financial system to enhance consumer information and foster bank competition.

### AML/CFT and transparency
- Commitment to combat money laundering and terrorism financing; strengthened compliance with international AML/CFT standards and transparency and information exchange frameworks in line with FATF standards.
- CONASSIF approved regulations to make sanctioning framework more effective, incorporate new regulated subjects, and adopt new regulatory and legal framework on beneficial ownership, including revised SUGEF Regulation 12-10 of September 2020.
- In accordance with Law 9416 and Decree no. 41040-H, created a centralized registry and started collecting shareholder and beneficial owner information in 2019 for all legal entities except trusts, third-party resource managers and non-profit organizations.
  - Intend to include trusts by April 2021 and the rest of the entities by April 2022.
- Will continue to dedicate resources to AML/CFT supervision and collaboration between competent authorities and carry out inspections with required frequency.

### Structural reforms for green, inclusive, and productivity-enhancing growth
- Committed to advancing growth-enhancing reforms to support a resilient recovery from COVID-19.
- In May 2020, Costa Rica was invited to become an OECD member; 14 landmark legal reforms introduced in context of OECD accession, in addition to many administrative reforms.
- Strategy hinges on three key objectives:
  - (i) Protecting the most vulnerable from the crisis and supporting inclusion, including promoting greater female labor force participation.
  - (ii) Boosting productivity growth, including eliminating barriers to business formalization, investment and job creation.
  - (iii) Promoting a green recovery, anchored by the National Decarbonization Plan and the goal of becoming a zero net emission economy by 2050.

*Source: 1criea2021001 - excerpt on fiscal reporting, monetary policy, financial sector policies, and structural reforms.*

### 33.       We are implementing a comprehensive package of measures to protect the most

### 1criea2021001 - 33.       We are implementing a comprehensive package of measures to protect the most

### COVID-19 response and immediate support measures
- Promoted and enforced compliance with health protocols, expanded hospital capacity, and deployed a large-scale vaccination campaign to control the pandemic and support reopening.
- Temporary tax relief and targeted subsidies to households through the Bono Proteger (MEFP ¶6).
- Employment protection measures:
  - Temporarily reduced working hours.
  - Made social security contributions proportional to time worked and deferred their payments until the end of the year.
  - Lowered minimum social security contributions for a period of six months (MEFP ¶6).
- Business and credit support:
  - Temporary US$300 million credit guarantee fund (MEFP ¶25) to support businesses and individuals.
  - Measures to support small- and medium-sized agricultural businesses and exporters via the Alivio program.
- Recovery catalyzation:
  - Exploring attracting near-shoring-oriented FDI and creating incentives for employment in the tourism sector.

### Productivity growth, human capital, and labor-market reforms
- Education and skills initiatives:
  - Increase provision of public childcare services (MEFP ¶35).
  - Updated curricula for 175 schools by end-December 2022.
  - Conduct regular student performance tests—including in digital and scientific fields—by end-December 2021.
  - Update performance-based evaluation system for teachers by end-December 2021.
  - Introduce a Bilingualism Education Policy by end-December 2021 to assure students are proficient in a second language by 2040.
  - Reduce the digital gap by providing infrastructure and access to hardware; launch measures to address learning continuity with WB support.
  - Modernize the National Apprenticeship Institute (INA) and link public universities’ funding to labor market needs.
  - Strengthen integration of universities with the business world via the National Science and Technology Information System (recommendations from the IDB and the OECD).
  - Passed a dual vocational training law in 2019; improved access, quality, and innovation capability of public higher education with WB collaboration.
- Investment, infrastructure, and regulatory reform:
  - Identify spending priorities and promote PPPs with support from CABEI and the IDB.
  - Planned reduction in electricity tariffs (MEFP¶15) to increase competitiveness and incentivize investment.
  - Continue strengthening digital infrastructure via the Digital Transformation Strategy 2018-2020 and related initiatives; set up a digital government portal.
  - National strategy to promote administrative reforms; Costa Rica Fluye project for intelligent deregulation in 25 public institutions.
  - Implemented a single-window system (VUI) for business licenses and permits.
  - Reform the Law for the Protection of Citizens from Excess Requirements and Administrative Procedures to reduce administrative burdens, including promoting sworn declarations, by end-December 2021.
  - New bankruptcy law expected to be approved by end-December 2021 to reduce duration and cost of liquidation proceedings and promote restructuring.
  - Promote online firm registration system.
  - Monitor FDI retention risks; explore new investment incentive plans focused on non-tax measures (e.g., innovation clusters, global value chain integration).
- Formalization and labor-market simplification:
  - 2019 legislation temporarily lowered employer and employee social security contributions for new microenterprises during their first four years.
  - 2017 sectoral pilot programs with reduced minimum rate contributions for domestic and some agricultural workers; plan to expand to the fishing sector and part-time workers by end-December 2021.
  - Strengthen employment services agency and nationwide single-window scheme.
  - Reduced number of minimum wages from 26 to 20 over the last three years; plan to reduce to 16 by end-June 2021 and to 11 over the medium term (in line with OECD recommendations).
  - Implement national strategy for transitioning to the formal economy with ILO technical assistance.

### Gender, childcare, and inclusion measures
- Increase female labor force participation (noting women’s better education outcomes but lower participation than men).
- Expand childcare services by providing 40,000 additional places, focusing on children up to 5 years old, improve access for low-income households, and implement a co-payment scheme for middle-class families by end-December 2022 (MEFP ¶34).
- Launch national policy to establish a long-term care system by end-June 2021 (initiative starting early 2021).
- Foster women’s participation in STEM with IDB collaboration and implement national action plan for gender equality in scientific and technological fields (MEFP ¶34).
- Considering additional measures to promote parental leave in public and private sectors.

### Environment, decarbonization, and climate resilience
- National Decarbonization Plan launched in 2019 aiming for zero net emission economy by 2050 (in line with the Paris Agreement).
  - Electricity matrix: almost 100 percent currently sourced from renewables.
  - Transport sector: encourage fleet electrification and strengthen charging infrastructure by installing 67 charging centers by end-December 2022; include fleet electrification considerations in operators’ concession contracts.
  - Protect 30 percent of marine territory under conservation schemes by end-December 2022.
  - Focus also on agriculture and forestry for carbon sequestration, emissions reduction in construction and industrial manufacturing, and improved wastewater management.
  - Carbon Neutrality Country Program (PPCN 2.0) for greenhouse gas management for public and private organizations.
  - Support farmers with WB assistance for low-carbon technologies, agricultural research on low-carbon solutions, and financing instruments.
  - Negotiating an Agreement on Climate Change, Trade and Sustainability (ACCTS) with five other countries (to align trade policy with the National Decarbonization Plan).
  - Developing price incentives to support transformation to a zero net emission economy (MEFP ¶9).
- Adaptation and resilience:
  - National Policy on Adaptation (PNA) launched in 2018 to establish adaptation goals for 2018-2030.
  - Develop a National Adaptation Plan and climate risk maps for every canton by end-December 2022.
  - Strengthen National System for Disaster Risk Management in line with Institutional Strategic Plan 2018-2022 of the National Commission for Risk Prevention and Emergency Care.
  - New insurance scheme (2019) for agricultural producers to insure harvests against climate risks with lower premia for producers implementing adaptation measures.
  - AGROINNOVA 4.0 started in 2020 to promote technology application in agriculture for productivity and sustainability.
  - Climate-proof infrastructure: set up an expert group and develop a roadmap to enhance infrastructure resilience by end-September 2022 (structural benchmark); include assessment of medium-term investment needs, costs, and financing options.
  - Promote the “blue economy” for sustainable coastal area use while ensuring conservation.
  - IDB collaboration to increase resilience of transport infrastructure.
  - WB-supported grants to reduce deforestation and forest degradation to foster ecosystem services and community resilience.
- Greening the financial sector:
  - BCCR joined the Network for Greening the Financial System in 2019 and is developing a roadmap to integrate climate change considerations into monetary and financial policy to be launched by end-2021.

### Risks, contingencies, and program monitoring
- Main program risks due to pandemic uncertainty:
  - (i) Lower-than-expected growth and/or new balance-of-payments pressures.
  - (ii) Weaker-than-expected revenue performance and higher COVID19-related spending, delaying fiscal consolidation.
  - (iii) Higher macro-financial vulnerabilities amid rising private sector distress and economic scarring—potentially challenging debt sustainability.
- Policy stance in response:
  - Government stands ready to adjust policies promptly in close consultation with IMF staff if risks materialize.
  - If recovery is faster than expected, readiness to accelerate adjustment and reform to strengthen resilience.
- Monitoring framework:
  - Semi-annual reviews, performance criteria (PCs), indicative targets (ITs), and structural benchmarks (SBs) detailed in Tables 1 and 2; definitions and data requirements in the attached TMU.
  - Purchases under the EFF to be used for direct budget support during the program period.
  - BCCR and Ministry of Finance updated Memorandum of Understanding on responsibilities for servicing financial obligations to the IMF.

- Selected quantitative targets and memorandum items (as presented in Table 1; cumulative from the beginning of the year, in billions of colones, unless otherwise noted):
  - Floor on cash primary balance of the central government (-= borrowing): -390 (End-Jul), -480 (End-Sep), -640 (End-Dec), -34 (End-Mar).
  - Floor on net international reserves of the Central Bank (stock, in millions of U.S. dollars): 3,660 (End-Jul), 4,336 (End-Sep), 3,768 (End-Dec), 4,123 (End-Mar).
  - Ceiling on accumulation of new external arrears (in millions of U.S. dollars): 0, 0, 0, 0 (Continuous Performance Criteria).
  - Monetary Policy Consultation Clause (MPCC) year-on-year inflation bands (percent):
    - Upper outer band limit (3 percent above center point): 4.4 (End-Jul), 4.4 (End-Sep), 4.3 (End-Dec), 4.1 (End-Mar).
    - Upper inner band limit (1.5 percent above center point): 2.9 (End-Jul), 2.9 (End-Sep), 2.8 (End-Dec), 2.6 (End-Mar).
    - End-of-period inflation center point (percent): 1.4 (End-Jul), 1.4 (End-Sep), 1.3 (End-Dec), 1.1 (End-Mar).
    - Lower inner band limit (1.5 percent below center point): -0.1 (End-Jul), -0.1 (End-Sep), -0.2 (End-Dec), -0.4 (End-Mar).
    - Lower outer band limit (3 percent below center point): -1.6 (End-Jul), -1.6 (End-Sep), -1.7 (End-Dec), -1.9 (End-Mar).
  - Ceiling on debt stock of the central government (Quantitative Indicative Targets, in billions of colones): 26,625 (End-Jul), 26,833 (End-Sep), 27,100 (End-Dec), 28,747 (End-Mar).
  - Memorandum items (selected):
    - External program financing (in millions of U.S. dollars): 540 (2021), 1,390 (2021), 2,511 (2021), 0 (2022).
    - External project financing (in millions of U.S. dollars): 577, 397, 49.
    - External commercial loans (in millions of U.S. dollars): 0, 0, 0, 1,000.
    - Domestic FX-denominated debt issuance (in millions of U.S. dollars): 88, 88, 88, 88, 80.
    - Amortization of official external debt by the central government (in millions of U.S. dollars): 557, 410, 320.
    - Interest payments of official external debt by the central government (in millions of U.S. dollars): 273, 416, 537, 190.
    - Domestic FX-denominated debt service (in millions of U.S. dollars): 684, 793, 1,797, 480.

- Structural benchmarks (selected, from Table 2):
  - Efficiency of government spending:
    - Legislative Assembly to approve Public Employment Bill. Target date: End-May 2021.
  - Revenue mobilization:
    - Tax Commissioner to approve a new Tax Compliance Improvement Plan, in line with IMF staff recommendations. Target date: End-December 2021.
  - Fiscal governance and transparency:
    - Publication of financial statement under IFRS standards for fiscal year 2020 for three SOEs (ICE, AyA, CNP). Target date: End-December 2021.
    - Cabinet to approve and publish a Medium-Term Fiscal Framework for the entire Non-Financial Public Sector for 2023-2026. Target date: End-April 2022.
    - Cabinet to approve and publish a Medium-Term Debt Strategy (MTDS) for 2023-2026. Target date: End-April 2022.
  - Social safety nets:
    - MOF’s National Treasury to centralize and digitalize the payment system for all the cash transfer social assistance programs, in coordination with social assistance units. Target date: End-December 2021.
  - Monetary and financial sector reforms:
    - The BCCR to submit to the Ministry of Finance draft amendments to the BCCR Law, prepared in consultation with IMF staff, to strengthen the central bank’s operational autonomy and governance framework. Target date: End-August 2021.
  - Macro-structural reforms:
    - Authorities to develop a roadmap to enhance infrastructure resilience to climate change, including cost assessment and financing options. Target date: End-September 2022.

*Source: 1criea2021001 - 33.       We are implementing a comprehensive package of measures to protect the most*

### 1.      This Technical Memorandum of Understanding (TMU) sets out  a framework for monitoring

### 1criea2021001 - Technical Memorandum of Understanding (TMU) framework for monitoring Costa Rica under the EFF-supported program

### Overview
- The TMU sets out a framework for monitoring the performance of Costa Rica under the program supported by the Extended Arrangement under the Extended Fund Facility (EFF). It specifies the performance criteria and indicative targets (including adjustors) to be assessed through semiannual reviews and also specifies monitoring procedures and reporting requirements.

### I. Performance criteria (quantitative and continuous)
- Quantitative performance criteria and indicative targets specified in Table 1 attached to the MEFP include:
  - a) a quantitative performance criterion on central government primary balance (floor);
  - b) a quantitative performance criterion on net official international reserves (floor);
  - c) a continuous quantitative performance criterion on new external payment arrears by the nonfinancial public sector and the BCCR (ceiling);
  - d) a monetary policy consultation clause;
  - e) an indicative target on debt stock of the central government (ceiling).
- In addition, arrangement includes performance criteria standard to all Fund arrangements (monitored continuously):
  - a) no imposition or intensification of restrictions on the making of payments and transfers for current international transactions;
  - b) no imposition or intensification of import restrictions for balance of payments reasons;
  - c) no introduction or modification of multiple currency practices;
  - d) no conclusion of bilateral payments agreements that are inconsistent with Article VIII of the IMF Articles of Agreement.

### Program exchange rates and valuation conventions
- For program monitoring, all foreign currency-related assets, liabilities, and flows will be evaluated at “program exchange rates” (those that prevailed on December 31, 2020), except fiscal operation items measured at current exchange rates.
- Monetary gold will be valued at US$ 1,891.10 per troy ounce (price prevailing on December 31, 2020).
- Table 1. Program Exchange Rates (December 31, 2020):
  - Colones to the U.S. dollar 613.915
  - U.S. dollar to the SDR 1.45
  - U.S. dollar to the Yen 0.0096
  - U.S. dollar to the Euro 1.23
  - U.S. dollar to the Canadian dollar 0.78
  - U.S. dollar to the Chinese RMB 0.15
  - U.S. dollar to the British Pound 1.37
  - Gold price per troy ounce (U.S. Dollar) 1,891.10

### Definition and scope of "central government"
- The central government figures comprise all branches of the government (executive, legislative, and judiciary), including:
  - the Comptroller’s Office and the Ombudsman's Office;
  - the Supreme Electoral Court;
  - the budget lines “Servicio de la Deuda Pública”, “Regímenes de Pensiones con cargo al Presupuesto de la República” and “Obras Específicas”;
  - public entities required to be consolidated under central government from 2021 by Law 9524.
- Excluded from central government: the Central Bank of Costa Rica (BCCR), the state-owned enterprises and other public sector agencies.
- Debt defined per paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board Decision No. 15688-(14/107), adopted December 5, 2014).
- Entities required to be consolidated under CG by Law 9524 (listed verbatim):
  1. Agencia de Protección de Datos de los Habitantes (PRODHAB)
  2. Casa de Cultura de Puntarenas
  3. Centro Costarricense de Producción Cinematográfica
  4. Centro Cultural e Histórico José Figueres Ferrer
  5. Centro Nacional de la Música
  6. Comisión Nacional para la Gestión de la Biodiversidad (CONAGEBIO)
  7. Comisión Nacional de Prevención de Riesgos y Atención de Emergencias (CNE)
  8. Comisión Nacional de Vacunación y Epidemiología
  9. Comisión de Ordenamiento y Manejo de la Cuenca Alta del Río Reventazón (CONCURE)
  10. Consejo Nacional de Clubes 4-S
  11. Consejo Nacional de Concesiones (CNC)
  12. Consejo Nacional de la Persona Adulta Mayor (CONAPAM)
  13. Consejo Nacional de la Política Pública de la Persona Joven (CPJ)
  14. Consejo Nacional de Vialidad (CONAVI)
  15. Consejo de Salud Ocupacional (CSO)
  16. Consejo de Seguridad Vial (COSEVI)
  17. Consejo Nacional de Investigación en Salud (CONIS)
  18. Consejo Nacional de Personas con Discapacidad (CONAPDIS)
  19. Consejo Superior de Educación (CSE)
  20. Consejo Técnico de Asistencia Médico Social (CTAMS)
  21. Consejo Técnico de Aviación Civil (CTAC)
  22. Consejo de Transporte Público (CTP)
  23. Dirección Nacional de Centros de Educación y Nutrición y de Centros Infantiles de Atención Integral (Dirección de CEN-CINAI)
  24. Dirección Nacional de Notariado
  25. Fondo de Desarrollo Social y Asignaciones Familiares (FODESAF)
  26. Fondo Nacional de Becas (FONABE)
  27. Fondo Nacional de Financiamiento Forestal (FONAFIFO)
  28. Instituto sobre Alcoholismo y Farmacodependencia (IAFA)
  29. Instituto Costarricense sobre Drogas (ICD)
  30. Instituto Costarricense de Investigación y Enseñanza en Nutrición y Salud (INCIENSA)
  31. Instituto Nacional de Innovación y Transferencia en Tecnología Agropecuaria (INTA)
  32. Instituto de Desarrollo Profesional Uladislao Gámez Solano
  33. Junta Administrativa del Archivo Nacional (JAAN)
  34. Junta Administrativa de la Dirección General de Migración y Extranjería
  35. Junta Administrativa de la Imprenta Nacional (JAIN)
  36. Junta Administrativa del Registro Nacional
  37. Laboratorio Costarricense de Metrología (LACOMET)
  38. Museo de Arte Costarricense
  39. Museo de Arte y Diseño Contemporáneo (MADC)
  40. Museo Histórico Cultural Juan Santamaría
  41. Museo Nacional de Costa Rica (MNCR)
  42. Museo Dr. Rafael Ángel Calderón Guardia
  43. Oficina de Cooperación Internacional de la Salud (OCIS)
  44. Patronato de Construcciones, Instalaciones y Adquisiciones de Bienes
  45. Servicio Fitosanitario del Estado
  46. Servicio Nacional de Salud Animal (SENASA)
  47. Sistema Nacional de Áreas de Conservación (SINAC)
  48. Sistema Nacional de Educación Musical (SINEM)
  49. Teatro Nacional (TNCR)
  50. Teatro Popular Melico Salazar (TPMS)
  51. Tribunal Registral Administrativo (TRA)
- Data from Unidad Ejecutora del Proyecto (UEP) included in historical series in the 2019 program document; from 2020 onwards UEP data included in the budgetary central government.

### I.A. Performance criterion on central government cash primary balance
- Definitions:
  - Overall balance of Central Government = budgetary revenue − total expenditure.
  - Cash primary balance = overall balance excluding net interest payment.
  - Revenue data: registered on a cash basis.
  - Expenses: accruals except interest recorded when disbursements are made.
  - Capital expenditure: accrued amounts recorded under investment projects (modified cash approach).
  - Proceeds from privatization or commercialization of public assets to residents or non-residents will not be recorded as part of central government revenues.
  - Consolidation of entities in paragraph 5 considers funds granted as both current and capital transfers; consolidation done entity by entity and never aggregated.
  - Financing (below the line) data are not currently used for calculation of primary or overall balance.
  - Figures until 2018 do not comprise the entities included in paragraph 5.
- Adjustor for 2021:
  - The floor on central government cash primary balance will be adjusted downward by the full amount of any increase in COVID-19 emergency spending compared to budgeted amounts (e.g., transfers to health system, targeted support to families, workers, and firms, social assistance programs).
  - Such additional expenditure should be clearly identified and reflected in an appropriate document (e.g., supplementary budget, government resolution, a circular of the ministry of finance).
  - The adjustor is capped at CRC 112 billion.

### I.B. Performance criterion on Net Official International Reserves (NIR)
- Program NIR measurement:
  - Program NIR = U.S. dollar value of (a) gross international reserves of the BCCR minus (b) gross reserve-related liabilities of the BCCR.
  - (a) Gross international reserves include: monetary gold; foreign exchange balances (foreign currency cash, deposits with foreign correspondents, and holding of foreign securities); the reserve position at the IMF and SDR holdings.
  - Exclusions from gross foreign reserve assets: participation in international financial institutions; holdings of nonconvertible currencies; holdings of precious metals other than monetary gold; claims on residents; pledged, non-liquid, collateralized or otherwise encumbered foreign assets; claims in foreign exchange arising from derivative transactions.
  - (b) Gross reserve-related liabilities include: all short-term liabilities to nonresidents denominated in convertible foreign currencies with an original maturity of one year or less; all short-term liabilities to residents denominated in convertible foreign currencies; the stock of IMF credit outstanding; the nominal value of all short-term derivative positions implying a sale of foreign currency or other reserve assets.
  - Excluded from liabilities: foreign exchange liabilities to the general government or related to deposit guarantees.
- Baseline and target conventions:
  - At end-2020, the Program NIR, evaluated at market exchange rates, stood at US$3,712 million.
  - Targets for Program NIR are set for cumulative flows from the end of the previous year. To calculate cumulative flows, Program NIR at the test dates and the end of the previous year are evaluated at the program exchange rates and gold price specified in paragraph 4.
- Adjustment clauses for Program NIR:
  - If any of the following (i)–(v) are higher/lower in U.S. dollar terms than assumed under the program, the floor on Program NIR will be adjusted upward/downward by the cumulative differences on the test date:
    - (i) foreign program financing by the central government and the BCCR net of debt service;
    - (ii) external commercial loans (including international sovereign bonds and syndicated loans) by the central government net of debt service;
    - (iii) project loans and grants disbursed to the central government net of debt service;
    - (iv) foreign exchange-denominated domestic debt issued by the central government net of debt service;
    - (v) proceeds from commercialization of public assets to non-residents (cash receipts from sale or lease of publicly held assets, including publicly held land, public holdings of infrastructure or commercial real estate, and public or quasi-public enterprises).
  - These adjustors apply to the NIR floor for end-July 2021 and thereafter.
  - If the sum of amortization of official external debt and interest payments on official external debt by the central government or the BCCR in U.S. dollar terms is higher/lower than assumed under the program, the floor on Program NIR will be adjusted downward/upward by the cumulative differences on the test date.
  - Official external debt refers to external debt owed to multilateral and official bilateral creditors, as defined in the 2013 External Debt Statistics: Guide for Compilers and Users.
  - These adjustors will apply to the NIR floor for end-July 2021 and thereafter.

### II. Continuous performance criterion on new external payment arrears
- A continuous performance criterion applies to the non-accumulation of new external payments arrears on external debt contracted or guaranteed by the nonfinancial public sector and the BCCR.
- Definitions and scope:
  - Nonfinancial public sector defined per the 1986 Government Finance Statistics Manual and the 2008 System of National Accounts; includes central government and nonfinancial public enterprises (boards, enterprises and agencies in which the government holds a controlling stake).
  - External payments arrears = debt-service obligations (principal and interest) to nonresidents falling due after the date of Board approval of the arrangement that have not been paid when due, as specified in contractual agreements, subject to any applicable grace period.
  - Overdue debt and debt service obligations in dispute with respect to amount and/or validity are not considered external payments arrears for program monitoring.
  - Excludes arrears on external financial obligations of the government subject to rescheduling.
  - Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

### III. Monetary policy consultation clause
- Inflation target bands around the projected 12-month rate of inflation in consumer prices, as measured by headline CPI published by INEC, are specified in Table 1 attached to the MEFP.
- Measurement of year-on-year inflation for each test date:
  - {CPI*(t) – CPI*(t-12)} / CPI*(t-12)
  - where:
    - t = the month within which the test date is included
    - CPI(t) = CPI index (all items) for month t
    - CPI(t-k) = CPI index (all items) as of k months before t
    - CPI*(t) = { CPI(t-2) + CPI(t-1) + CPI(t) } / 3
    - CPI*(t-12) = { CPI(t-14) + CPI(t-13) + CPI(t-12) } / 3
- Consultation triggers:
  - If observed year-on-year inflation falls outside the outer band limits of +/- 3 percentage points around the interim targets (as specified in Table 1 attached to the MEFP) for the relevant semi-annual test dates, the authorities will complete a consultation with the IMF Executive Board, focusing on:
    - (i) the stance of monetary policy and whether the Fund-supported program remains on track;
    - (ii) reasons for deviations from the specified band, taking into account compensating factors; and
    - (iii) proposed remedial actions, as deemed necessary.
  - When such Board consultation is triggered, access to Fund resources would be interrupted until the consultation takes place and the relevant program review is completed.
  - If observed year-on-year inflation falls outside the inner band limits of +/- 1.5 percentage points around the interim targets for the relevant semi-annual test dates, the authorities will conduct a consultation with IMF staff on reasons for the deviation and the proposed policy response.

### IV. Indicative target on debt stock of the central government
- Debt definition (per Guidelines on Public Debt Conditionality, Decision No. 15688-(14/107)):
  - Debt = a current, i.e., not contingent, liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, requiring the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) to discharge principal and/or interest.
  - Primary forms include loans, debt securities, bonds, commercial loans, buyers’ credits and off-budget project loans.
- Conversion conventions:
  - All foreign currency denominated debt will be converted into colones using the program exchange rates set out in Table 1.
  - All domestic debt denominated in inflation indexed units (TUDES) will be converted into colones using the program rate set out in Table 1.
- Adjustor for 2021:
  - The ceiling on debt stock of the central government will be adjusted upward by the full amount of any increase in COVID-19 emergency spending compared to budgeted amounts (e.g., transfers to health system, targeted support to families, workers, and firms, social assistance programs).
  - Such additional expenditure should be clearly identified and reflected in an appropriate document (e.g., supplementary budget, government resolution, a circular of the ministry of finance).
  - The adjustor is capped at CRC 112 billion.

### V. Data reporting requirements and timelines
- Costa Rica shall provide the Fund, through reports at intervals or dates requested by the Fund, with such information as the Fund requests in connection with progress in achieving objectives and policies set forth in the MEFP and Letters of Intent.
- Program monitoring data providers: Ministry of Finance, IMAS, FODESAF, and the BCCR.
- Data formats for monitoring:
  - Fiscal performance: format shown in Tables 2, 3, and 4.
  - External sector performance: format shown in Tables 5 and 6.
  - Treasury guarantees performance against indicative target: format shown in Table 7.
- Timelines for fiscal targets (Tables 2, 3, and 4):
  - Data on the cash primary balance of central government will be provided on a monthly basis, no later than three weeks after the end of the month to which the cash balance is calculated.
  - Data relating total stock of debt of the central government will be provided on a monthly basis, no later than three weeks after the end of the month, with breakdowns listed in Table 4.

*Source: 1criea2021001 - Technical Memorandum of Understanding (TMU) for Costa Rica (excerpt).*

### 18.      Data relating to the external targets (Table 5) and monetary consultation band will be

### 18.      Data relating to the external targets (Table 5) and monetary consultation band will be

### Data reporting timelines for program monitoring
- Data relating to the external targets (Table 5) and monetary consultation band will be furnished within no more than three weeks after the end of each month.
- Data on official reserve assets (Table 6) will be furnished within one week after the end of each week.
- Data regarding the level of social safety net spending (program spending only, not including wage and salaries and administrative costs of relevant agencies; see Table 7) will be provided on a quarterly basis, no later than four weeks after the end of the quarter.

### Tables and coverage (as structured in the informational annex)
- Table 2. Costa Rica: Central Government Operations (1/ As agreed for the purpose of monitoring the program) — (In billions of colones). Components listed include: Total Revenue; Current Revenue; Income Tax; Tax on Income and Profits; Income and to natural and legal pers; Income and to Individuals; Revenue and Profit Corporations; Dividends and interest s / Securities; Remittances Abroad; Banks and non-domiciled Financ; Property Tax; Owned vehicles; Supportive Housing Imp; Import Tax; Tariff; 1% Customs Value; Export Tax; Exported Banana Case; Der.de Exp.ad / valorem; Sales Tax (Internal, Customs); Consumption Tax (Internal, Customs); Undistributed Customs; Indirect Tax; Single tax fuels; Tax soft drinks; Tax soap; Alcohol tax; Transfer used vehicles; Transfer property; Fiscal Stamp; Exit fees Homeland; Consular Rights; Tax Law on Migration and Aliens; Tax on Tobacco; Other tax revenue; Social Security Contributions; Non Tax; Current transfers; Capital Income; Recovery of Loans; Capital Transfers; Donation; Admin.Finan Act. (Cash only).
- Table 3. Costa Rica: Central Government Financing (1/ As agreed for the purpose of monitoring the program) — (In billions of colones). Items include: Financing; Net Domestic Financing; Net BCCR Financing; BCCR Renegotiated debt; Deposits BCCR (Initial Balance, Final Balance); BCCR Net loans; Banking System Financing (Loans, Amortization, Deposits, Var. Securities, Cash and Banks, Net Loans); Central Government Financing (Amortization of government, Change in Government Securities with Initial and Final Balance); Other domestic financing (Credit providers, Disbursements, Amoritizations, Var. Dep in other entities with Initial and Final Balance, Other financ. internal, Exchange Losses, Net loans); Net Foreign Financing (Disbursements, Amortization, Var. Dep abroad with Initial and Final Balance).
- Table 4. Costa Rica: Central Government Debt (1/ As agreed for the purpose of monitoring the program) — (In billions of colones). Items include: Debt stock (Domestic — Bonds: Tasa basica; Zero coupon colones; Zero coupon dolares; Fixed coupon colones; Fixed coupon dolares; Floating coupon colones; Floating coupon dolares; Inflation-linked bond (TUDES); Other liabilities; External — Bilateral; Bonds; Multilateral); Unidentified financing; Domestic debt stock by maturities (o.w.: OD domestic debt by maturities); External debt stock by maturities (o.w.: OD external debt by maturities); Total borrowing requirement (Financial deficit of CG; CG debt amortization — Domestic (o.w.: OD domestic debt amortization); External (o.w.: OD external debt amortization — Bilateral, Bonds, Multilateral)); Source of funds (Domestic placement or disbursement; External placement or disbursement — Bilateral, Bonds, Multilateral); Use of government deposits.
- Table 5. Costa Rica: Foreign Exchange Cashflows of the Central Bank and the Government (1/ As agreed for the purpose of monitoring the program) — (In millions of U.S. dollars). Sections include:
  - 1. Total Inflows: Official sector disbursement; Program loans; IMF; World Bank; IDB; CABEI; ADF; CAF; Project loans and grants (of which World Bank; IDB; CABEI; bilateral: KFW/JICA/China Eximbank); Commercial loans; Syndicated loans; Sovereign bond, incl Eurobonds; Domestic FX debt issuance; Other inflows; BCCR Interest receipts and other net items; Change in balances in public accounts (o/w proceeds from public asset sale).
  - 2. Total outflows: External debt service; Amortization (excl. to IMF), of which: Official loans (of which World Bank; IDB; CABEI; CAF; Bilaterals: AFD/KFW/JICA/Eximbank); Commercial loans; Syndicated loans; Sovereign bonds; Interest payment (incl. to IMF); Domestic FX debt service (Residents; Non-residents); Net capital transfers and miscellaneous.
  - 3. Net FX intervention, of which: Net intervention for volatility management; Programmed reserve accumulation; Net FX purchases for rest of public sector.
  - 4. Other net flows: Net Central Government<-->BCCR transactions; Change in short-term liabilities with non-residents; Change in liabilities w/ residents; Net International Reserves (at market exchange rates) (2/); Net International Reserves (at program exchange rates) (2/); Gross International Reserves (at market exchange rates).
  - Footnotes: 1/ As agreed for the purpose of monitoring the program. 2/ As defined in ¶ 8.
- Table 6. Costa Rica: Gross Official Reserve Position (1/ As agreed for the purpose of monitoring the program) — (In millions of U.S. dollars).
- Table 7. Costa Rica: Priority social spending (1/ As agreed for the purpose of monitoring the program) — (In billions of Colons). Components include: Government Foreign Assets (FA) (Without DA); Net International Reserves (5) - (9); Gross Official Reserves (3) + (4); Reserves managed by BCCR; Central Bank Liabilities; Domestic Assets (DA); Reserve Position at IMF & SDR holdings; Total (1)+(2); Foreign Reserve Asset Balances; Short-term Liabilities with Residents; Short-term Liabilities with Non-Residents; Drawings from the IMF; Total (6)+(7)+(8); FODESAF; Central Govt transfers; Other sources of financing; Total public sector spending; Number of beneficiaries.
  - Priority social spending program components listed: 1. Non-contributory pensions and healthcare (1.1. Non contributory pensiones regime (RNC)); 2. Targeted social assistance programs (2.1. Conditional cash transfer Crecemos; 2.2. Conditional cash transfer Avancemos; 2.3. Poverty reduction and income support — 2.3.1. Basic needs (Atención a Familias); 2.3.2. Family allowance (Asignación Familiar); 2.3.3. Emergencies; 2.3.4. Fishing subsidies (Veda)); 2.4. Childcare (2.4.1. Childcare transfer; 2.4.2. Childcare transfer CIDAI; 2.4.3. Childcare services (API intramuros)); 2.5. School programs (2.5.1. School lunch program; 2.5.2. School transportation; 2.5.3 Social scholarship program); 2.6. Housing subsidies (2.6.1. Housing improvement; 2.6.2. Housing grants); 2.7. Food security and nutrition programs (2.7.1. Prestación alimentaria); 2.8. Active labor market programs (2.8.1. Employment National Program (PRONAE); 2.8.2. Small enterprises' support program (PRONAMYPE); 2.8.3. Productive ideas; 2.8.4. Training aid); 2.9. Other targeted programs (2.9.1. Subsidies for elderly persons; 2.9.2. Subsidies for persons with disabilities; 2.9.3. Subsidies for violence female victims; 2.9.3. Subsidies for teenage mothers); 3. Capital transfers to social assistance programs (3.1. Community infrastructure and socio-productive projects); TOTAL.

### Institutional and program context (selected items present in the annex)
- Exchange rate arrangement: de jure classification “managed floating.” The central bank is committed to allowing the exchange rate to be freely determined by foreign currency supply and demand but reserves the right to participate in the market to meet its own foreign currency requirements and those of the nonbank public sector and, at its discretion, to prevent sharp fluctuations in the exchange rate. The de facto exchange rate is classified as “crawl-like,” as of February 2019.
- Article IV Consultation: The last Article IV consultation was concluded on March 27, 2019 (Country Report No. 19/101).
- FSAP/FSSR and ROSCs: FSAP took place in 2001 and was updated in 2008. A Financial Sector Stability Review (FSSR) mission was conducted in 2017. A data ROSC took place in 2002 with a reassessment in 2010. A fiscal ROSC took place in 2007, with a reassessment in 2013.
- Safeguards Assessment: An update safeguards assessment of the BCCR was finalized in October.

*Source: STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION AND REQUEST FOR AN EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY—INFORMATIONAL ANNEX (February 12, 2021).*

### 2020. Since the last assessment in 2009, the BCCR has enhanced safeguards in its external audit

### 1criea2021001 - 2020. Since the last assessment in 2009, the BCCR has enhanced safeguards in its external audit

### Safeguards, legal framework, and governance
- Since the last assessment in 2009, the BCCR has enhanced safeguards in its external audit mechanism and financial reporting.
- The BCCR Law was last amended in 2019 to improve personal autonomy provisions but:
  - Requires further amendments to safeguard the central bank's institutional, functional, and financial autonomy.
- Governance and decision-making issues identified:
  - Need to strengthen the decision-making structure of the BCCR.
  - A current vacancy on the BCCR Board should be filled.
  - Need to clearly distinguish between executive and oversight functions.
  - Need to safeguard the independence of internal audit.
- Financial position and recommended actions:
  - The BCCR has significant negative equity.
  - The central bank should develop a recapitalization roadmap over the medium to long term.
- Monitoring:
  - Staff will continue monitoring the implementation of these recommendations per the safeguards policy for as long as Fund credit remains outstanding.

### Technical Assistance (since Last Article IV Consultation)
- Departments and time of delivery with purpose (selected entries as presented):
  - STA, CAP TAC-DR — June 2019: Government Finance Statistics (GFS): Compilation of central government high frequency data
  - STA, CAP TAC-DR — September 2020: GFS: Compilation of high frequency central government GFS and PSDS data, including from entities required to be consolidated under central government starting in 2021
  - STA, CAP TAC-DR — October 2020: GFS: Reconciliation of high frequency central government GFS and PSDS data, including from entities required to be consolidated under central government starting in 2021
  - STA — July 2019; November 2019; December 2019; March 2020; August 2020; January 2021: Real Sector Statistics (RSS) activities including Quarterly SUT, Monthly service survey, Annual Sectoral accounts flows and stocks, 2008 SNA implementation, Sectoral accounts: Captive Financial Corporations, Review of new national accounts series (2017=100)
  - MCM, CAP TAC-DR — April/May 2019; December 2019; June 2020; July/August 2020; October 2020; February 2021: Banking supervision (SBF) and related items including credit risk regulation management & provisioning, liquidity stress test, supervisory liquidity stress, credit risk regulation follow-up, FSSR follow-up: Solvency II and IFRS17, FX market framework development
  - FAD, CAP TAC-DR — March 2019; June 2019; June, October 2019; June 2019; October 2020: Customs Administration (AAA) and related items including improving risk analysis, Risk Management Strategy, Process Management, Integral Cargo Control Plan, Improve import and export process
  - FAD, CAP TAC-DR — April 2019; May, November 2019; June 2019; August 2019; January 2020; June 2020; July, October 2020; September 2020: Tax administration (ATT) and other PFM items including Strengthen the Taxpayers Registry, Strengthen Risk Management, Tax Administration Diagnostic Assessment Tool, Improve management of declarations, Improve tax filling compliance, Strengthen Strategic Planning, Strengthen identification/assessment/ranking/quantification of compliance risks, Improve Tax Compliance Plan
  - Additional PFM topics: Treasury; Fiscal Risks and Fiscal Risks – Specific Risks; Treasury - Debt treasury coordination; Accounting - IPSAS & Consolidation; Medium-term fiscal framework

### Statistical issues and data quality (As of January 2021)
- General:
  - Data provision is broadly adequate for surveillance.
  - Quality of macroeconomic data has continued to improve; further improvements pursued in real, monetary, fiscal and balance of payments sectors.
  - Central Bank, Ministry of Finance, and National Institute of Statistics and Census publish regular official data.
- National accounts:
  - Compiled generally in accordance with the System of National Accounts 2008 (2008 SNA).
  - Central Bank disseminated annual national accounts data for the years 1991-2019 and quarterly estimates up to 2020 Q3.
  - Quarterly estimates are released with around a 90-day lag and TA is assisting authorities to reduce the lag to 60 days.
  - Benchmark year revised to 2017 (from 2012) for the chained volume measures in late 2020; national account data reflecting this revision were published in January 2021.
  - Estimation of real estate activities including owner-occupied housing has been improved.
  - Deflation methods improved to obtain annual value added in constant prices.
  - Changes in inventories largely obtained following 2008 SNA recommendations; TA recently recommended improvements to estimates for cattle and poultry.
  - Informal activity of households as producers of goods and services is included in GDP levels (but not separately estimated).
- Price statistics:
  - CPI compilation generally follows CPI Manual concepts and definitions; structure, scope, and coverage updated in March 2017.
  - Index reference period is June 2015.
  - CPI weights are based on the 2012/2013 Income and Expenditure Survey and are now out of date.
  - CPI covers resident urban households comprising approximately 73 percent of the total population and 82 percent of the total consumption expenditures of Costa Rica.
  - A new Income and Expenditure Survey was collected during 2018.
  - PPI generally follows PPI Manual concepts and is calculated by product and economic activity (manufacturing and selected services). Base year of the PPI for domestic manufacturing and for services (transportation, accommodation and food services, and professional services) is 2012.
- Government Finance Statistics:
  - Concepts and definitions generally follow GFSM 1986.
  - Financing data and government debt use national concepts that combine instruments and holders, not in accordance with international standards.
  - Monthly fiscal statistics are compiled and disseminated only for budgetary central government (these data are not reported to STA).
  - Annual statistics are compiled and disseminated for the entire public sector and its subsectors.
  - Annual data for the GFS Yearbook are reported regularly, most recently for 2019.
  - Recent incorporation of 51 public entities as part of the budgetary central government as required by Law 9524 starting in 2021 was supported by CAPTAC-DR’s TA to reconcile fiscal and debt data.
  - Data in the IMF staff report are adjusted back to 2019 for comparability.
  - On PSDS, the market of issuance (Costa Rica or abroad) criterion is followed to classify domestic and foreign debt, instead of the internationally recommended holder residency criterion.
  - Fiscal data discrepancies among national compilers on specific items are not regularly reconciled, though large fluctuations or discrepancies are investigated.
  - Fiscal statistics are not regularly reconciled with monetary statistics or other macroeconomic statistics.
- Monetary and financial statistics:
  - BCCR reports the Standardized Report Forms (SRFs) for the central bank, depository corporations, other financial corporations, and monetary aggregates for publication in IMF's International Financial Statistics (IFS) monthly with a lag of one month.
  - Reported monetary statistics broadly follow the Monetary and Financial Statistics Manual (MFSM).
  - BCCR has recently expanded coverage to include money-market investment funds (MMF) in the 2SR, non-MMF investment funds, pension funds, and insurance companies in the 4SR.
  - BCCR reports some key series and indicators of the Financial Access Survey (FAS), including commercial bank branches per 100,000 adults and ATMs per 100,000 adults.
- Financial sector surveillance:
  - Costa Rica reports all core financial soundness indicators (FSIs) and one of the 13 encouraged FSIs for deposit takers monthly for posting on IMF’s FSI website with less than one quarter lag.
  - Authorities recently started reporting seven additional encouraged FSIs for deposit takers.
- External sector statistics:
  - BCCR compiles and disseminates quarterly balance of payments and international investment position (IIP) statistics on a BPM6 basis.
  - Source data generally adequate; work ongoing to improve coverage of financial transactions of the nonfinancial private sector (e.g., trade credit and advances), and remuneration of employees.
  - BCCR compiles and disseminates monthly Data Template on International Reserves and Foreign Currency Liquidity, reports semi-annual data to CPIS and annual inward and outward CDIS, and submits quarterly external debt statistics to QEDS.
- Data Standards and Quality:
  - Costa Rica is in observance with the Special Data Dissemination Standards (SDDS).
  - Data Module Report on the Observance of Standards and Codes (ROSC) was published in February 2010.

### Table of Common Indicators Required for Surveillance (As of January 31, 2021) — selected entries
- Exchange Rates: Date of latest observation 1/28/2021; Date received 1/29/2021; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation Dec 20; Date received Jan 21; Frequency M; Frequency of Reporting M; Frequency of Publication M
- Reserve/Base Money: Dec 20; Jan 21; M M M
- Broad Money: Dec 20; Jan 21; M M M
- Central Bank Balance Sheet: Dec 20; Jan 21; M M M
- Consolidated Balance Sheet of the Banking System: Dec 20; Jan 21; M M M
- Interest Rates: Dec 20; Jan 21; M M M
- Consumer Price Index: Dec 20; Jan 21; M M M
- Revenue, Expenditure, Balance, and Composition of Financing – Central Government: Dec 20; Jan 21; M M M
- Stocks of Central Government and Central Government-Guaranteed Debt: Dec 20; Jan 21; M M M (Note: Data for 2020 and earlier years do not cover the public entities required to be consolidated under central government by Law 9524 starting in 2021)
- External Current Account Balance: 2020 Q3; Jan 21; Q Q Q
- Exports and Imports of Goods and Services: 2020 Q3; Jan 21; Q Q Q
- GDP/GNP: 2020 Q3; Jan 21; Q Q Q
- Gross External Debt: 2020 Q3; Jan 21; Q Q Q
- International Investment Position: 2020 Q3; Jan 21; Q Q Q

### Background, pandemic impact, and financing
- IMF financing and authorities' request:
  - Authorities requested a three-year Extended Fund Facility (EFF) for SDR 1,237.49 million (335 percent of quota).
  - EFF will help fulfill part of the balance of payments gap and support budget needs from the exogenous COVID-19 shock and is expected to catalyze additional financial support.
  - EFF follows a disbursement of SDR 369.4 million (100 percent of quota) under the Rapid Financial Instrument (RFI), approved in April 2020.
  - The combined RFI and EFF resources mark a historical step; Costa Rica last drew Fund resources in 1991 under an SBA.
- Structural and macroeconomic context:
  - Costa Rica recognized for strong institutions and long-standing democracy; significant structural shift to a knowledge-intensive, service-oriented economy.
  - Since 2018, authorities adopted wide-ranging structural reforms aligned with OECD accession process; OECD invited Costa Rica to become its 38th member in May 2020.
  - December 2018 comprehensive fiscal reform included VAT base broadening, higher income taxes, and a fiscal rule limiting expenditure growth with provisions to cap public sector wages.
- Economic impact of COVID-19:
  - BCCR preliminary estimates: 2020 ended with a 4.5 percent drop in GDP, the deepest contraction since 1982.
  - Tourism accounts directly and indirectly for about 13 percent of GDP and employment and was severely affected.
  - Unemployment rate doubled to over 24 percent, disproportionately affecting women and the young.
  - Tax collections tumbled due to contraction of activity and targeted moratoria on income and VAT taxes.
  - Authorities increased health-related spending and introduced the Bono Proteger transfer program; they contained non-priority primary spending including current transfers to the public sector.
  - Monetary and financial authorities adopted measures to lower interest rates, improve credit conditions, and ensure adequate functioning of financial markets.
  - Health outcomes and vaccination:
    - Fatality rate at 1.37 percent, one of the lowest in Latin America.
    - Costa Rica was among the first in the region to begin vaccinations; over 100k doses administered so far and supplies secured for the entire adult population.

*IMF staff report content as provided in the source PDF.*

### 2.6 percent in 2021 and 3.6 percent in 2022. While subject to the unprecedented uncertainties

### 1criea2021001 - 2.6 percent in 2021 and 3.6 percent in 2022. While subject to the unprecedented uncertainties

### Outlook
- Growth projections: "2.6 percent in 2021 and 3.6 percent in 2022."
- Outlook drivers: anchored on better external conditions, reopening of economies globally, supportive credit conditions, and improvement in consumer and business confidence as vaccination continues.
- Uncertainty: outlook is "subject to the unprecedented uncertainties of the pandemic."

### Engagement with the Fund
- Initial Fund support: requested through the RFI; LOI for the RFI signed in April 2020.
- Subsequent request: formal request for an EFF program for budget support, to address balance of payments and government financing needs, support the economic recovery, and provide a policy anchor for macroeconomic stability.
- Dialogue timeline: public consultation between October and November 2020; formal negotiations with Fund staff mission started in January 2021.

### The EFF program: objectives and structure
- Program structured around three pillars; three key objectives listed in the authoritieś LOI:
  - (i) "gradually implementing equitable fiscal reforms to ensure debt sustainability while protecting the most vulnerable";
  - (ii) "maintaining monetary and financial stability while continuing to strengthen central bank autonomy and governance, and addressing structural financial vulnerabilities";
  - (iii) "on the structural front, advancing on key reforms to promote inclusive, green, and sustainable growth."
- Political and social engagement: broad public consultation and ongoing public dialogue with private sector, civil society organizations, and Congress.

### Fiscal program: targets and measures
- Anchor targets:
  - Primary balance of "1 percent of GDP by 2023."
  - Debt-to-GDP ratio of "50 percent by 2035."
- Fiscal rule: continued implementation of the fiscal rule and measures to contain expenditure beyond the mandate of the fiscal rule.
- Expenditure-side reform: a public employment bill to modernize and streamline public administration and contain the wage bill, aligned with OECD recommendations.
- Revenue-side measures include:
  - reduction of tax expenditures;
  - adjustment of capital income rates;
  - personal income tax reform;
  - special tax on lottery prizes;
  - overhaul of the tax on luxury homes;
  - mandated dividend distributions from state-owned enterprises.
- Additional fiscal gains envisaged from reforms to public procurement, modernization of the tax and customs administration, and public financial management reforms.
- Protection of capital expenditure and well-targeted social spending to address critical infrastructure needs and support the most vulnerable.

### Legislative process and engagement with Congress
- The Government has submitted to Congress all draft bills contained in the EFF policy commitments.
- Authorities are actively working with members of Congress to address questions and secure support to ensure adequate and timely progress.

### Monetary policy and financial stability
- Inflation targeting framework: target of "3 percent ± 1 percentage point" under a flexible exchange rate.
- Current stance: context of current and forecast inflation "well below target," negative output gap, and high unemployment; BCCR has cut its policy rate to a record low.
- Commitments: authorities "are committed to maintaining this counter-cyclical stance for as long as necessary to bring inflation gradually back to target as conditions allow."
- Exchange rate and prudential measures:
  - introduced greater exchange rate flexibility to absorb shocks and reduce financial dollarization;
  - reserve requirements differentiated by currency;
  - prudential regulation measures to discourage foreign-currency lending to unhedged borrowers.
- 2019 reforms: amendments to the BCCR Law to strengthen central bank autonomy by tightening dismissal rules for the BCCR’s Governor, delinking the Governoŕ s term from the political cycle, and removing the Minister of Finance’s voting rights in the BCCR Board.

### Structural reform agenda and climate change
- Structural reform roadmap: align public governance and policies with international best practices to foster transparency, efficiency, and growth while reducing inequality and protecting the most vulnerable; many reforms completed as part of OECD accession, remaining ones being implemented.
- EFF focus areas: reducing skill mismatches, promoting innovation, incentivizing formalization, closing infrastructure gaps, cutting red tape, and continuing to attract FDI.
- Climate commitments under the EFF:
  - measures to reduce greenhouse gas emissions, for instance by promoting the electrification of the transport fleet;
  - strengthen adapting capacity by assessing medium-term investment needs for enhancing resilience of the countrý s physical infrastructure.

### Fund capacity development
- Active engagement with Fund technical assistance on fiscal and national accounts statistics, financial regulation and supervision, customs efficiency, and revenue mobilization.
- Capacity building described as instrumental in EFF design and "will continue to be critical for success of the policy agenda under the program."

### Authorities' commitment and program expectations
- Authorities emphasize "strong commitment to the requested EFF" to support a smooth economic recovery, boost green and inclusive growth over the medium term, and provide a strong policy anchor for macroeconomic stability while protecting the poor.
- Confidence expressed that policies outlined in the LOI and detailed in the Memorandum of Economic and Financial Policies "will ensure an effective use of the requested disbursement."
- Authorities will "remain in close dialogue with the Fund" to ensure successful implementation of the program.

*Source: IMF staff report text from the provided content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1criea2021001.pdf_