## 1criea2022001

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### Executive summary — context, program, and review focus
- IMF Executive Board approved a 36-month EFF arrangement on March 1, 2021 with access of SDR 1.23749 billion (335 percent of quota, equivalent to US$1.778 billion).
- EFF arrangement ratified by the Legislative Assembly on July 19, 2021.
- Review focus:
  - advancing fiscal consolidation plans while strengthening fiscal institutions;
  - BCCR’s move towards a neutral stance given the stronger inflation outlook;
  - supervisory efforts to strengthen financial oversight;
  - mitigating disproportionate pandemic impacts and capitalizing on low-carbon transition opportunities.
- Authorities requested:
  - extension of the arrangement until July 31, 2024;
  - rephasing of access by shifting SDR 103.115 million from each of the first- and second-review purchases to a new sixth review.

*March 10, 2022*

### Recent developments — health, real economy, prices, external, and financial flows
- Health and vaccination:
  - As of end-February 2022: 74 percent fully vaccinated; 26 percent received a booster dose.
  - Authorities’ goal: fully vaccinate eligible population, including children, and apply booster vaccines to vulnerable groups by end-2022.
- Real economy and labor market:
  - Real GDP expanded by 12.1 percent (y-o-y) in Q3 (source text statement).
  - GDP growth: 7.5 percent in 2021 (compared to 2.6 percent forecast at EFF request); projected 3.6 percent in 2022 (see projections section).
  - Unemployment declined from a peak of 24 percent to 13.7 percent as of end-2021 (and 13.1 percent in January 2022 in later text).
  - Job creation in informal and lower-skilled sectors is lagging.
- Prices and external sector:
  - Headline inflation: 4.9 percent (y-o-y) in February; core inflation 3.8 percent (y-o-y).
  - Current account deficit expected around 3 percent of GDP in 2022; medium-term adjustment to around 2½ percent of GDP.
  - International reserves: US$6.8 billion at end-January (~95 percent of IMF ARA metric).
  - Exchange rate depreciated by 4.6 percent against the U.S. dollar in 2021 (4.5 percent in real effective terms).
- Financial conditions and flows:
  - Financial conditions loosened due to a decline in sovereign spreads.
  - FDI inflows picked up, including new green-field investments.
  - Portfolio outflows remain sizable largely due to domestic pension funds diversifying into offshore assets.

### Outlook and risks
- Growth and inflation projections (selected):
  - GDP growth: 7.5 percent in 2021; projected 3.6 percent in 2022.
  - Inflation: increase to 4.8 percent in 2022, expected to return within BCCR’s tolerance band within a one- to two-year horizon.
  - Current account: expected to adjust to around 2½ percent of GDP over the medium term.
- Downside risks:
  - New pandemic waves from aggressive variants; higher oil prices; tightening global financial conditions; geopolitical risks from Russia–Ukraine conflict.
- Upside possibilities:
  - Quick resolution of the pandemic and/or faster reform momentum could boost investment and job creation.

### Program performance — quantitative and structural benchmarks
- All end-July and end-December quantitative performance criteria were met by comfortable margins.
- Structural benchmarks:
  - Met: end-August 2021 SB on the central bank law; end-December SBs on centralization and digitalization of social assistance cash programs and on the new Tax Compliance Improvement Plan.
  - Not met: SB on the Public Employment Bill (not met by end-May 2021; approved by the Legislative Assembly in early March 2022).
  - Not met: end-December SB to publish the 2020 financial statements of three state-owned enterprises under IFRS due to reporting issues at two companies.

### Extension, rephasing, and financing
- Authorities requested extension to July 31, 2024 and rephasing of access (shift SDR 103.115 million from each of the first- and second-review purchases to a new sixth review).
- Program remains fully financed with firm financing commitments over the next 12 months and good prospects thereafter.
- Fund exposure projected to peak at 2.7 percent of GDP or 6.5 percent of exports in 2023.
- Program financing table (millions of U.S. dollars) (as presented):
  - Financing need: 2022: 2,288; 2023: 1,938; 2024: 1,224
  - Reserve accumulation: 2022: 1,690; 2023: 470; 2024: 870
  - Underlying BOP need1/: 2022: 598; 2023: 1,468; 2024: 354
  - Official multilateral financing: 2022: 2,288; 2023: 1,938; 2024: 1,224
  - IMF: 2022: 582589 297 (table formatting as presented)
  - World Bank: 2022: 426; 2023: 369; 2024: 335
  - IDB: 2022: 613350 353 (table formatting as presented)
  - CAF: 2022: 50; 2023: 500; 2024: 0
  - CABEI: 2022: 617; 2023: 130; 2024: 239
  - Unidentified financing: 0 0 0
  - Memorandum items:
    - Capital market access: 1,000 (each year 2022–2024 listed)
    - Gross international reserves: 8,611 9,081 9,951
    - In percent of the ARA metric: 106 107 111
- Note: table entries preserved as presented in source.

### Fiscal performance, outlook, and policy discussion
- Fiscal 2021 overperformance:
  - Primary deficit: 0.3 percent of projected GDP (compared to 1.7 percent at EFF request).
  - One-off revenues in 2021 estimated at 0.7 percent of GDP (collections from public entities; partial recovery from 2020Q2 tax moratorium; higher income tax payments in March 2021 due to 15-month fiscal year transition).
  - Yields from the 2018 tax reform estimated at 1.4 percent of GDP by 2021 (about 0.15 percent of GDP higher than previously anticipated).
  - COVID-related emergency spending: 0.3 percent of GDP.
  - Current spending breached fiscal rule ceiling by about 0.3 percent of GDP in 2021.
  - End-December debt target was comfortably met.
- Near-term fiscal targets and flexibility:
  - 2022 budget targets a primary balance of 0.7 percent of GDP.
  - 2023 primary balance target of 1 percent of GDP expected to be met.
  - Program allows up to 0.3 percent of GDP in 2022 additional health and related spending in response to the pandemic.
  - If revenues underperform, authorities will propose temporary tax measures and reprioritize non-critical spending; if recovery is stronger, over-performance will be saved to accelerate debt reduction.
- Revenue and expenditure measures under discussion (selected):
  - Implement scheduled VAT increases and phasing-in of sub-capitalization rules generating incremental yields of about 0.04 percent of GDP in 2022.
  - Possible measures: removing 14th month salary income tax exemption; harmonizing capital gains and income tax at 15 percent; increasing withholding tax rates on transfers to non-residents by 5 percentage points (remittances exempted); allowing SOE dividends to CG; reducing tax-exempt threshold for wage income from CRC 10 million to CRC 8.4 million; replacing solidarity property tax with luxury immovable property tax.
  - Compensatory social transfers to poorest deciles to complement revenue measures.
- Spending controls (selected):
  - Total spending expected to grow ~2 percent in 2022 (excluding emergency spending).
  - Reduction in primary expenditure as share of GDP estimated at 2 percentage points in 2022, net of additional allocations to social programs.
  - Rules include freeze in base salaries, annuities, new hiring; elimination of vacancies; annual nominal reduction of temporary wage components by 8.5 percent; freeze in pensions of public sector retirees; cut in non-pension private transfers; annual nominal reduction in goods and services by 11 percent.
- Public Employment Bill:
  - Approved by Legislative Assembly on March 7, 2022.
  - Introduces a single pay spine; entry into force 12 months after approval; implementation milestone proposed end-March 2023.
  - Estimated savings (IDB): 0.5 to 0.8 percent of GDP over five years for entire public sector (0.4 to 0.6 percent of GDP for CG).
- PFM and revenue administration reforms (with IMF TA):
  - MTFF for CG published April 2021 and updated September 2021; extend MTFF to NFPS by end-April 2022 (SB).
  - New Tax Compliance Improvement Plan implemented (end-December SB).
  - Hacienda Digital para el Bicentenario digital transformation plan underway with World Bank support.
  - Customs Law expected to be approved by end-March 2022.

### Debt outlook, DSA findings, and main risks
- Central government debt:
  - Expected to peak at 68½ percent of GDP in 2022 and decline to 63½ percent of GDP by 2027 under baseline.
  - Baseline improvement driven by higher nominal GDP and fiscal savings and additional structural measures of 3½ percent of GDP over 2022–27.
- Gross financing needs:
  - Will peak at 11¼ percent of GDP in 2023 before declining below 10 percent of GDP by 2027.
- Debt composition and vulnerabilities:
  - Public debt rose from 56½ percent of GDP at end-2019 to 68½ percent at end-2021.
  - Domestic debt: about 51½ percent of GDP (~three quarters of total public debt).
  - External public debt: about 8 percent of GDP (multilateral & bilateral) and Eurobonds 9 percent of GDP.
  - Foreign-currency denominated debt: about 40 percent of total.
  - Contingent liabilities: 2021: 5,664.3 million US$ (13.3 percent of GDP).
- Stress tests and main risk:
  - Heat map: moderate risk to debt sustainability; contingent liability and exchange rate shocks are significant.
  - A 30 percent real depreciation in 2022 could raise external debt-to-GDP to about 88 percent by 2024.
  - Combined shock could raise debt-to-GDP to 85 percent in 2023 and gross financing needs to around 13-14 percent of GDP.
  - Baseline assumes access to official financing and US$4.5 billion in Eurobond issuances over 2022–27.
- External debt projections (selected):
  - External debt (percent of GDP): 2021: 52.2; 2022: 58.0; 2023: 58.3; 2024: 59.0; 2027: 56.1.
  - Gross international reserves (millions US$): 2022: 6,921; 2023: 8,956; 2024: 8,611; 2027: 11,278.
- DSA caveats:
  - Baseline excludes yields from planned measures pending approval and from full implementation of Public Employment Bill and tax compliance plan.

### Monetary policy, FX, and financial sector policies
- Monetary policy stance:
  - Inflation target: 3 percent with tolerance band ±1 percentage point.
  - Policy rate: record low 0.75 percent in June 2020; BCCR raised rates in December 2021 and January 2022 to 1.75 percent and further increases including 50 b.p. in December 2021, 50 b.p. in January 2022, and 75 b.p. in March 2022 reported later in text.
  - BCCR’s approach: data-dependent and forward-looking; recommended to continue raising policy rate toward neutral stance and increase tightening pace if inflationary pressures persist.
- FX policy and reserves:
  - Flexible exchange rate; aim to maintain reserves aligned with ARA metric and net international reserves floor.
  - Program NIR definitions and program exchange rates fixed as of January 31, 2022 (Colones to USD 642.73; gold US$1,797.17 per troy ounce; USD to SDR 1.3917; USD to Euro 1.1235; others listed).
  - End-2021 exchange rate depreciation ~4.4–4.6 percent.
- Financial sector resilience and reforms:
  - Banking system entered pandemic with strong capital and liquidity buffers; countercyclical provisioning and other temporary measures phased out progressively.
  - Basel III phased implementation, NSFR to take effect from 2023.
  - Ongoing work: strengthen crisis management framework, enhance consolidated supervision, publish stress tests, implement deposit insurance and resolution framework (Law no. 9816 and implementing regulations in effect; payments into DGF started October 2021).
  - Measures to reduce dollarization: differentiated reserve requirements, additional capital requirements for FX mortgages to unhedged borrowers, planned redefinition of unhedged borrower by end-June 2022 (effective January 2023).
  - Financial inclusion and fintech agenda: Financial Innovation Center by end-June 2022; modernize credit registry with draft legislation by end-December 2022.

### Structural, social, and climate-related reforms
- Social assistance and PFM:
  - Centralized and digitalized payment system for cash transfer programs (National Treasury, December 2021 SB); expected full operationalization by end-April 2022 with payment processing time reduced from 3–5 days to 24 hours.
  - SINIRUBE targeting tools adopted by main institutions with World Bank support; remaining programs ~30 percent of social assistance expenditure to transition.
  - Gender budgeting roadmap developed with IMF TA; pilot to identify gender spending by end-December 2022; legal framework by end-December 2023.
- Public Employment Bill and wage bill:
  - Single pay spine with eight job families; entry into force 12 months after approval; implementation by March 2023 (SB proposed).
  - Estimated savings: 0.5–0.8 percent of GDP (first five years, public sector); 0.4–0.6 percent of GDP for CG (IDB estimates).
- SOEs and transparency:
  - Commitment to accelerate IFRS adoption by SOEs; ICE fully compliant for 2020, AyA nearly, CNP partially.
  - 2020 aggregate SOE report published February 2021; 2021 aggregate report published February 2022.
  - Procurement reforms: Public Procurement Law No. 9986 (May 2021); beneficial ownership implementing regulations to be published by November 2022; interim amendment published early-March 2022.
- Climate and green transition:
  - National Decarbonization Plan (2019) to achieve zero net emissions by 2050; pledge to cap 2030 net absolute emissions to 9.11 million tons CO2e and a 2021–2030 net emissions budget of 106.3 million tons CO2e.
  - Transport electrification: 40 charging centers installed; 21 more expected by end-December 2022; Bill 22.923 to extend bus concession periods linked to fleet electrification.
  - Green Climate Fund award US$54 million (UNDP) and first disbursement US$23.9 million in January 2022.
  - Roadmap for greening financial sector with BCCR NGFS membership and GAECC milestones for data, modeling, risk management, and greening reserves (selected milestones end-2022 through end-2024).
- Public investment management:
  - PIMA completed with climate module; roadmap and selection criteria, PPP appraisal guidelines, and centralized project monitoring timetables listed (various end-2022 and 2023 deadlines).

### Annex I — Russia–Ukraine conflict implications (selected quantitative impacts)
- Direct linkages: Russia and Ukraine account for ~0.2 percent of tourist arrivals; imports <0.5 percent of total.
- Fertilizer imports: around one-quarter sourced from Russia and Belarus.
- Commodity price effects:
  - 10-percent increase in fuel prices would: raise inflation by 0.5–1 percent; reduce current account by ~¼ percent of GDP; add 0.1 percent of GDP to primary deficit; lower growth by around 0.1–0.3 percent.
  - Comparable historical shock (energy prices nearly +50 percent between Oct 2010–Mar 2012) would depress GDP growth by 0.5–1.5 percentage points.
- Financial conditions: increased global risk aversion and faster tightening could raise sovereign issuance costs; scope to substitute to domestic markets and regional contingency lines.
- Banks: direct exposures to Russia and Ukraine negligible; principal impacts via lower growth and tighter conditions; stress tests suggest banks can withstand significant shocks.

### Staff appraisal and recommendations (summary)
- Assessment:
  - Authorities’ proactive pandemic response and sustained export performance supported robust recovery.
  - End-December 2021 program targets were comfortably met despite legislative delays.
- Key policy recommendations:
  - Fiscal: sustain consolidation through revenue mobilization and prudent spending under fiscal rule; improve tax equity and administration to secure medium-term debt sustainability.
  - Monetary: BCCR should continue withdrawing accommodation; raise policy rate toward neutral; remain data-dependent and forward-looking; maintain clear communication and exchange rate flexibility; enhance central bank law to underscore operational autonomy.
  - Financial sector: Continue phased Basel III adoption; strengthen crisis management and incentives for de-dollarization; enhance supervision and publish stress tests.
  - Structural and social: Advance reforms for equitable, low-carbon economy; strengthen social safety nets, promote formal employment, women’s economic empowerment, digitalization, and green transition.

*Source: IMF staff text from content unit 1criea2022001.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- On March 1, 2021, the IMF Executive Board approved a 36-month arrangement under the Extended Fund Facility (EFF) with access of SDR 1.23749 billion (335 percent of quota, equivalent to US$1.778 billion) to support the country’s response to the pandemic and its reform efforts toward strong, inclusive, and sustainable growth.
- The authorities’ proactive response to the COVID-19 crisis, combined with sustained export performance, have supported a robust recovery.
- The outlook remains subject to downside risks, amid tighter global financial conditions, higher commodity prices, and the threat of new COVID variants.

### Program performance
- The EFF arrangement was ratified by the Legislative Assembly on July 19, 2021.
- All end-July and end-December quantitative performance criteria (PC) were met by comfortable margins.
- Structural benchmarks (SBs):
  - Met: end-August 2021 SB on the central bank law; end-December SBs on centralization and digitalization of social assistance cash programs and on the new Tax Compliance Improvement Plan.
  - Not met: SB on the Public Employment Bill (not met by end-May 2021; approved by the Legislative Assembly in early March 2022).
  - Not met: end-December SB to publish the 2020 financial statements of three state-owned under IFRS was not met due to reporting issues at two companies.

### Focus of the review
- The review focused on:
  - advancing fiscal consolidation plans while strengthening fiscal institutions;
  - the Central Bank of Costa Rica (BCCR)’s move towards a neutral stance given the stronger inflation outlook;
  - supervisory efforts to strengthen financial oversight;
  - steps to mitigate the disproportionate impact of the pandemic on the most vulnerable and plans to capitalize on economic and job opportunities from the transition to a lower carbon economy.
- To accommodate legislative delays and provide additional time for the incoming administration to design and implement reforms under the EFF-supported program, the authorities requested an extension of the current arrangement and rephasing of access, together with the completion of the reviews.

*March 10, 2022*

### Recent developments
- Health and vaccination:
  - As of end-February 2022, 74 percent of the population were fully vaccinated, and 26 percent had received a booster dose.
  - Authorities’ goal: fully vaccinate the eligible population, including children, and apply booster vaccines to vulnerable groups by end-2022.
- Real economy and labor market:
  - Real GDP expanded by 12.1 percent (y-o-y) in Q3.
  - Unemployment declined from a peak of 24 percent to 13.7 percent as of end-2021.
  - Job creation in informal and lower-skilled sectors is lagging.
- Prices and external sector:
  - Headline inflation reached 4.9 percent (y-o-y) in February; core inflation rose to 3.8 percent (y-o-y).
  - Current account deficit is expected to remain at around 3 percent of GDP in 2022.
  - International reserves were US$6.8 billion at end-January or about 95 percent of the IMF’s Assessing Reserve Adequacy (ARA) metric.
  - Exchange rate depreciated by 4.6 percent against the U.S. dollar in 2021 (and 4.5 percent in real effective terms).
- Financial conditions and flows:
  - Financial conditions have loosened due to a decline in sovereign spreads.
  - FDI inflows have picked up, with new green-field investments.
  - Portfolio outflows remain sizable (largely due to domestic pension funds diversifying into offshore assets).

### Outlook and risks
- Growth and inflation projections:
  - GDP growth: 7.5 percent in 2021 (compared to 2.6 percent forecast at the time of the EFF request) and projected at 3.6 percent in 2022.
  - Inflation: after increasing to 4.8 percent in 2022, inflation is expected to return within the BCCR’s tolerance band within a one- to two-year horizon.
  - Current account: expected to adjust to around 2½ percent of GDP over the medium term.
- Downside risks:
  - New pandemic waves from aggressive variants could depress external demand and derail the domestic recovery, negatively impacting the fiscal position.
  - Higher oil prices or a tightening of global financial conditions—amid concerns about geopolitical risks from the conflict between Russia and Ukraine (Annex I)—would hit confidence and weigh on growth.
- Upside possibilities:
  - A quick resolution of the pandemic and/or faster reform momentum could boost investment and job creation.

### Program performance and policy discussions — A. Strengthening Fiscal Institutions

Background findings
- Fiscal overperformance in 2021:
  - End-December fiscal targets were comfortably met.
  - Primary deficit was 0.3 percent of projected GDP (compared to 1.7 percent of GDP at the time of the EFF request).
  - Overperformance drivers: robust revenues from stronger economic recovery, some one-off factors, better-than-expected yields from the 2018 tax reform, and improving revenue administration.
  - COVID-related emergency spending was 0.3 percent of GDP.
  - Current spending breached the ceiling implied by the fiscal rule by about 0.3 percent of GDP.
  - End-December debt target was comfortably met.
- One-off revenues in 2021 estimated at 0.7 percent of GDP, including:
  - collections from public entities;
  - partial recovery from the 2020Q2 tax moratorium;
  - higher income tax payments in March 2021 due to the 15-month fiscal year transition.
- Yields from the 2018 tax reform are estimated at 1.4 percent of GDP by 2021, higher by about 0.15 percent of GDP than previously anticipated, mainly on account of VAT reforms.

Policy discussion and fiscal outlook
- The 2023 primary balance target of 1 percent of GDP is expected to be met.
- Insufficient consensus to date to approve revenue measures in the Legislative Assembly; however, program targets appear comfortably within reach even without new measures.
- 2022 budget targets a primary balance of 0.7 percent of GDP.
- Program flexibility:
  - The program would allow for up to 0.3 percent of GDP in 2022 in additional health and related spending in response to the pandemic.
- Public Employment Bill:
  - Approved by the National Assembly in early March 2022.
  - Expected outcomes: strengthen fairness of public compensation, reduce the high public-private wage premium, and lessen the gender gap (Annex II).
  - With IDB support, implementation plans for the introduction of a single pay spine and related regulations are expected to be finalized within 12 months from the bill’s approval (proposed end-March 2023 SB).
- Social safety net and targeting:
  - National Treasury centralized and digitalized the payment system for cash transfer social-assistance programs (end-December 2021 SB).
  - Main institutions have begun channeling transfers through the new IT platform (SUPRES) and are adopting SINIRUBE’s targeting tools with World Bank support.
  - Expected impact: improved targeting, freeing resources to expand coverage and generosity of social transfer programs to eligible beneficiaries.
- Fiscal institutions and PFM reforms (with IMF TA support):
  - Revenue administration: stepped-up anti-tax evasion efforts; implementation of the new risk-based Tax Compliance Improvement Plan (end-December SB); a new Customs Law expected to be approved by end-March 2022.
  - Public financial management: first Medium-Term Fiscal Framework (MTFF) for the CG published in April 2021 and updated in September 2021; work to expand MTFF to the nonfinancial public sector (end-April 2022 SB); operationalize the Fiscal Council; implement a plan to phase in gender budgeting (Box 1).
  - Public investment management: priority actions identified from the Public Investment Management Assessment (PIMA) to improve appraisal, selection and implementation and medium-term capital budget allocation; development of a roadmap to strengthen climate-resilience infrastructure (¶30).
- Debt outlook and public debt management:
  - Central government (CG) debt is expected to peak at 68½ percent of GDP in 2022, more than 7 percent of GDP lower than at the time of the EFF request.
  - Improvement drivers: higher nominal GDP and fiscal savings.
  - Vulnerabilities: debt path remains vulnerable to growth, exchange rate, interest rate, and contingent liability shocks (Annex III).
  - Institutional steps: creation of an Assets and Liabilities committee; publication of Medium-Term Debt Management Strategy (MTDS); preparing a semi-annual plan for debt issuance; efforts to unify government debt-related functions under a debt management office.
  - MTDS is being updated (end-April 2022 SB) to address risks associated with SOE debt and underpin the Annual Borrowing Plan.

*Approved By Nigel Chalk (WHD) and Martin Cerisola (SPR). Team led by Manuela Goretti. Discussions held remotely during September 22-October 6, 2021 and February 22-March 3, 2022.*

### Box 1. Gender Budgeting for Costa Rica

### Box 1. Gender Budgeting for Costa Rica

### Overview
- Gender budgeting (GB) uses fiscal policy and PFM to promote gender equality by introducing a gender lens throughout the budget process.
- GB helps governments understand the impact of expenditure and revenue policies on gender and operationalize policies that promote gender equality at all stages of the budget cycle—preparation, execution, and control.
- GB introduces tools to translate gender-equality policies into budget allocations and is key to holding governments accountable for their gender-related commitments.

### International experience and GB tools
- Successful GB efforts encompass both policy and PFM.
- Examples of countries cited for good practices: Austria, Canada, Mexico.
- GB tools cited:
  - Gender impact assessments.
  - Budget markers or classifiers to mark relevant budget allocations.
  - Gender budget statements that document how the budget contributes to gender-related policy objectives and is implemented through appropriations to relevant entities.
- Purpose of tools:
  - Highlight intended and unintended impacts of new policies on gender.
  - Link policy objectives with budgetary allocations and accountability mechanisms.

### IMF technical assistance and Costa Rica’s plan
- With support from IMF TA, the authorities have developed a plan to introduce GB in Costa Rica.
- GB is expected to support the implementation of the Gender Parity Initiative aimed at:
  - increasing women’s participation in the labor force and leadership, and
  - reducing the gender wage gap.
- Actions identified with IMF TA:
  - Identify gender spending.
  - Establish adequate coordination mechanisms between the Ministry of Finance, Women’s Ministry, sectoral entities, and decentralized and autonomous entities.
  - Introduce new GB instruments such as budget markers, budget circulars, and gender budget statements.

### Roadmap and operational elements
- The action plan focuses on:
  - Translating gender-equality policies into budget allocations.
  - Developing coordination across central and sectoral institutions for implementation.
  - Introducing and using budgetary instruments (markers, circulars, statements) to document and track gender-related budgetary commitments and spending.

*Prepared by Virginia Alonso and Laura Gores (both IMF).*

### 33.      The authorities have requested a 5-month extension of the EFF arrangement and a

### 1criea2022001 - 33.      The authorities have requested a 5-month extension of the EFF arrangement and a

### Extension and rephasing of the EFF arrangement
- The authorities are requesting an extension of the current arrangement until July 31, 2024.
- The authorities request a rephasing of access: shifting SDR 103.115 million from each of the first- and second-review purchases to a new sixth review.
- The proposed rephasing is consistent with the duration of the extended arrangement as ratified by the Costa Rica Legislative Assembly in July 2021.

### Financing and repayment capacity
- Access under the EFF is helping Costa Rica meet its sizable balance-of-payments needs and will continue to be used for direct budget support.
- The program remains fully financed (with firm financing commitments over the next 12 months and good prospects thereafter).
- The Fund’s exposure is relatively low, with outstanding Fund credit peaking at 2.7 percent of GDP or 6.5 percent of exports (of goods and services) in 2023 (Table 7).

- Program financing table (in millions of U.S. dollars) as presented:
  - 2022 2023 2024
  - Financing need2,288 1,938 1,224
  - Reserve accumulation1,690 470 870
  - Underlying BOP need 1/598 1,468 354
  - Official multilateral financing 2,288 1,938 1,224
  - IMF 582589 297
  - Other multilateral creditors 1,7051,349 928
  - World Bank 426 369 335
  - Inter-American Development Bank (IDB) 613350 353
  - CAF Development Bank for Latin America 50 500 0
  - Central American Bank for Economic Integration (CABEI) 617 130 239
  - Unidentified financing 0 00
  - Memorandum items:
    - Capital market access 1,000 1,0001,000
    - Gross international reserves 8,6119,081 9,951
    - In percent of the ARA metric106 107111

- Source: IMF staff estimates.
- Footnote: 1/ Net of private sector and bilateral financing.

### Downside risks and program flexibility
- The program remains subject to downside risks, including from a worsening of the pandemic or higher external pressures, amid rising geo-political tensions (Annex I).
- The program has flexibility to accommodate negative shocks.
- The authorities stand ready to take additional measures as needed to achieve their program goals.
- A return to international bond markets is planned but additional financing could be mobilized domestically and from regional partners if downside risks materialize.

### Staff appraisal — recent performance and policy recommendations
- The authorities’ proactive response to the pandemic, including a vigorous vaccination campaign, and sustained export performance have supported a robust recovery in Costa Rica.
- Risks: threat of new COVID variants, higher commodity prices, and tighter global financial conditions, including from rising geo-political tensions.
- Progress under the EFF-supported program:
  - End-December 2021 targets under the program were comfortably met.
  - Despite legislative delays due to extensive consultations and constitutionality reviews, the authorities strengthened social safety nets and improved the efficiency of the public administration.
- Fiscal policy:
  - Sustained fiscal consolidation through revenue mobilization and prudent spending under the fiscal rule remains a priority.
  - The authorities delivered a strong fiscal overperformance in 2021.
  - Fiscal position bolstered by revenue mobilization efforts from the 2018 tax reform, improved tax administration, and prudent spending under the fiscal rule even as more resources were allocated to support the vulnerable and respond to the pandemic.
  - Further efforts are needed to improve the tax system to make it more equitable, supporting a balanced reduction of the fiscal deficit and ensuring a more sustainable path for public debt over the medium term.
- Monetary policy:
  - The BCCR’s ongoing withdrawal of monetary accommodation is warranted given the rise in inflation and in inflationary risks.
  - The BCCR’s data-dependent and forward-looking approach to monetary policy, focused on ensuring low and stable inflation as its primary objective, is critical.
  - In response to the stronger inflation outlook, the BCCR should continue to raise the policy rate, and increase the tightening pace were inflationary pressures to persist.
  - Continued clear and transparent communication and exchange rate flexibility will support these efforts.
  - Ongoing steps to enhance the central bank law will underscore the BCCR’s operational autonomy and governance.
- Financial sector:
  - The financial system has shown resilience throughout the pandemic due to supportive monetary policy and a proactive approach to monitoring risks, running stress tests, and updating contingency plans.
  - Basel III requirements are being phased in a systematic way, giving banks adequate time to adjust to the new regime.
  - Ongoing efforts to enhance the crisis management framework and incentivize de-dollarization remain critical and will further benefit the financial system.
- Structural and social policy:
  - The authorities should press ahead with their ambitious agenda to promote an equitable, low-carbon economy.
  - The pandemic has brought Costa Rica’s inequality challenges to the forefront.
  - Ongoing efforts to support the most vulnerable, incentivize formal employment, pursue women’s economic empowerment, increase digitalization, and transition to a lower carbon economic model will be instrumental to achieving inclusive and green economy that creates high quality jobs for all Costa Ricans.

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

### 42.      Staff supports the completion of the first and second reviews, the extension of the

### 1criea2022001 - 42.      Staff supports the completion of the first and second reviews, the extension of the

### Staff recommendation
- Staff supports the completion of the first and second reviews, the extension of the arrangement, and rephasing of access. There has been important progress to date and the authorities have demonstrated their commitment to strong policies and reforms.

### Real sector: key projections and developments
- Real GDP (annual percentage change): 4.2 2.6 2.4 -4.1 2.6 7.5 3.3 3.6 3.3 3.2 3.2 3.2 3.2
- Domestic demand (annual percentage change): 3.5 1.9 0.2 -3.6 2.4 6.7 2.8 2.4 2.7 3.0 3.0 3.0 3.1
- Consumption (annual percentage change): 4.8 1.7 2.5 -3.8 1.4 4.7 1.6 2.8 2.5 2.7 2.6 2.8 2.8
- Gross fixed capital formation (annual percentage change): 0.1 1.6 -8.2 -1.7 3.8 7.8 4.5 4.3 5.4 5.2 5.1 5.0 5.0
- Net exports contribution: 0.6 0.7 2.2 -0.6 0.2 0.9 0.6 1.2 0.7 0.3 0.4 0.3 0.2
- Output gap (as percent of potential GDP): 1.1 1.1 0.2 -3.4 -3.0 -0.2 -1.4 -0.1 0.1 0.1 0.1 0.1 0.0
- GDP per capita (US$): 12,185 12,429 12,691 12,118 11,803 12,381 12,315 12,663 13,267 13,787 14,364 14,971 15,602

### Price developments
- GDP deflator (annual percentage change): 2.9 2.2 2.6 0.2 1.4 2.0 1.0 3.3 3.4 3.1 3.0 3.0 3.0
- Consumer prices (period average): 1.6 2.2 2.1 0.7 1.2 1.7 1.1 4.8 3.7 3.2 3.1 3.0 3.0
- Consumer prices (end of period): 2.6 2.0 1.5 0.9 1.2 3.3 0.9 4.4 3.4 3.2 3.1 3.0 3.0

### External sector: balances, reserves, debt
- Current account balance (percent of GDP, Table 1 projections): -3.6 -3.0 -1.3 -1.1 -3.2 -3.2 -3.0 -3.1 -2.9 -2.8 -2.8 -2.6 -2.6
- Trade balance (percent of GDP): -7.2 -7.4 -6.0 -2.9 -4.8 -4.9 -6.0 -6.6 -7.4 -7.4 -7.3 -7.3 -7.3
- Services (percent of GDP): 7.9 8.9 9.8 6.4 6.6 7.2 7.9 8.9 9.9 10.0 10.2 10.3 10.5
- Gross international reserves (millions of U.S. dollars): 7,150 7,501 8,937 7,232 8,004 6,921 8,956 8,611 9,081 9,951 9,957 10,478 11,278
- Gross international reserves (in percent of the ARA metric, Table 4 memorandum): 118 131 104 112 95 114 106 107 111 108 109 116 (values listed as: 11813110411295114106107111108109116)
- External debt (percent of GDP, Table 1): 44.5 46.4 47.6 50.6 59.1 52.2 61.5 58.0 58.3 59.0 58.0 57.0 56.1

### Fiscal sector: central government (Table 2 highlights)
- Central government primary balance (percent of GDP): -2.9 -2.2 -2.6 -3.8 -1.7 -0.3 -0.3 0.7 1.3 1.8 2.0 2.1 2.3
- Central government overall balance (percent of GDP): -6.0 -5.7 -6.7 -8.4 -7.0 -5.2 -5.9 -4.5 -3.6 -3.0 -2.5 -2.3 -2.0
- Central government debt (percent of GDP): 47.1 51.8 56.4 67.2 72.5 68.5 75.0 68.6 68.3 67.5 66.3 65.0 63.4
- Revenue (in billions of colones): 4,560 4,767 5,676 5,077 5,486 6,326 5,970 6,391 6,877 7,316 7,750 8,210 8,723
- Expenditure (in billions of colones): 6,611 6,830 8,223 8,147 8,121 8,379 8,268 8,326 8,510 8,752 9,027 9,461 9,863
- Total Financing (in billions of colones): 2,068 1,999 2,494 3,388 2,635 2,178 2,298 1,934 1,633 1,436 1,277 1,250 1,140

### Balance of payments (Table 3 highlights)
- Current Account (millions of U.S. dollars): -2,189 -1,867 -824 -707 -1,976 -2,079 -1,915 -2,055 -2,048 -2,093 -2,140 -2,161 -2,205
- Goods and services balance (millions of U.S. dollars): 393 919 1,921 2,424 2,224 1,083 1,475 1,269 1,515 1,739 1,961 2,247 2,461
- Trade balance (millions of U.S. dollars): -4,367 -4,620 -3,868 -1,779 -2,932 -3,125 -3,847 -4,371 -5,198 -5,424 -5,657 -5,990 -6,276
- Exports of goods (f.o.b., millions of U.S. dollars): 10,811 11,730 11,831 11,991 12,253 14,795 12,896 16,076 17,060 17,961 18,928 19,881 20,910
- Imports of goods (f.o.b., millions of U.S. dollars): 15,178 16,350 15,700 13,770 15,185 17,921 16,743 20,447 22,259 23,384 24,585 25,870 27,186
- Financial account (millions of U.S. dollars): -2,445 -2,203 -1,268 -1,199 -1,940 -2,061 -1,875 -2,035 -2,025 -2,068 -2,112 -2,130 -2,171
- Foreign direct investment, net (millions of U.S. dollars): -2,652 -2,434 -2,695 -1,644 -1,982 -3,524 -2,388 -3,413 -3,521 -3,608 -3,756 -3,923 -4,074
- Change in International Reserves (increase +, millions of U.S. dollars): -419 390 1,393 -1,754 773 -317 952 1,690 470 870 652 180 0

### Gross external financing needs and sources (Table 4 highlights)
- Gross external financing needs (millions of U.S. dollars): -9,172 -8,310 -10,963 -10,245 -10,891 -10,869 -11,910 -11,775 -10,270 -10,662 -10,325 -10,167
- Current account balance (millions of U.S. dollars): -1,867 -824 -707 -1,976 -2,079 -1,915 -2,055 -2,048 -2,093 -2,140 -2,161 -2,205
- Amortization (millions of U.S. dollars): -4,037 -4,789 -5,168 -5,149 -5,366 -5,893 -5,094 -6,085 -4,787 -5,261 -5,124 -5,061
- Short-term private sector amortization (of which, millions of U.S. dollars): -2,299 -3,048 -2,999 -2,987 -3,842 -3,193 -3,650 -3,467 -3,294 -3,398 -3,473 -3,503
- Gross external financing sources (millions of U.S. dollars): 8,832 7,807 9,575 7,567 9,737 9,124 9,623 9,904 9,311 9,914 9,534 9,217
- Direct investment, net (millions of U.S. dollars): 2,434 2,695 1,644 1,982 3,524 2,388 3,413 3,521 3,608 3,756 3,923 4,074

### Monetary and financial sector (Table 5 and Table 6 highlights)
- Monetary base (in billions of colones): 2,749 2,813 2,667 3,033 3,222 3,155 3,429 3,404 3,720 4,014
- Broad money (in billions of colones): 15,958 16,298 16,957 19,990 19,617 21,490 20,175 22,584 24,125 25,700
- Credit to the private sector (annual percent change): 8.5 6.3 -2.3 3.4 6.1 2.8 6.4 3.8 6.0 6.0
- Consolidated financial system - Net foreign assets (in billions of colones): 1,673 1,750 3,354 3,753 4,090 3,808 4,408 4,871 5,264 5,895
- Selected financial soundness indicators (Table 6, latest deciles reported):
  - Risk-adjusted capital ratio (percent): 16.4 16.8 16.7 17.5 16.8 16.5
  - Nonperforming loans to total loans (percent): 1.5 2.0 2.1 2.4 2.5 2.3
  - Loan loss provisions to total loans (percent): 2.2 2.8 3.3 3.5 4.2 4.3
  - Return on assets (ROA, percent): 1.2 0.9 0.9 1.0 0.6 0.9
  - Liquid assets to total short-term liabilities (percent): 95.9 102.7 98.6 96.8 96.8 99.9

### IMF program access and phasing (Tables 8 and 9)
- Current access and phasing under the Extended Fund Facility (Table 8):
  - Availability dates and tranches listed (March 1, 2021; October 15, 2021; March 15, 2022; October 15, 2022; March 15, 2023; October 15, 2023) with repeated tranche amounts "206.3 55.8 3" formatting (table shows Millions of SDR and Percent of Quota entries). Total listed: 1237.49335
  - Memorandum item: Quota 369.40
- Proposed access and phasing under the Extended Fund Facility (Table 9) similarly lists tranche sequencing with a different phasing (including 103.11527.91 entries for October 15, 2021 and March 15, 2022) and the same Total 1237.49335 and Quota 369.40

### Fund credit and obligations (Table 7 highlights)
- Fund obligations based on existing credit (millions of SDRs):
  - Principal (selected years): 0.0 46.2 184.7 138.5 34.4 34.4 34.4 34.4 34.4
  - Charges and interest (selected entries): 5.3 7.2 6.0 3.8 2.5 2.0 1.6 1.2 0.8 0.4 0.2 0.2 0.2
- Outstanding IMF credit based on existing and prospective drawings (millions of SDRs, projection series): 988.2 1,354.5 1,376.0 1,237.5 1,185.9 1,065.6 876.5 670.3 564.0 257.8 103.1 17.2 0.0
- Net use of IMF credit (millions of SDRs, partial series): 412.5 366.3 21.5 -138.5 -51.6 -120.3 -189.1 -206.3 -206.2 -206.3 -154.7 -85.9 -17.2
- Memorandum items (selected): Exports of goods and services (millions of U.S. dollars): 26,862.6 29,527.2 31,151.5 32,894.5 34,690.3 36,844.6 39,132.7 41,562.9 44,144.0 46,885.4 49,797.0 52,889.4 56,173.9

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

### Annex I. Implications of the Russia-Ukraine Conflict for Costa Rica

### Annex I. Implications of the Russia-Ukraine Conflict for Costa Rica

### Direct trade linkages
- Russia and Ukraine account for about 0.2 percent of tourist arrivals.
- Imports from Russia and Ukraine are less than 0.5 percent of the total.
- Imports of semi-finished iron are sourced from Russia and Ukraine.
- Around one-quarter of fertilizer imports are sourced from Russia and Belarus.

### Commodity price effects
- A 10-percent increase in fuel prices would:
  - raise inflation in Costa Rica by 0.5-1 percent;
  - reduce the current account by around ¼ percent of GDP;
  - add 0.1 percent of GDP to the primary deficit;
  - lower growth by around 0.1-0.3 percent.
- Such a negative terms of trade shock is likely to put downward pressure on the currency.
- Higher international food and metal prices would add to these effects.
- Comparative note: energy prices increased by nearly 50 percent between October 2010 and March 2012. A shock of comparable size and duration would depress GDP growth in Costa Rica by 0.5-1.5 percentage points, with likely second-round effects from a slowdown in trading partners.

### Global financial conditions and sovereign financing
- Increased global risk aversion and a faster pace of tightening by advanced economy central banks could tighten financial conditions, raising the costs of planned placements of sovereign debt in international markets in 2022.
- Costa Rica has scope to substitute to domestic markets and tap contingency lines from regional partners.

### Banks’ balance sheets
- Direct bank exposures to Russia and Ukraine are negligible.
- Principal impacts on bank balance sheets and credit quality would come via lower growth and tighter financial conditions.
- Stress tests suggest banks can withstand a significant shock to growth, interest rates, and the exchange rate.

### Contingency planning (program space and likely authorities’ actions)
- The program would have space to accommodate a negative global shock within the current structure.
- The authorities would likely need to:
  - Accelerate the pace of monetary policy normalization to counter second round inflationary effects of the external shock and anchor inflation expectations.
  - Rely on the exchange rate as a shock absorber while using limited FX sales to counter disruptive market conditions.
  - Reprioritize public spending to increase social assistance programs and mitigate the effects of rising commodity prices on the poor.
  - Mobilize additional financing from regional partners and domestic debt markets.
  - Potentially allow for the drawdown of countercyclical buffers in the banking system.

*Source: Annex I. Implications of the Russia-Ukraine Conflict for Costa Rica*

### Annex II. Public Employment Reform in Costa Rica

### Main problem and compensation system
- Over the past decade, high public wage growth widened the public-private wage premium and has been at the root of Costa Rica’s fiscal vulnerabilities.
- The compensation system is complex and fragmented, making it difficult to control, adjust, target, and manage.
- Salary includes a base pay plus numerous additional bonuses and supplements that can account for half of the total remuneration (and are tied to seniority rather than performance).
- Wages are not competitive at entry levels and there are large discrepancies in compensation for employees performing similar tasks.

### The Public Employment Bill: objectives and design
- The Legislative Assembly has approved a new Public Employment Bill to improve sustainability, fairness, and productivity of public employment.
- Main goals:
  - introduce a better integrated HR management system;
  - a single pay spine;
  - transparent and performance-based non-monetary incentives;
  - additional employment benefits, including parental leave.
- The new pay structure will apply directly to new hires, with a mandatory transition for existing workers with salaries below their corresponding job reference wage.
- Salaries of many existing workers that fall above the spine will be frozen until they are reached by the single pay scheme.

### Savings, implementation timeline, and processes
- Depending on the new reference salaries, expected savings from the bill are 0.5 to 0.8 percent of GDP over a five-year horizon for the entire public sector (0.4 to 0.6 percent of GDP for the central government), according to IDB estimates.
- MIDEPLAN has started working on implementation plans for the introduction of the single pay spine and related reforms under the law, due to be implemented within 12 months of the Bill’s approval date, by March 2023.
- Implementation steps include job evaluation exercises to map all professions, grades, and posts into the unified pay spine and private market surveys used to decide the appropriate salary level for each job family.

*Source: Annex II. Public Employment Reform in Costa Rica*

### Annex III. Debt Sustainability Analysis

### Background and key assumptions
- Public debt increased significantly over the last decade, with a recent spike due to the COVID-19 shock.
- Since the global financial crisis, public debt increased by about 40 percent of GDP amid an expansion in fiscal spending, relatively weak growth dynamics, and increasing interest costs.
- Public debt rose from 56½ percent of GDP at end-2019 to 68½ percent of GDP at end-2021, after rising by 4½ percentage points in 2019.
- Domestic debt accounts for about 51½ percent of GDP or about three quarters of total public debt.
- External public debt consists of multilateral and bilateral loans (about 8 percent of GDP or 10 percent of total) as well as Eurobonds (9 percent of GDP or 13 percent of total).
- Foreign-currency denominated debt accounts for about 40 percent of the total.
- The DSA focuses on the central government (CG); the CG definition was expanded to include 51 public entities required to be consolidated under Law 9524 (accounting for about 0.4 percent of GDP in debt as of end-2020).
- The CG accounts have been consolidated retroactively back to 2019.

### Baseline macro-fiscal scenario
- Real GDP growth: 7.5 percent rebound in 2021; estimated at 3.6 percent in 2022; expected to stabilize around potential of 3 percent over the medium term.
- Inflation: end-2021 inflation stood at 3.3 percent; reaching 4.8 percent in 2022; forecast to gradually decline towards 3 percent over a one- to two-year horizon.
- Primary balance: from a 0.3 percent of GDP deficit in 2021 to a surplus of around 2¼ percent of GDP in 2027.
- Baseline is underpinned by spending ceilings and corrective mechanisms under the fiscal rule.
- Baseline revenue assumptions remain conservative; phased implementation of the 2018 tax reform is expected to deliver higher yields over time than reflected under the current baseline.
- Baseline does not include yields from any planned measures pending formal approval, or from the implementation of the Public Employment Bill or the new Tax Compliance Improvement Plan.
- Interest payments expected to remain sizable; projections based on actual interest payments for existing debt and prevailing interest rates in the primary market for newly issued debt, adjusted with developments in domestic and global financial conditions.

### Public debt sustainability (baseline and risks)
- Under the baseline, central government debt is projected to reach about 68½ percent of GDP in 2022 and decline to 63½ percent of GDP by 2027.
- Debt adjustment supported by additional gains from structural measures of 3½ percent of GDP over 2022-27, including sustained implementation of the fiscal rule.
- Gross financing needs will peak at 11¼ percent of GDP in 2023 before declining to below 10 percent of GDP in 2027.
- Baseline assumes access to external financing in the form of official financing and US$4.5 billion in Eurobond issuances over 2022-27.
- Contingency financing could be mobilized from domestic banks and from regional partners if downside risks materialize.

### Risk assessment and stress test results
- The heat map indicates a moderate risk to debt sustainability.
- Baseline debt does not exceed the 70 percent of GDP benchmark for EMs in 2022 through 2027, but the benchmark is exceeded for some shocks.
- A contingent liability shock could push peak debt-to-GDP ratio to 80 percent.
- GDP growth or real exchange rate shocks would also drive debt above the 70 percent of GDP benchmark.
- If the primary balance falls short of the forecast for 2023 and 2024, debt-to-GDP would remain marginally below 70 percent but delay its downward path.
- Gross financing needs remain below the benchmark of 15 percent of GDP in all standardized macro-fiscal stress tests except for the historical and contingent liability shock scenarios.
- When all shocks are combined, the debt-to-GDP ratio would reach 85 percent in 2023 and gross financing needs would increase to around 13-14 percent of GDP.
- The envisaged maximum three-year improvement in the structurally adjusted primary balance by 3.8 percent of GDP over 2020−23 is higher than in 83 percent of international experiences.
- Vulnerabilities noted: market perception, external financing requirement, debt held by non-residents, and debt denominated in foreign currency.
- Since the time of the EFF request, spreads have fallen comfortably below the 600 basis points upper early warning benchmark.
- Foreign-currency denominated debt as share of total debt reached about 40 percent as of end-2021 and is projected to continue to rise until 2024; it will remain below the high-risk of debt distress benchmark of 60 percent.

### External debt sustainability
- Total external debt (public and private) to GDP is projected to increase by 5.8 percent in 2022 to 58.0 percent of GDP, due to the widening current account deficit as weak tourism receipts, higher oil prices, and increased demands for intermediate inputs offset the strong performance of goods exports.
- External debt is projected to peak in 2024 at around 59 percent of GDP and then decrease to around 56 percent by 2027 as GDP growth and the trade balance normalize.

*Source: Annex III. Debt Sustainability Analysis*

### 7.      The main risk to external debt sustainability is a sharp depreciation  of the exchange

### 7.      The main risk to external debt sustainability is a sharp depreciation  of the exchange rate.

### Main Risk and Stress Test Results
- The primary risk to external debt sustainability is a sharp depreciation of the exchange rate; currency risks, notably vis-à-vis the U.S. dollar, are high.
- A 30 percent real depreciation in 2022 could lead to a sizable increase in the external debt-to-GDP ratio to about 88 percent by 2024.
- Other common risk factors—from interest rates, growth, and the current account primary balance—pose relatively low risk according to stress tests.

### Robustness and Recent Developments
- The debt-to-GDP ratio fell substantially in 2021 and the forecast is similarly lower relative to forecasts at the time of the EFF request, despite a nearly five percent depreciation.
- Further FDI is projected to more than cover the current account for the foreseeable future.
- Nevertheless, further tightening in global liquidity conditions as well as country-specific shifts in investor confidence, for example related to a weakening of the fiscal and debt trajectory, could raise rollover risks and interest costs.

### Public DSA Baseline Assumptions and Projections (selected baseline assumptions)
- Real GDP growth: 3.6, 3.3, 3.2, 3.2, 3.2, 3.2 (for 2022–2027)
- Inflation: 3.3, 3.4, 3.1, 3.0, 3.0, 3.0 (for 2022–2027)
- Primary Balance (baseline): 0.7, 1.3, 1.8, 2.0, 2.1, 2.3 (for 2022–2027)
- Effective interest rate: 8.1, 7.7, 7.4, 7.1, 7.1, 7.0 (for 2022–2027)
- Constant Primary Balance Scenario primary balance: 0.7 each year (2022–2027)
- Public Gross Financing Needs and Gross Nominal Public Debt are presented in percent of GDP in the DSA charts (figures available in the source).

### External Debt Sustainability Framework (selected figures, 2017–27)
- Baseline: External debt (percent of GDP) — 44.5 (2017), 46.4 (2018), 47.6 (2019), 50.6 (2020), 52.2 (2021), 58.0 (2022), 58.3 (2023), 59.0 (2024), 58.0 (2025), 57.0 (2026), 56.1 (2027)
- Debt-stabilizing non-interest current account: -5.6
- Change in external debt (annual): 1.0, 1.9, 1.2, 3.0, 1.6, 5.8, 0.3, 0.7, -1.0, -0.9, -0.9
- Identified external debt-creating flows (4+8+9): -2.1, -2.4, -4.4, 0.1, -3.9, -3.9, -3.9, -3.8, -3.9, -3.9, -3.9
- Current account deficit, excluding interest payments: 2.3, 1.4, -0.3, -0.3, 1.9, 1.7, 1.3, 1.1, 0.8, 0.7, 0.6
- Net non-debt creating capital inflows (negative): -4.5, -4.0, -4.3, -2.7, -5.5, -5.2, -5.0, -4.9, -4.9, -4.8, -4.8
- Automatic debt dynamics (1/): 0.2, 0.2, 0.1, 3.2, -0.3, -0.4, -0.2, 0.0, 0.1, 0.2, 0.3
- Contribution from nominal interest rate: 1.4, 1.6, 1.6, 1.5, 1.3, 1.4, 1.6, 1.8, 1.9, 1.9, 2.0
- Contribution from real GDP growth: -1.8, -1.1, -1.1, 2.0, -3.7, -1.8, -1.8, -1.8, -1.8, -1.7, -1.7
- Contribution from price and exchange rate changes (2/): 0.6, -0.2, -0.3, -0.3, 2.1, ... (projection line includes impact of price and exchange rate changes)
- Residual, incl. change in gross foreign assets (2-3): 3.1, 4.3, 5.6, 2.9, 5.5, 9.6, 4.2, 4.6, 2.8, 3.0, 3.0
- External debt-to-exports ratio (in percent): 138.7, 134.9, 134.8, 157.3, 140.3, 143.0, 138.5, 139.6, 136.7, 134.4, 132.0
- Gross external financing need (in billions of US dollars): 6.3, 5.9, 5.6, 5.9, 7.4, 7.3, 8.3, 7.3, 7.7, 7.5, 7.6
- Gross external financing need (in percent of GDP): 10.4, 9.5, 8.7, 9.5, 11.6, 10-Year, 10-Year, 11.0, 11.9, 9.9, 10.0, 9.2, 8.8 (as presented in table formatting)

### Stress Test Scenarios and Outcomes (selected)
- Real exchange rate shock: One-time real depreciation of 30 percent occurs in 2023; under a 30 percent depreciation scenario gross nominal public debt rises (bound test shows real depreciation shock increases external debt to 83 percent in the scenario box).
- Combined shock and other stress tests displayed: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Contingent Liability Shock; Combined Macro-Fiscal Shock.
- Stress test finding: The 30 percent real depreciation scenario is the primary driver that could raise external debt-to-GDP to about 88 percent by 2024 (as noted in the text).

### Risk Assessment and Indicators (selected)
- Debt burden benchmark used: 70 percent (cells highlighted green/yellow/red per benchmark exceedance in the DSA risk assessment heat map).
- Market perception indicators and benchmarks listed in the DSA:
  - EMBIG: 503 bp (average over last 3 months, 19-Nov-21 through 17-Feb-22)
  - External Financing Requirement benchmarks: 5 and 15 percent of GDP
  - Annual change in Short-Term Public Debt benchmark: 0.5 and 1 percent
  - Public Debt in Foreign Currency benchmark: 20 and 60 percent
  - Public Debt Held by Non-Residents benchmark: 15 and 45 percent
- In the risk-assessment heat map, the exchange rate shock and contingent liability shock are highlighted as relevant stress channels.

### Decomposition of Public Debt and Debt Service (selected, 2021 and projections)
- Total debt stock (end of period) 2021: 42,436.1 (in millions of US$) — 100.0 percent of total
- External debt 2021: 10,548.1 (24.9 percent of GDP; 24.9 percent of total)
  - Multilateral creditors total: 4,590.4 (10.8 percent of GDP)
  - IMF: 805.8 (1.9 percent of GDP)
  - World Bank: 1,291.6 (3.0 percent of GDP)
  - ADB/AfDB/IADB: 1,555.0 (3.7 percent of GDP)
  - Bonds (external): 5,500.0 (13.0 percent of GDP)
- Domestic debt 2021: 31,888.0 (75.1 percent of GDP; 74.9 percent of total)
  - Bonds (domestic): 31,585.4 (74.4 percent of GDP)
  - Held by residents, total: 31,246.7 (73.6 percent of GDP)
  - Held by non-residents, total: 641.3 (1.5 percent of GDP)
- Contingent liabilities 2021: 5,664.3 (13.3 percent of GDP)
  - Public guarantees: 867.4 (2.0 percent of GDP)
  - Other explicit contingent liabilities: 4,796.9 (11.3 percent of GDP)

### Capacity Development Integration and Policy Priorities
- Costa Rica’s capacity development (CD) efforts are aligned with reform objectives under the Fund-supported program.
- CD priorities include:
  - Improving fiscal institutions
  - Strengthening the central bank’s autonomy and governance and the supervisory and crisis management framework
  - Advancing structural reforms to foster green and inclusive growth
- Authorities’ engagement and ownership on these issues remain strong.
- Close integration between CD activities and program priorities, and coordination with other technical assistance providers, remain critical given heavy use of CD from the Fund and other partners.

*Source: IMF staff calculations and content from the provided IMF country DSA chapter.*

### 1.      Despite the authorities’ timely response, the COVID-19 pandemic took a heavy toll on

### 1criea2022001 - 1.      Despite the authorities’ timely response, the COVID-19 pandemic took a heavy toll on

### Overview and program context
- Following the disbursement under the Rapid Financing Instrument in 2020, the Executive Board on March 1 approved the country’s request for a three-year arrangement under the Extended Fund Facility (EFF) to further support the authorities’ response and gradual economic recovery, while anchoring their policy and reform efforts.
- The program’s reform priorities are anchored by three key pillars:
  - (i) implementing equitable fiscal reforms to ensure debt sustainability, while protecting the poor and most vulnerable;
  - (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 structural reforms to support inclusion, while boosting labor productivity, under the government’s strong commitment to fighting climate change.
- With a new government set to take office in May 2022, CD will continue to play a key role in the Fund’s engagement with the authorities to advance the implementation of priority reforms.

### Engagement strategy and coordination
- Fund’s CD Engagement with Costa Rica:
  - Historically, Costa Rican authorities have received extensive CD, with generally good traction and implementation record.
  - Examples of past CD impact include punctual update of the base year of the national accounts (NA) and publication of tax expenditure reports as part of the budget process.
  - Table AIII.1 and AIII.2 summarize the key CD priority areas and engagement since January 2019.
- Integration of CD in Fund’s surveillance and lending:
  - CD delivery has been closely integrated with surveillance priorities identified in previous Article IV Consultations and follows recommendations of the 2018 Financial Sector Stability Review.
  - Coordination is being stepped up under the EFF-supported program with country team and CD providers working closely together, including through mission participation.
  - Appropriate sequencing of CD across reform streams is coordinated by the country team, in consultation with the authorities and CD providers, including CAPTAC-DR.
  - The Fund’s resident representative office plays a key role in these efforts.
- Collaboration with other partners:
  - Strong collaboration, especially with the World Bank on debt management and targeting accuracy of social safety net.
  - Engagement with multilateral and bilateral donors to support public spending efficiency, transparency, and an inclusive and green recovery, including:
    - WB on climate change adaptation and business climate;
    - IDB on public employment reform, climate change mitigation, FinTech, and road infrastructure PPPs;
    - OECD on improving reporting standards of state-owned enterprises;
    - UN on gender and education.
  - Regular joint meetings/missions and donor debriefs to ensure consistency of policy advice and synergies supporting program objectives.

### CD priorities — macro-critical reform areas
- Main objectives: consolidate achievements and make further progress on macro-critical reforms under the Fund-supported program, focusing on fiscal reforms, central bank autonomy and governance, supervisory and crisis management framework, and structural financial vulnerabilities.

- Implement fiscal reforms to support inclusive and green growth while ensuring debt sustainability:
  - Context:
    - Authorities approved a comprehensive fiscal reform in 2018 including tax reforms, spending measures, and a new fiscal rule with spending ceilings to ensure debt sustainability.
    - Authorities plan to strengthen price incentives to support their National Decarbonization Plan through revenue instruments, based on options for environmental tax reforms identified by past CD by FAD.
  - Program aims:
    - Improve fiscal institutions via more efficient revenue administration and public financial management.
    - Strengthen the social safety net.
    - Improve high-quality data reporting and analytical and forecasting capacity.
  - Specific CD workstreams and objectives:
    - Revenue administration (FAD/CAPTAC-DR):
      - Support revenue mobilization through Tax and Custom Compliance Improvement Plans (SB) and implementation of the Hacienda Digital project and new dual income tax.
    - Public financial management (FAD/CAPTAC-DR):
      - Support development of a comprehensive Medium-Term Fiscal Framework covering the entire non-financial public sector (SB) and improvement of the Treasury’s cash management.
      - Action plan on gender budgeting and centralization/digitalization of payment system for cash transfer social assistance programs (SB).
      - PIMA to improve public investment efficiency and resilience to climate change in support of the authorities’ climate infrastructure agenda (SB).
    - Debt management (MCM, coordination with WB):
      - Deepen domestic debt market and enhance debt management in line with international best practices, including updating the Medium-Term Debt Strategy (SB).
    - Government financial statistics (STA/CAPTAC-DR/ICD):
      - Improve quality and timeliness of fiscal reporting, expand coverage beyond central government, and transition from GFSM 1986 to GFSM 2014.
      - ICD support to enhance analytical and forecasting capacity of the MoF and develop a comprehensive macro-fiscal framework and customized training.

- Further strengthen the autonomy and governance of the BCCR and the supervisory and crisis management framework:
  - Progress and context:
    - Authorities have advanced implementation of the 2018 FSSR recommendations, including approving new laws on consolidated supervision and banking resolution, strengthening macroprudential framework and systemic risk monitoring, and implementing the national financial education strategy.
  - Central bank operations (LEG/MCM/CAPTAC-DR):
    - LEG supports strengthening BCCR’s operational autonomy and governance as recommended by the 2020 Safeguards Assessment (SA), with draft amendments to the BCCR Law prepared in August 2021 (SB) for submission to the Legislative Assembly (SB).
    - MCM/CAPTAC-DR supports deepening the FX market to facilitate effective risk management and increased intermediation in local currency.
  - Financial crisis management (LEG/MCM):
    - CD to improve alignment of legal framework on bank resolution and deposit insurance with international practices based on gap analysis; reforms to address institutional arrangements for deposit insurance fund and resolution authority, safeguards for resolution, and clear resolution triggers.
  - Financial supervision and regulation (CAPTAC-DR/MCM):
    - Ongoing CD to strengthen supervision and regulation, including enhancing consolidated supervision and gradual adoption of Basel III.
    - CD will engage on climate change issues, FinTech regulation, and cybersecurity.

### CD integration matrix — selected achieved outcomes and future outcomes
- Implementing fiscal reforms (selected outcomes and future CD targets):
  - Tax Policy:
    - Achieved: Publication of tax expenditure reports as part of the budget process.
    - Future: Assess available revenue options to strengthen price incentives to support climate change; Achieve full compliance with BEPS.
  - Revenue Administration:
    - Achieved: TADAT assessment completed; New Custom Portal aligned with WTO TF Agreement; Submission of a bill containing a new Custom Law.
    - Future: Develop and implement Tax CIPs; Update estimates of VAT and CIT compliance gaps; Implement Hacienda Digital project.
  - Public Financial Management:
    - Achieved: First MTFF report for the central government (CG) published; Methodology for fiscal risk reporting formulated; General assessment of the Treasury Single Account (TSA) operation and coverage completed.
    - Future: Create and staff a macro-fiscal unit; Publish a MTFF for Non-Financial Public Sector (NFPS); Expand coverage of the TSA; Implement PIMA recommendations; Develop gender budgeting.
  - Financial Integrity:
    - Achieved: New public procurement law approved.
    - Future: Draft and enact implementing regulations to enable collection and publication of beneficial ownership information for awarded contracts.
  - Debt Management:
    - Achieved: Publication of guidelines for public institutions debt management; Debt Committee established on public debt management; Structure operational responsibilities of the Public Credit Directorate and the National Treasury.
    - Future: Deepen domestic debt market and improve price formation and auction mechanism; Update MTDS to also include government’s contingent liabilities.
  - Macro-Fiscal Capacity Building and GFS:
    - Achieved: Higher frequency of GFS and PSDS compiled and disseminated; 51 public institutions consolidated under CG.
    - Future: Fully adopt 2014 GFSM accrual accounting standards for NFPS data; Develop comprehensive macro-fiscal framework to support policy decisions and MTFF.

- Maintaining monetary and financial stability (selected outcomes and future CD targets):
  - Central Bank Operations:
    - Achieved: Regulation on emergency liquidity assistance facility approved by the BCCR Board in July 2018; Legal reforms drafted and submitted to the MoF.
    - Future: Deepen FX market, increase daily variation in net open FX position limits, introduce BCCR FX swaps, develop interbank markets, promote legal reform to allow greater NFPS’ FX activity with FX intermediaries; Amend the BCCR law to align mandate, autonomy, decision-making structures, and transparency and accountability mechanisms with international best practices.
  - Financial Supervision and Regulations:
    - Achieved: Greater exchange rate flexibility and prudential policies implemented to discourage dollarization; Liquidity risk monitoring improved with the introduction of liquidity coverage ratio (LCR).
    - Future: Further discourage financial dollarization by: (i) revising the definition of “unhedged borrowers”; (ii) assessing the change from provisions to additional capital requirements on foreign currency loans.

*International Monetary Fund — Costa Rica capacity development strategy (EFF-supported program)*

### introduction of a net

### introduction of a net

### Macroprudential Policy Framework and Systemic Risk Analysis
- Objective: Strengthen resilience of the financial sector through enhancing macroprudential (MAP) frameworks and systemic risk monitoring.
- Key actions and status:
  - MCM: FSSR follow-up.
  - Develop a NSFR.
  - Financial Stability Committee established to coordinate MAP policy.
  - A NSFR to take effect from 2023.
  - Crisis management protocols in place.
  - Strengthen macro-financial stress testing tools, including on climate risks.
  - Credit-risk regulation revamped.
  - Strengthened supervisory stress test models/tools of credit, market, liquidity and contagion risks.
  - Introduce regulations for consolidated supervision of financial groups.
  - Integrate climate change into financial policies.
  - Enhance FinTech and cybersecurity regulation.
  - Publish data on unhedged FX borrowing and introduce regulation to unhedged borrowers and issuing the corresponding regulation.

### Financial Crisis Management
- Objective: Enhance financial safety net and crisis preparedness framework.
- Key actions and status:
  - MCM/LEG: Strengthen banking resolution and deposit insurance legal framework.
  - A roadmap developed to close the gaps identified in the legal framework.
  - Legal amendments drafted for submission to CONASSIF.
  - Submit the revised law on bank resolution and Deposit Guarantee Fund for Legislative Assembly’s approval.

### Real Sector Statistics
- Objective: Strengthen compilation and dissemination of macroeconomic and financial statistics according to internationally accepted statistical standards.
- Key actions and status:
  - CAPTAC-DR: compile a quarterly supply and use table (SUT) and improve monthly economic activity indicator (IMAE), annual accounts, and non-financial asset balance sheets.
  - GDP rebased to 2017.
  - Rebased GDP published by industry and expenditure.
  - Develop financial accounts, balance sheets, revaluation and other volume changes in asset accounts.
  - Main 2008 SNA recommendations implemented.
  - Quarterly SUT for all sectors to meet national data and ISWGNA minimum requirements.
  - Missions and TA activities listed for national accounts, quarterly SUT, sectoral accounts, balance sheets, price statistics, and related areas (missions completed by February 15, 2022).

### IMF Capacity Development and Technical Assistance (selected)
- Revenue Administration, Public Financial Management, Financial Integrity, Debt Management, Macro-Fiscal Capacity Building, Government Finance Statistics, Central Bank Operations, Financial Supervision and Regulation, Financial Crisis Management, Real Sector Statistics.
- Notable items:
  - Preparations and missions on Tax Compliance Improvement Plan, centralization and digitalization of social assistance cash programs, Treasury Single Account, MTFF, IPSAS & consolidation, Safeguards assessment update, developing FX market framework, amendments to the Central Bank Law, derivatives market development (currency swap), credit risk regulation strengthening, supervisory liquidity stress test, and roadmap for strengthening legal framework for banking resolution.
  - Specific mission dates and providers are listed in the source (missions completed by February 15, 2022).

### Program Performance and Macroeconomic Outlook (from Letter of Intent and MEFP)
- Recent macroeconomic developments:
  - Real GDP growth is estimated at around 7.5 percent in 2021 and projected at 3.6 percent in 2022.
  - Over the medium term, economic growth is expected to moderate back to its potential of around 3 percent.
  - Inflation accelerated in the last quarter of 2021, reaching 4.9 percent y/y in February 2022.
  - BCCR’s tolerance band for inflation: 2-4 percent over a one- to two-year horizon.
- Program performance and commitments:
  - End-July and end-December 2021 quantitative performance criteria (QPC) on the central government (CG) primary balance were met with large margins.
  - End-July and end-December indicative targets (IT) on the ceiling on debt stock of CG were met; end-September IT was missed by a small margin due to higher-than-expected pre-financing.
  - End-July and end-December net international reserves QPCs were met after adjustments.
  - The inner target band under the program’s Monetary Policy Consultation Clause was breached in December, triggering a consultation with IMF staff.
  - Continuous performance criteria observed on non-accumulation of new external arrears; non-imposition/intensification of restrictions on payments and transfers for current international transactions; non-introduction/intensification of multiple currency practices (MCPs); non-introduction/intensification of import restrictions for BOP reasons; and no bilateral payments agreements inconsistent with Article VIII obligations.
  - Structural benchmarks met: draft amendments to the BCCR’s law submitted to the Ministry of Finance on August 31, 2021; new Tax Compliance Improvement Plan; digitalizing the payment system for cash transfer social assistance programs.
  - Structural benchmark not met by end-May 2021: Public Employment Bill delayed, but subsequently approved by the Legislative Assembly on March 7.

### Letter of Intent: Key Requests and Targets
- Letter date and signatories:
  - San José, March 9, 2022.
  - Signed by Rodrigo Cubero (President, Central Bank of Costa Rica) and Elian Villegas (Minister of Finance).
- Requests to the IMF:
  - Request completion of the First and Second Reviews of the Extended Arrangement under the EFF.
  - Request the purchase of SDR 206.23 million upon completion of these reviews.
  - Request a five-month extension of the current arrangement until July 31, 2024.
  - Request addition of one review and a rephasing of access, shifting SDR 103.115 million from both the first- and second-review purchases to a new sixth review, with a March 15, 2024 availability date.
- Fiscal objectives and projections:
  - On track to achieve a primary surplus of 1 percent of GDP by end-2023.
  - Target debt-to-GDP ratio of 50 percent of GDP by end-2035.

*Source: 1criea2022001 - introduction of a net (PDF chapter/section) — content from the provided document excerpts.*

### 2022. The end-December benchmark to publish the 2020 financial statements of three state-owned

### 2022. The end-December benchmark to publish the 2020 financial statements of three state-owned enterprises according to IFRS standards was not met,  as  the authorities have needed more time to resolve reporting issues at two companies.

### Fiscal stance — objectives, recent performance, and targets
- Main priorities: secure debt sustainability, meet critical social and health needs, and support recovery.
- Historical context:
  - Fiscal balance deteriorated sharply over the past decade due to a permanent increase in current spending following the global financial crisis.
  - Comprehensive fiscal reform bill approved December 2018 aimed to rein in spending and strengthen revenue; reform put public debt on a declining trajectory over the medium term primarily by forcing a significant decline in spending as a share of GDP.
- COVID-19 pandemic effects and 2020 outcomes:
  - COVID-related spending in 2020: 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.
  - Primary deficit for the CG, including newly consolidated public entities, reached 3.8 percent of GDP in 2020.
  - Headline deficit reached 8.4 percent of GDP in 2020.
- 2021 performance:
  - Cumulative primary deficit as of end-December 2021: CRC112 billion (about 0.3 percent of GDP).
  - Program target prior to adjustor: CRC640 billion (or about 1.7 percent of GDP).
  - Fiscal overperformance driven by strong revenue collection, higher yields from the 2018 tax reform, improved tax administration, and one-off revenues including:
    - collections from public entities;
    - partial recovery from the 2020Q2 tax moratorium;
    - higher income tax payments in March 2021 due to the 15-month fiscal year transition.
  - Legislative Assembly approved resource allocations in January, September, and December 2021 for vaccine purchase and distribution totaling 0.25 percent of GDP.
  - Breach of the current spending ceiling under the fiscal rule by about 0.3 percent of GDP in 2021.
- 2022 target and commitments:
  - Target primary surplus by end-December 2022: CRC287 billion (or about 0.7 percent of GDP).
  - Committed to implementing revenue and expenditure measures consistent with the 2022 budget approved in November 2021 and the fiscal rule.
  - Any 2021 spending excluded for fiscal rule calculations triggers a downward revision in the 2021 spending base for 2022 spending ceilings; slippage in the 2021 current spending ceiling automatically adjusted downward for 2022 ceilings.
- Policy flexibility and contingencies:
  - Program allows an adjustor to accommodate increased COVID-19 emergency spending up to 0.3 percent of GDP in 2022.
  - If revenues underperform, the authorities will propose temporary tax measures and reprioritize non-critical spending to keep the primary target within reach.
  - If recovery is stronger than expected, revenue over-performance in 2022 and outer years will be saved to accelerate debt reduction.

### Composition of planned fiscal measures (2022 and medium term)
- Revenue measures (selected measures under discussion or planned):
  - Continued implementation of the 2018 tax reform expected to generate incremental yields of about 0.04 percent of GDP in 2022 through scheduled VAT rate increases on construction-related and tourism services and phasing-in of new sub-capitalization rules for CIT.
  - Measures under discussion in the Legislative Assembly include:
    - removing the income tax exemption for the 14th month salaries for public sector employees;
    - bringing forward the harmonization of capital gains and income tax at 15 percent;
    - increasing withholding tax rates on most transfers to non-residents by 5 percentage points (family and personal remittances are exempted);
    - amending legislation to allow distribution of dividends by SOEs to the CG;
    - further globalizing personal income tax, including reducing the tax-exempted threshold for wage income from CRC 10 million to CRC 8.4 million;
    - replacing the current solidarity property tax with a new luxury immovable property tax.
  - Compensatory social transfers to the poorest deciles will complement revenue measures.
- Spending measures:
  - Total spending expected to grow by around 2 percent in 2022 (after excluding emergency spending), in line with the fiscal rule.
  - Reduction in primary expenditure as a share of GDP estimated at 2 percentage points in 2022, net of additional allocations to social programs.
  - Specific spending controls include:
    - continued wage constraints from the 2018 fiscal reform (freeze in base salaries, annuities, new hiring; elimination of all vacancies);
    - annual nominal reduction of temporary wage components (such as overtime) by 8.5 percent;
    - freeze in pensions of public sector retirees and current transfers to the public sector excluding CCSS transfers;
    - cut in non-pension private transfers, non-CCSS public transfers, and transfers with external resources;
    - annual nominal reduction in spending on goods and services by 11 percent.
  - Capital spending: after temporary cuts in 2021, capital spending projected to gradually increase.
  - Given debt-to-GDP exceeded 60 percent in 2020 and 2021, the freeze in basic wage and accrual of annuities will be extended beyond 2025 per the fiscal rule and the PEB.
  - Commitment to stay current on payment obligations and not accumulate spending arrears.
  - Approval of external loans by multilateral partners, improved market conditions, and debt management efforts expected to help reduce interest expenditure.

### Medium-term strategy and structural reforms
- Medium-term goals:
  - Achieve a primary balance of 1 percent of GDP by end-2023.
  - Reach a debt-to-GDP ratio of 50 percent by 2035.
  - Implement additional progressive income and expenditure measures during the program period to deliver a faster decline in debt while fostering inclusive and sustainable growth.
- Additional structural measures to support consolidation and growth:
  - New revenue measures under discussion (referenced in MEFP ¶9) to secure a more progressive tax structure.
  - Continued yields from already approved expenditure measures over the medium term (MEFP ¶9).
  - Ambitious reform of public-sector employment (MEFP ¶14) to keep nominal spending growth low.
  - Modernization of tax and customs administration (MEFP ¶13) and PFM reforms (MEFP ¶15) expected to generate efficiency gains and greater revenue mobilization, providing upside to debt and financing challenges.

### Structural fiscal and debt-management reforms with climate and environmental dimensions
- Climate commitments and emissions targets:
  - Pledged to reduce greenhouse gas emissions to a net absolute maximum of 9.11 million tons of carbon dioxide equivalent (CO2e) for 2030.
  - Pledged 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 ¶4  2).
- Price incentives and revenue instruments:
  - Developing a revenue-neutral feebate scheme to promote low-emission vehicles:
    - sliding scale of fees for vehicles with above average emission rates and rebates for vehicles with below average emission rates;
    - 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.
    - Assessment of available options finalized and published in early March 2022; followed by public consultation; phased in to minimize impact on the lowest quintiles.
  - Updating and expanding the Payment for Environmental Services (PES) scheme to support payment for ecosystem services beyond carbon sequestration, including transfers for reforestation efforts to inhabitants of remote areas and support for blue carbon and organic carbon in soils under the Costa Rican Offset Mechanism (MCCR), which replaces the “Mercado Doméstico de Carbono.”
  - PES expansion financed by the Green Climate Fund award of US$54 million to Costa Rica by UNDP in May 2021.

### Revenue administration and tax compliance improvements
- Strengthening tax collection since 2018 through:
  - enforcing electronic invoicing;
  - deploying new audit programs;
  - improving framework for tax information exchange with other jurisdictions.
- Tax administration reforms and actions:
  - Building on 2019 TADAT assessment, committed to adopting a compliance risk management approach, revamping taxpayer services, and improving collection of tax arrears.
  - Expected approval of the new Customs Law by end-March 2022 (with IMF TA support) to promote trade facilitation and improve revenue collection through risk-based enforcement.
  - Refocusing anti-tax evasion efforts toward enforcement of recent tax reforms to reduce VAT and CIT compliance gaps.
  - Tax Commissioner approved a new Tax Compliance Improvement Plan in December 2021 (structural benchmark), supported by IMF TA, including:
    - large-scale automated-information cross-matching to detect inaccurate reporting;
    - revamped audit programs focused on VAT on services and erosion of CIT bases through cross-border transactions (BEPS).
  - Monitoring: progress on compliance risk mitigation strategies to be monitored quarterly from April 2022 using quantitative and qualitative indicators.
  - Enhancements planned by end-December 2022:
    - tax and customs coordinated risk management approach;
    - effective use of corporation shareholders and beneficial owners’ registers;
    - automatic exchange of information on financial accounts (CRS) and Country-by-Country (CbC) reports.
  - Plan to formulate a complete impact evaluation assessment framework to identify compliance improvement gains by end-2023.
  - Additional efficiencies expected from the MOF’s digital transformation plan “Hacienda Digital para el Bicentenario”, supported by the WB, to upgrade tax and customs procedures and information systems.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 14. We are committed to rationalizing and improving the efficiency and quality of

### 14. We are committed to rationalizing and improving the efficiency and quality of

### Rationalizing the public wage bill and public employment reform
- Objective: bring the public wage bill back to a sustainable path after its excessive expansion over the last 15 years; apply reallocation rules when the debt-to-GDP ratio is above 50 percent of GDP (exemption for constitutional mandates).
- Public Employment Bill approved by the Legislative Assembly on March 7, 2022 (delayed from end-May 2021 structural benchmark).
- Scope and features of the Bill:
  - Applies to all public sector institutions except non-state public entities operating in the public interest and state-owned companies and institutions operating under competitive markets.
  - Replaces the current salary system with a single pay spine with eight job families; consolidates within the single salary other wage supplements such as annuities, bonuses, incentives, and others.
  - Oversight over the single wage spine design shared between MIDEPLAN and autonomous institutions for their employees (Judiciary and Legislative Branches, Supreme Electoral Tribunal, public universities, municipalities, and CCSS), following criteria and ceilings approved by the Bill.
  - Entry into force: 12 months after approval; preparations already started.
  - Implementation milestone: introduction of a single pay spine and related reforms by end-March 2023 (proposed structural benchmark).
  - Treatment of existing salaries:
    - Salaries above the spine will be frozen until reached by the single pay scheme.
    - Gradual transition for existing workers whose salaries fall below the reference wage (Transitory Disposition XI).
  - Estimated savings (IDB): range between 0.5 and 0.8 percent of GDP during the first five years for the entire public sector (depending on new reference salaries).
  - New hiring under the new rules to start no later than twelve months after entry into force.
  - Additional measures: rules for recruitment and selection, professional development, performance assessment (including top-ranked officials); new employee benefits including one-month parental leave, two-month extension of maternity leave (for special cases), and sick leave to take care of a family member.

### Social assistance: targeting, digitalization, and payment efficiency
- Budgetary commitment: social assistance represented 1.8 percent of GDP in 2021.
- Objectives: enhance targeting accuracy and delivery, reduce fragmentation, improve payment processes, institutional arrangements, and transparency.
- Digitalization and centralization:
  - Centralized and digitalized payment system for all cash transfer social assistance programs at the MOF’s National Treasury in December 2021 (structural benchmark).
  - Signed agreements with responsible institutions; issued regulations; incorporated payment software into the Digital Treasury system in coordination with IMAS, CCSS, PRONAE, CONAPDIS, PANI, the Ministry of Labor and Social Security, and the BCCR.
  - Pilot programs using the new system: Avancemos (including Crecemos) and Programa Nacional de Empleo.
  - Expected full operationalization, including for Régimen No Contributivo de Pensiones, by end-April 2022.
  - Expected impact on payment processing time: reduce from 3-5 days to just 24 hours.
  - Benefits: improved service delivery, fiscal operations efficiency, and financial inclusion of the low-income population, especially women, through digital payment tools.
- Targeting improvements via SINIRUBE:
  - With World Bank support, strengthen SINIRUBE as main instrument to target social protection benefits and services and harmonize inter-institutional coordination.
  - Major social assistance programs have already adopted SINIRUBE.
  - Remaining programs represent about 30 percent of social assistance expenditure; IMAS supports capacity constraints for these programs to use SINIRUBE information.
  - Build on IMAS Directive 0122-2022 to increase SINIRUBE capabilities and ensure compliance with Directive 060-MTSS-MDHIS, including assessing continued beneficiary eligibility, based on information updating, established period of validity of benefits and regulated exceptional cases, and the socioeconomic classification of SINIRUBE.
- Expected outcome: improve spending efficiency, free resources for expanded coverage and generosity of social transfers, and support fiscal consolidation.

### Public financial management (PFM) improvements and fiscal rule implementation
- Medium-Term Fiscal Framework (MTFF):
  - First MTFF published in April 2021 covering the CG, providing macro-fiscal forecasts for 2021-2025.
  - MTFF updated in September 2021 as part of the 2022 budget submission.
  - Planned MTFF covering the entire Non-Financial Public Sector to be published by end-April 2022 (structural benchmark), one year ahead of Fiscal Responsibility Law deadline; IMF TA supporting enhanced NFPS fiscal projection models.
  - MTFF to include analysis/reporting of fiscal risks with contingent liabilities, debt guarantees, explicit fiscal contingency reserve schemes, and integrate a medium-term public investment plan/framework.
- Public Investment Management Assessment (PIMA):
  - Undertaken in November-December 2021 by IMF jointly with WB and IDB; included a new Climate Module.
  - Roadmap to strengthen public investment efficiency and create fiscal space for climate-related and other critical infrastructure needs.
  - Planned next steps and deadlines:
    - Define selection criteria, including climate objectives and a ranking methodology by end-May 2022.
    - Issue guidelines for PPP project appraisal by end-August 2022.
    - Modify the general decree for the public investment system to clarify the appraisal process by end-December 2022.
    - Build a centralized system to monitor major projects during implementation for the non-financial public sector, as envisaged by bill 22.470, by end-April 2023.
- Other PFM institutional reforms:
  - Gradual setup of a macro-fiscal unit to centralize MTFF preparation (in line with IMF TA).
  - Continued MoF-Comptroller collaboration across the budget cycle to ensure compliance with the fiscal rule.
  - Gender budgeting:
    - Complete initial pilot to identify gender budget spending by end-December 2022 (with IMF support).
    - Approve legal framework and governance arrangements for gender budgeting by end-December 2023, in coordination with the Comptroller Office for entities outside the CG budget.
    - Define a new set of gender budget markers for Hacienda Digital.
  - Budget consolidation efforts resumed: consolidation under the CG budget from 2021 of all public entities as required by Law 9524 of April 2018; further enhancements to be analyzed as part of public sector reform.
  - Treasury Single Account expansion: extend to decentralized and autonomous entities to reduce cash held in commercial bank accounts, subject to analysis coordinated by SUGEF, BCCR and MoF.
  - Fiscal Council operationalization: aim for the Council to publish its first public assessment of the government’s fiscal strategy in 2022; support to develop communication tools and memorandum of collaboration with the MoF.
  - MOF digital transformation plan “Hacienda Digital para el Bicentenario” (WB supported) to modernize and integrate PFM information systems.

### Public procurement modernization and transparency
- Enforce use of electronic platform SICOP by all procuring entities (as per Social Dialogue agreements).
- Public Procurement Law (No. 9986) approved in May 2021 introduced umbrella contracts framework, eliminated past exceptions to public bidding, and increased competition.
- Beneficial ownership transparency:
  - MoF developing implementing regulations to collect and publish beneficial ownership information; regulations to be published by November 2022.
  - Requirement: competing bidders submit accurate and current beneficial ownership information via affidavits as part of bidding; information to be publicly available through a renovated e-procurement portal for awarded bidders.
  - Interim measure: amendment to existing procurement regulation (with IMF TA) to enable collection and publication of beneficial ownership information for awarded public procurement contracts; amendment published in the Official Gazette in early-March 2022.
- Launched Public Procurement Observatory offering open data on public procurement since 2010 contained in SICOP and SIAC systems.

### Transparency in COVID-related spending and audits
- Comptroller’s Office developed a Fiscal Transparency Portal for COVID-19 with public information on purchases and audit results on emergency assistance.
- Ministry of Labor and Social Security created a transparency portal for the Bono Proteger program (beneficiary lists, statistics, reports).
- With IDB support, MIDEPLAN launched revamped Transparency Portal (Rendir Cuentas) to disseminate CG’s COVID-19-related public purchases, subsidies and donations, including data from SICOP, IMAS, MTSS, MINSA, CNE, CCSS and SINIRUBE.
- Portal data on public purchases include awarded vendors and legal ownership (if tenders required it).
- Comptroller’s Office conducting audits on emergency cash transfers and publishing results in its Portal.

### State-owned enterprises (SOEs): governance and reporting
- Commitment to accelerate full adoption of International Financial Reporting Standards (IFRS) by SOEs to improve transparency and reveal fiscal risks.
- Publication of 2020 financial statements according to IFRS (end-December 2021 structural benchmark):
  - ICE: fully compliant.
  - AyA: nearly compliant.
  - CNP: partially compliant.
  - Almost all remaining SOEs published 2020 financial statements in line with IFRS.
- Expected follow-up:
  - AyA expected to become fully IFRS compliant with publication of 2021 financial statements.
  - CNP will need a new accounting system to fully comply with IFRS.
- Aggregate SOE reports:
  - 2020 aggregate report published in February 2021 with expanded coverage.
  - 2021 aggregate report published in February 2022.
- Procurement and confidentiality reforms for SOEs:
  - With OECD and WB support, bring SOEs’ public procurement within SICOP by end-December 2022.
  - Limit use of exceptions for direct public procurement and gradually eliminate regulations allowing withholding of confidential information.

### Energy sector efficiency and electricity prices
- Energy companies do not receive CG transfers but impose high energy costs on consumers and the productive sector.
- ICE efficiency strategy (Strategy 4.0, strategic plan 2019-23) actions: reduce operational costs, restructure debt, implement IFRS.
- Cumulative tariff reductions in 2021 compared to December 2020:
  - Generation: 15.98 percent.
  - Distribution: 12.73 percent.
  - Transmission: 13.44 percent.
- Government commitment: advance ICE’s efficiency strategy through further debt restructuring and cost reduction; ICE to execute Financial Sustainability Roadmap to reduce fixed costs and renegotiate debt conditions.
- ICE contract policy: will not renew or will renegotiate at affordable terms private generator contracts as they expire to stop future liabilities.
- Legislative and regulatory steps to increase competition and improve tariff methodologies:
  - Bill No. 22.561 submitted to authorize private energy generators to sell surplus energy to the regional market.
  - Law No. 10086 approved in October 2021 to simplify administrative procedures for private participation in renewable power generation.
  - ARESEP to expand efforts through 2022 to reduce electricity prices charged by other generators and adopt new benchmark tariffs for generation, distribution, and transmission, with IDB support.
  - ARESEP to monitor distribution companies’ financial costs to ensure financing terms fit assets’ useful lifespan.

### Comprehensive reform of debt management
- Debt Policy for the Public Sector approved in 2019 (Executive Decree 41935-H) establishing guidelines for debt sustainability.
- Reform pillars: institutional reforms, medium-term strategy, and domestic market development.
- Institutional debt management reforms:
  - Established Assets and Liabilities Committee including Treasury, DCP, soon-to-be-established Macroeconomic Analysis Unit of MoF, and BCCR.
  - By end-December 2022: submit amendment to Law 8131 to unify debt-related functions within a unified debt management office and structure operational responsibilities of DCP and National Treasury along front, middle, and back-office functions.
  - Liaise with Legislative Assembly to seek general authorization for external borrowing consistent with approved annual budgetary and borrowing limits and debt management strategy (to reduce individual approval burdens).
- Medium-term debt management strategy (MTDS):
  - Formalized publication of MTDS through Directive Order; updating MTDS for 2023-26 with IMF support.
  - Publish MTDS by end-April 2022 (structural benchmark); first-time coverage to include government’s contingent liabilities, especially guarantees to state-owned companies.
  - Commit to publish and adhere to Annual Borrowing Plans and Quarterly Issuance calendars in line with MTDS.
  - Strengthen accounting and budget execution processes of public debt payments at MoF to improve debt data monitoring and budget control.
- Domestic market development:
  - Improve primary market functioning and markets under Article 23 of the Law of the Securities 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 become a price-taker to improve price discovery; form a technical pricing committee to develop pricing guidelines.
  - Encourage non-resident participation by easing regulatory barriers and harmonizing tax regime for non-resident investors, subject to macroprudential considerations; consult with Euroclear to allow clearing and settlement on that platform.
  - Active use of liability management operations to reduce rollover risks for debt maturing in the next 12-24 months and smooth impacts of maturing benchmark bonds, in line with MTDS.
  - By end-September 2022, roll out a pilot market-making/primary dealer program with a small group of participants with well-defined rights and responsibilities (with BCCR and IDB support).

*Source: 1criea2022001 - 14. We are committed to rationalizing and improving the efficiency and quality of (PDF).*

### 21. We are advancing our efforts to improve data quality and transparency in fiscal

### 1criea2022001 - 21. We are advancing our efforts to improve data quality and transparency in fiscal

### Fiscal data quality, coverage, and transparency
- Commitment to improve the timeliness, quality, and comprehensiveness of fiscal, financial and debt accounting for the public sector, with IMF TA support.
- Resumed efforts to fully adopt 2014 GFSM accrual accounting standards for fiscal and debt information, initially achieving this at the CG level.
- By end-December 2021, published monthly CG historical series and corresponding metadata.
- Interest data continue to be cash-based, with plan to start publishing data on accrued interests by end-March 2022.
- Progressive extension plan:
  - Full adoption of international standards for the fiscal and debt data of the general government by end-December 2022.
  - Full adoption for the entire non-financial public sector by end-December 2023.
- Consolidation and fiscal-risk reporting activities (with IMF TA) to include:
  - Consolidation of assets and liabilities of local governments, social security and SOEs.
  - Reporting of contingent liabilities, guarantees, concession contracts, and indebtedness of municipal governments and SOEs in the MTFF context.
  - 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 public sector accounting improvements to guarantee stock-flow consistency and enable balance sheet analysis.
- Program coverage and definitions to be updated in subsequent reviews and reflected in the attached TMU.

### Monetary and exchange rate policy — objectives, recent actions, and plans
- Inflation framework:
  - Firm commitment to low inflation within an inflation targeting framework.
  - Inflation target of 3 percent, with a tolerance band of ±1 percentage point over the medium term.
- Policy-rate path and recent moves:
  - Policy rate lowered to a record low of 0.75 percent in June 2020 during the pandemic.
  - BCCR raised rates in December and January 2022 to 1.75 percent to begin unwinding expansionary stance.
  - Inner Monetary Policy Consultation Clause (MPCC) band breached in December 2021; BCCR Board held a consultation with IMF staff in February 2022.
- Liquidity and credit support measures:
  - Special, temporary repo facility introduced in September 2020 for on-lending to debtors affected by the pandemic.
  - By June 2021, CRC826 billion (2 percent of GDP) had been disbursed through the special facility.
  - BCCR legally enabled to purchase capped amounts of sovereign securities in secondary market in April 2020; instrument marginally tapped in 2020 and unwound by end-July 2021.
- Reserve management and targets:
  - Maintain adequate international reserve buffers; exchange rate allowed to adjust under a flexible regime.
  - End-July and end-December NIR targets were met by a margin of US$240 million and US$392 million, respectively, net of relevant adjustors.
  - Aim to maintain reserves in line with the IMF’s Assessing Reserve Adequacy (ARA) metric and the net international reserves floor set under the program (Table 1).
  - Internal Audit Office of the BCCR to regularly review NIR and underlying data and reconcile with audited financial statements as needed at fiscal year-end.
- FX market development and related reforms (with IMF TA):
  - Revise net open FX position requirements in line with international best practices.
  - Promote legal reform to allow greater proportion of NBPSE FX activity to be conducted with FX intermediaries.
  - Intermediate step: encourage NBPSE to internalize market impact by setting indicative daily limits for FX purchases/sales through the BCCR and fees for exceeding limits.
  - Restrict the MONEX to FX intermediaries by end-September 2022.
  - Introduce FX swaps as a tool for BCCR participation in the FX market by end-September 2023.
  - Reforms conducted consistent with Article VIII commitments and the IMF’s Institutional View on Liberalization and Management of Capital Flows.
  - Complementary measures to reduce financial dollarization (MEFP ¶32).
- Governance and institutional-strengthening measures:
  - 2019 amendments improved dismissal rules for the BCCR Governor, delinked Governor’s term from political cycle, and removed Minister of Finance voting rights on the BCCR Board.
  - Draft amendments to the BCCR law submitted to the MoF at end-August 2021 (met structural benchmark).
  - Final amendments, once approved by MoF and President, to be submitted to the Legislative Assembly by end-December 2022 (proposed structural benchmark).
  - Executive Branch to take steps to fill current BCCR Board vacancy.
  - Develop a long-term roadmap to strengthen BCCR’s equity position.

### Financial sector policies — recent reforms, pandemic measures, and forward agenda
- General progress and vulnerabilities:
  - Significant financial sector reforms implemented, building on IMF’s 2018 FSSR and OECD recommendations.
  - Banking system entered COVID-19 crisis with strong capital and liquidity buffers; stress test results published in 2019 Financial Stability Report.
  - High levels of unhedged FX borrowing and household/corporate indebtedness remain key vulnerabilities.
- Pandemic-related regulatory measures and unwind:
  - March 2020 CONASSIF transitional measures allowed loan restructurings, moratoria without affecting credit history, and reduced minimum counter-cyclical provisions to zero.
  - BCCR special facility supported credit to private sector (MEFP ¶23).
  - Pre-pandemic regulatory treatment of restructured loans restored as of January 1, 2022.
  - Use of accumulated countercyclical provisions and softer regulatory capital thresholds extended until December 2022.
  - Legislative Assembly approved in December 2021 a 15-year government-funded program for US$270 million to provide guarantees to smaller-sized businesses affected by the pandemic; banks remain liable for 25 percent of loan principal; borrower eligibility limited to loans that were performing prior to the pandemic.
- Macroprudential framework and stress testing:
  - Financial Stability Committee (FSC) established in 2016 to coordinate macroprudential policy across agencies.
  - Monitoring and Coordination Group (MCG) created May 2019; presidency of FSC made permanent with BCCR President as FSC President in January 2020.
  - Strengthened stress test models and contagion tools; publish stress test results in Financial Stability Report going forward.
- Measures to reduce financial dollarization:
  - Since 2018, greater exchange rate flexibility and, in 2019, differentiated reserve requirements by currency (higher rate for FX liabilities).
  - Measures by SUGEF and CONASSIF include:
    - Higher general provision requirement for loans to non-FX generators.
    - Calculating liquidity coverage requirements by currency.
    - Additional capital requirements for foreign currency mortgages to unhedged borrowers, based on LTV thresholds.
    - Requirement for banks to assess sensitivity of debtors’ payment capacity to exchange rate changes (suspended during COVID response; to be gradually reintroduced in 2022).
  - Planned actions (with IMF TA):
    - Review definition of an unhedged borrower by end-June 2022, effective January 2023.
    - Complete assessment of change from provisions to additional capital requirements on FX loans to unhedged borrowers and issue regulation by end-December 2023 to take effect from January 1, 2025.
    - Measures to apply to marginal loans from corresponding effective dates and consider Basel III recommendation for risk weight multipliers for unhedged exposures.
    - Begin regularly publishing data on unhedged FX borrowing to increase transparency.
- Prudential regulation and supervision strengthening:
  - 2019 reforms (Law no. 9768) improved supervisors’ powers, including sanctioning powers.
  - SUGEF to introduce regulations by October 2022 to implement revamped supervision of financial groups, including guidelines to strengthen regulatory provisions, information sharing, and update solvency and capital requirements for financial groups.
  - Consider expanding SUGEF’s scope to include financial companies linked by common foreign ownership for cross-border supervision.
  - Basel III adoption in a phased manner:
    - Enhancements to liquidity risk management and monitoring of the liquidity coverage ratio; net stable funding ratio expected in effect from January 1, 2023.
    - Revamped credit risk management with forward-looking assessment of losses and provisioning; new regulation and guidelines finalized in November 2021 to come into effect from January 1, 2024.
    - Revised banks’ capital definition, conservation and systemic importance buffers, and definition of systemically important institutions; regulation issued in August 2021 to come into effect from January 1, 2025.
    - During adjustment period, financial entities required to assess operational and financial impacts and send results to SUGEF quarterly starting in the last quarter of 2022.
- Financial safety net, resolution, and deposit insurance:
  - Law on banking resolution and creation of a deposit guarantee fund (DGF) approved February 2020 (law no. 9816).
  - Implementing regulations effective since May 2021; quarterly payments into DGF started in October 2021.
  - Roadmap (with IMF TA) to strengthen legal framework on bank resolution and deposit insurance, including institutional arrangements, safeguards for resolution, and clear resolution triggers.
  - Plan to prepare and submit amendments to Law 9816 to CONASSIF by end-July 2022 and to the Legislative Assembly by end-March 2023; draft to include legal power to regulate and supervise resolution and recovery plans.
  - Enhanced crisis preparedness: early warnings system updated with pandemic, FSC contingency plan with communications protocol, and BCCR’s enhanced Lender of Last Resort mechanism.
- Financial inclusion, competition, fintech, and credit registry:
  - Pandemic-led increase in electronic transactions and Bono Proteger allocation boosted bancarization and inclusion.
  - National strategy for financial education coordinated by MEIC; strategic alliance with 20 financial institutions delivered training to around 350 thousand people and 14 million views of financial education material on social media.
  - Simplified requirements for opening bank accounts and launched electronic payment system for public transport nationwide.
  - CONASSIF and four superintendencies (with BCCR and Ministry of Economy) working on draft financial consumer protection legislation.
  - With IMF TA, regulation to balance innovation and financial stability; with IDB support, design and implement Financial Innovation Center by end-June 2022 to support fintech startups and guide regulation on sandboxes and crypto assets.
  - Commitment to improve Centro de Información Crediticia (CIC): with Alliance for Financial Inclusion support, prepare draft legislation by end-December 2022 to build a modern credit registry including supervised financial entities and non-supervised credit providers.
  - Commit to strengthening SBD governance and efficiency and develop instruments to strengthen synergies between private banks and SMEs (including guarantee fund MEFP ¶30).
  - BCCR and MEIC launched a database comparing credit products across the financial system to enhance consumer information and foster competition.

*Source: 1criea2022001 - 21. We are advancing our efforts to improve data quality and transparency in fiscal (PDF chapter/section).*

### 36. We remain fully committed to combating money laundering and countering terrorism.

### 1criea2022001 - 36. We remain fully committed to combating money laundering and countering terrorism.

### AML/CFT commitment and regulatory updates
- Costa Rica continues to strengthen technical compliance with the FATF standards on AML/CFT to help the fight against money laundering and terrorist financing.
- CONASSIF has approved regulations to:
  - make the sanctioning framework more effective, proportionate and dissuasive;
  - incorporate new regulated subjects;
  - adopt a new regulatory and legal framework related to beneficial ownership, including in revised SUGEF Regulation 12-21 of September 2020.
- CONASSIF updated regulations (effective from January 1, 2022) to strengthen due diligence measures that financial entities must carry out for:
  - politically exposed persons;
  - the financing of political parties;
  - the receipt of cash especially in foreign currency.

### CICAC (Centralized KYC repository) and implementation timeline
- In January 2021 CONASSIF approved SUGEF regulation 35-21 establishing the Centro de Información Conozca a su Cliente (CICAC) as a centralized repository of customer information to promote transparency, efficiency, and cost reduction for know-your-client (KYC) monitoring and supervision.
- This regulation became effective in January 2022.
- CICAC is now accessible to financial entities supervised by the four superintendencies attached to CONASSIF.
- The gradual filling of the database will start in July 2022.

### Beneficial ownership registry and inclusion of entity types
- In accordance with Law 9416 and Decree no. 41040-H, Costa Rica created a centralized registry and started collecting shareholder and beneficial ownership information in 2019 for all legal entities except trusts, third-party resource managers and non-profit organizations.
- As of October 2021, trusts have been included.
- Intention to include the rest of the entities by end-December 2023.

### Designated non-financial businesses and professions (SUGEF registration and suspensions)
- Close to 5,000 legal entities and individuals are registered in SUGEF.
- The regulation allows SUGEF to “suspend” the registration of legal entities and individuals that do not comply with regulatory requirements, preventing regulated financial intermediaries from providing services to them.
- More than 1,500 registered legal entities and individuals have been suspended (all by automated means) and 694 remained suspended as of end-December 2021.

### Ongoing supervisory commitments
- CONASSIF and the Financial Intelligence Unit will continue to dedicate resources to AML/CFT supervision and collaboration between competent authorities and carry out inspections with the required frequency.

### Greening the financial sector — roadmap and milestones
- BCCR joined the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) in 2019.
- BCCR established the Group for Strategic Analysis of Climate Change (GAECC), now including CONASSIF and the superintendencies, to address climate impacts and risks on the central bank’s main objectives.
- Roadmap centers on four blocks with target milestones:
  - Data
    - BCCR is taking stock of required data and, with support of the WB, aims to identify suitable indicators to measure and monitor climate-related risks that would be placed in a comprehensive information repository by end-December 2023.
  - Modeling
    - With support from the IDB, BCCR developed an integrated economic and environmental model to conduct impact analysis of climate policies.
    - BCCR aims at being fully operational in the analysis of different climate scenarios combined with various mitigation and adaptation policies by end-December 2024.
  - Climate change risk management
    - BCCR is assessing interlinkages between climate-related and macro-financial variables and risks to the financial system from climate change.
    - BCCR plans to incorporate NGFS recommendations in its “top-down” stress-testing methodologies by end-December 2022.
  - Greening international reserves
    - BCCR aims to lead the search for an environmentally friendly investment portfolio for its international reserves and to publish indicators of the “greenness” of its reserve holdings by end-December 2022.
- GAECC, CONASSIF, and the superintendencies coordinate efforts on climate change issues, aligning CONASSIF’s agenda with the National Strategic Plan 2050.
- BCCR plans, in coordination with supervisory authorities and within their respective mandates, to obtain firm-level disclosures of climate-related risks to inform regulatory and supervisory approaches.

### Structural reforms to boost productivity and promote green and inclusive growth
- Strategy hinges on three key objectives:
  - (i) protecting the most vulnerable from the impact of the crisis and supporting inclusion, including by promoting greater female labor force participation;
  - (ii) boosting productivity growth, including by 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.

### COVID-19 response and vaccination milestones
- Measures taken: health protocol enforcement, expanded hospital capacity, large-scale vaccination campaign launched December 2020.
- Vaccination status as of February 28, 2022:
  - 74.1 percent of the population was fully vaccinated;
  - 25.7 percent had already received a booster dose.
- Aim to fully vaccinate all eligible population and apply booster vaccines to vulnerable groups by end-2022.
- December 2021 Legislative Assembly approved a temporary US$270 million credit guarantee fund to support businesses affected by the pandemic.

### Measures to foster productivity growth: education, investment climate, formalization
- Education
  - Review of teacher evaluation system completed in November 2021 to inform a new performance-based evaluation model planned to start implementing in February 2023.
  - Updated curricula expected to be implemented for 175 schools by end-June 2023, with 80 schools already approved for implementation.
  - Resumed regular student performance tests for 2021, including digital and scientific fields.
  - Bilingualism Education Policy introduced February 2021 with Action Plan to ensure all students are proficient in a second language by 2040.
  - Vocational curricula in context of Industry 4.0 to be implemented by end-December 2023, with support from the IDB.
  - INA’s Organic Law amended to provide greater autonomy; linkage of public universities’ funding to labor market needs and integration in the National Science and Technology Information System.
- Investment climate
  - With CABEI and IDB support, efforts to identify spending priorities and promote PPPs; Program of Road Infrastructure and Promotion of PPP recently launched with PPP training during 2022-2024.
  - Digital Transformation Strategy 2018-2020 strengthened digital infrastructure and cybersecurity; Costa Rica ranked #76 in the Global Cybersecurity Index 2020, advancing 39 positions from 2019.
  - National Telecommunications Plan 2022-2027 to be developed by end-April 2022 with IDB support.
  - National strategy for administrative reforms and Costa Rica Fluye project for Smart Deregulation in 25 public institutions; implemented a single-window system (VUI).
  - Reform of the Law for the Protection of Citizens from Excess Requirements and Administrative Procedures in November 2021 to reduce administrative burden.
  - Work with 23 additional local governments to simplify procedures and centralize at national level by end-June 2022.
  - New bankruptcy law (Ley 9957) entered into force on December 1, 2021 to simplify bankruptcy processes.
- Formalization
  - 2019 CCSS modification temporarily lowered employer and employee social security contributions for new microenterprises during their first four years.
  - 2017 CCSS sectoral pilot with reduced minimum contribution base for domestic workers.
  - 2020 creation of mechanism to provide coverage for coffee harvest workers, changing tripartite contributions to a two-party modality covered by the state and ICAFE.
  - CCSS plan to adjust minimum contribution base for part-time workers to be approved by the CCSS Board of Directors by end-June 2022 (proposed structural benchmark) and implemented by end-July 2022.
  - Nationwide single-window shop (ane.cr) established to connect job seekers and companies and include complementary services such as childcare.
  - Reduced number of minimum wages from 26 to 16 over the last four years and plan to reduce to 11 by end-December 2022.
  - National strategy for transitioning to the formal economy with technical assistance from the ILO.

### Promoting female labor force participation and care policies
- Gender Parity Initiative (IPG) launched in September 2020 with support from IDB, WEF, and AFD to reduce women’s care burden and promote labor market participation and leadership; action plan over a minimum period of three years.
- Exploring options for gender budgeting to support IPG and other initiatives (MEFP ¶15).
- Childcare
  - 2018 fiscal reform expanded definition of public education to include early education centers.
  - In 2021, increased childcare services to cover 15,000 additional children (relative to 2017), focusing on children up to 5 years old.
  - Aim to expand childcare to cover an additional 8,000 children (relative to 2021) to enable an increase in childcare coverage to 8 per 100 children aged 0 to 12 years (which represents 23 percent of children aged 0 – 12 living in poverty).
  - Public Employment Bill introduced one month of paternity leave for public sector workers, a two-month extension of maternity leave (in specific cases), and paid leave to take care of a family member.
- Long-term care
  - National Care Policy 2021-2031 launched (Decree 42878-MP-MDHIS) to establish a long-term care system; five pillars: governance, data intelligence, strengthening of care supply and benefits, conditions for closing gender gaps, and quality assurance.
  - IMAS, INAMU and MTSS working with UN Women on mechanism to prioritize provision of care services where women can enter or remain in formal employment and to ensure money transfers to caregivers in extreme poverty.
  - Plan to complete protocols for eligibility by end-March 2022 and possibly refine after a planned pilot with UN Women.
  - Intention to fully implement the new Policy for all eligible women by end-December 2022.
  - Launch by end-March 2022 three pilots of care services financed by the IDB.
  - Implement a single dependency scale and a co-payment scheme based on family income by end-December 2022.
- Education and entrepreneurship
  - Continued efforts to strengthen education and vocational training and deepen financial inclusion (MEFP ¶35) to support women’s economic empowerment.
  - Plans to foster women’s participation in STEM fields with IDB collaboration and implement a national action plan for gender equality in scientific and technological fields.

*International Monetary Fund — Costa Rica: extract covering AML/CFT, climate-finance roadmap, and structural reforms.*

### 42. We are strongly committed to promoting environmentally sustainable medium-term

### 1criea2022001 - 42. We are strongly committed to promoting environmentally sustainable medium-term

### National Strategic Plan and governance
- Launched National Decarbonization Plan in 2019 aiming at transitioning to a zero net emissions economy by 2050, in line with the Paris Agreement.
- Electricity matrix: almost 100 percent currently sourced from renewables.
- Territorial Economic Strategy for an Inclusive and Decarbonized Economy 2020-2050 released March 2021 (support from the IDB); aims for gradual transition by 2050 with 12 development poles, six corridors, and 12,750 km2 of territorial management areas.
- National Strategic Plan 2050 to be launched by end-April 2022 after broad-based consultation (support from IDB and GIZ); will serve as main long-term planning instrument to implement the Strategy.
- MINAE’s National Directorate of Climate Change oversees Carbon Neutrality Country Program (PPCN 2.0) to provide voluntary greenhouse gas management for public and private organizations.
- Establish Secretariat for the Energy and Ecological Transition to mainstream decarbonization and adaptation across line ministries by end-June 2022; Secretariat will implement, coordinate, and operate the National Climate Change Metrics System (SINAMECC) to facilitate reporting and measure progress on revised NDCs.
- Establish National Ambition Cycle to create a data-driven, inclusive process to update NDCs and long-term climate action plans; National Ambition Cycle decree will be ready by end-March 2022 and will establish the Strategic Climate Change Planning System (SiPECC)—initially comprising MINAE, MIDEPLAN, BCCR and UCR.
- Recent UN-supported modeling confirms job creation potential of the National Decarbonization Plan and its support for pandemic recovery.
- Analytical work: first impact assessment study completed in November 2021; models to study technical profiles for new green and blue jobs by end-November 2022; identify transition pathways for different industries to move towards decarbonization by end-March 2023.
- Establish just-transition governance structure with ILO support to mitigate adverse labor-market consequences.
- Greening financial sector: BCCR joined the Network for Greening the Financial System in 2019 and completed in June 2021 a roadmap to integrate climate change considerations into monetary and financial policy (MEFP ¶37).

### Electrification of transport sector
- Transport sector targeted for fleet electrification as it is the largest contributor to greenhouse gas emissions.
- Implemented promotional electric tariff for electricity supply to charging centers for electric buses; incorporated into current tariff schedules of electricity distribution companies.
- Installed 40 charging centers nationwide with IDB support; other 21 centers expected by end-December 2022.
- Incorporated unit (fleet) electrification considerations into operators’ concession contracts.
- Bill 22.923 submitted to the Legislative Assembly in early March 2022 to extend line concession periods for public buses from 7 to up to 15 years, subject to commitment to convert at least 40 percent of the fleet to electric units during the contractual term.
- Signing agreements with bus companies underway; by end-May 2022 expect to have signed 12 agreements to cover all bus routes for the Greater Metropolitan Area.
- Developing price incentives to support the transformation to a zero net emission economy (MEFP ¶12).

### Agriculture, forestry, and marine ecosystems
- Agriculture and forestry recognized as major contributors to carbon sequestration and crucial to zero net emission target.
- With World Bank support: technical assistance to farmers for low-carbon technologies/practices, promotion of agricultural research on low-carbon solutions, and development of financing instruments.
- Developing nationally appropriate mitigation actions for rice, sugarcane and bananas with support from IDB and AFD.
- Green Climate Fund: received first disbursement of US$23.9 million out of a total of US$54 million in January 2022 to support reforestation and ecosystem conservation (National Fire Management Program, enhancement to the Indigenous Payment for Environmental services, and Payment for Environmental Services).
- Forest Carbon Partnership Facility: will receive US$60 million during 2022-25 through the Emission Reductions Purchase Agreement (ERPA) for projected CO2 reduction during 2018-2024.
- With World Bank support: implement Benefit Sharing Plan associated with ERPA, including allocation of grants to reduce deforestation and forest degradation to foster green economy and improve communities’ resilience and livelihoods.
- Additional initiatives target emissions reduction in construction and industrial manufacturing sectors and improved wastewater management.
- Support “blue” economy through sustainable, innovative coastal-area use while ensuring conservation; target to protect 30 percent of marine territory under conservation schemes by end-December 2022.
- Decree 43368-MINAE signed in December 2021 to expand protection of Coco Island National Park and Montes Submarinos Marine Area.
- Regional strategy: establish transboundary biosphere reserve to connect Cocos Island (Costa Rica), Galapagos (Ecuador), Malpelo (Colombia) and Coiba (Panama) by end-December 2024.

### Environmental trade
- Negotiating Agreement on Climate Change, Trade and Sustainability (ACCTS) with five other countries: Fiji, Iceland, New Zealand, Norway, Switzerland.
- ACCTS members agreed to work towards eliminating tariffs on environmental goods trade, barriers to environmental services trade, and environment-damaging subsidies and commitments, and to promote good practices for voluntary eco-labeling systems.

### Adaptation efforts and resilience
- National Policy on Adaptation (PNA) to climate change launched in 2018 to establish adaptation goals for 2018-2030.
- National Adaptation Plan expected to be completed by end-March 2022.
- Developed climate risk maps for extreme hydrometeorological events for 23 cantons; expect to cover remaining cantons by end-March 2023.
- Strengthening National System for Disaster Risk Management with World Bank support in line with Institutional Strategic Plan 2018-2022 of the National Commission for Risk Prevention and Emergency Care, with focus on financial management in public investment.
- New insurance scheme introduced in 2019 allows agricultural producers to insure harvests against climate change risks and offers lower premia for producers implementing adaptation measures.
- AGROINNOVA 4.0 started in 2020 to promote application of technology to increase productivity and sustainability in agriculture.

### Infrastructure resilience and public investment
- Climate-proofing infrastructure to mitigate fiscal impact of climate-related disasters and protect coast lines.
- With World Bank support: updated methodological guidelines for preparation and appraisal of public investment projects to incorporate exposure and resilience principles to extreme weather events.
- Addressing PIMA climate module recommendations (MEFP ¶15) with IMF TA to strengthen institutional readiness for climate-related risks in infrastructure planning and investment.
- Key planned actions and timelines:
  - Develop standardized methodology for climate change analysis in project appraisal and incorporate it in MIDEPLAN guidelines annex on natural disaster risks by end-November 2022.
  - Include climate policy objectives among selection criteria in revisions of technical rules by end-May 2022.
  - Include climate-related risks in a standardized methodology for the non-financial public sector for estimating capital maintenance needs, as envisaged by bill 22.470 currently under discussion in the Legislative Assembly, by end-April 2023.
- Roadmap to enhance infrastructure resilience (structural benchmark) to be developed with World Bank support by end-September 2022; will guide technical planning and implementation including assessment of medium-term investment needs and costs and financing options.
- With IDB support: develop criteria to align and prioritize projects that support the National Decarbonization Plan in the National Public Investment System by end-March 2022 through mandatory use of standardized sustainability criteria from earlier cost-benefit analyses.
- Develop new classification of climate change and disaster risk expenditure with IDB and AFD support; expected approval by end-April 2022.
- In collaboration with IDB: aim at increasing resilience of transport infrastructure (MEFP ¶40).

*Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1criea2022001.pdf*

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

### Technical Memorandum of Understanding (TMU) — Framework for monitoring Costa Rica under the EFF-supported program

### Overview
- Establishes the framework for monitoring performance under the Extended Arrangement under the Extended Fund Facility (EFF), including the performance criteria, indicative targets (including adjustors), monitoring procedures, and reporting requirements.
- Performance will be assessed through semiannual reviews.

### Performance criteria (Table 1 in MEFP)
- Quantitative performance criteria and indicative targets listed in the TMU:
  - 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, the 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
- All foreign currency-related assets, liabilities, and flows will be evaluated at “program exchange rates” (prevailing on January 31, 2022), except fiscal operation items which are measured at current exchange rates.
- Monetary gold valued at US$ 1,797.17 per troy ounce (price prevailing on January 31, 2022).
- Program exchange rates (January 31, 2022):
  - Colones to the U.S. dollar 642.73
  - U.S. dollar to the SDR 1.3917
  - U.S. dollar to the Yen 0.008687
  - U.S. dollar to the Euro 1.1235
  - U.S. dollar to the Canadian dollar 0.7869
  - U.S. dollar to the Chinese RMB 0.1572
  - U.S. dollar to the British Pound 1.3447
  - Gold price per troy ounce (U.S. Dollar) 1,797.17

### Central government definition and consolidation
- 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”; and the public entities required to be consolidated under central government (CG) from 2021 by Law 9524.
- Excluded from the definition of central government: the Central Bank of Costa Rica (BCCR), state-owned enterprises, and other public sector agencies.
- Debt defined in accordance with paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board Decision No. 15688-(14/107), adopted December 5, 2014).
- The entities required to be consolidated under CG by Law 9524 (listed entities 1 through 51 in the TMU) include, among others, PRODHAB, CONAGEBIO, CNE, CONAVI, FODESAF, FONABE, FONAFIFO, IAFA, INCIENSA, INTA, SINAC, TNCR, and TRA.
- Data from Unidad Ejecutora del Proyecto (UEP) was included in the historical series presented in 2019; from 2020 onwards, UEP data is included in the budgetary central government.

### I. Performance criterion on central government cash primary balance
- Definitions:
  - Overall balance = budgetary revenue − total expenditure.
  - Cash primary balance = overall balance excluding net interest payments.
  - Revenue registered on a cash basis; expenses recorded on an accrual basis except interest, which is recorded when disbursements are made. Capital expenditure reflects accrued amounts recorded under investment projects (modified cash approach).
  - Proceeds from privatization or commercialization of public assets will not be recorded as central government revenues.
  - Consolidation is done entity by entity; residual consolidation adjustments affect capital transfers (income and/or expense).
  - Financing (below the line) data are not used for calculation of primary or overall balance.
  - Figures until 2018 do not comprise the entities included in paragraph 5.
- Adjustor for COVID-19 emergency spending:
  - The performance criterion will have one adjustor for 2021 and 2022.
  - 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, targeted support to families, workers, and firms, or social assistance programs), provided such additional expenditure is clearly identified and reflected in an appropriate document.
  - The adjustor is capped at CRC 112 billion for 2021 and CRC 128 billion for 2022 (about 0.3 percent of GDP).

### II. 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 holdings of foreign securities); the reserve position at the IMF; and SDR holdings. Exclusions: participation in international financial institutions; holdings of nonconvertible currencies; precious metals other than monetary gold; claims on residents; pledged or encumbered foreign assets; and claims arising from derivative transactions.
  - (b) Gross reserve-related liabilities include all short-term liabilities to nonresidents denominated in convertible foreign currencies with 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. Exclusions: foreign exchange liabilities to the general government or related to deposit guarantees.
- Baseline and targets:
  - 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; Program NIR at test dates and end of previous year are evaluated at the program exchange rates and gold price in paragraph 4.
- Adjustors to the NIR floor:
  - If the sum of (i) through (v) as set out in Table 1 of the MEFP—(i) foreign program financing by the central government and the BCCR net of IMF purchases and all debt service; (ii) external commercial borrowing 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; and (v) proceeds from commercialization of public assets to non-residents—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. Proceeds from commercialization of public assets are cash receipts from sale or lease of publicly held assets. These adjustors apply to 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—as set out in Table 1 of the MEFP—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 debt owed to multilateral and official bilateral creditors as defined in the 2013 External Debt Statistics: Guide for Compilers and Users. These adjustors apply to end-July 2021 and thereafter.

### III. Continuous performance criterion on new external payment arrears
- A continuous performance criterion applies to non-accumulation of new external payment arrears on external debt contracted or guaranteed by the nonfinancial public sector and the BCCR.
- Definitions and scope:
  - Nonfinancial public sector defined following the 1986 Government Finance Statistics Manual and the 2008 System of National Accounts; includes central government and nonfinancial public enterprises (boards, enterprises and agencies with government controlling stake).
  - External payment 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 at the time they are due as specified in contractual agreements, subject to applicable grace period.
  - Overdue debt and debt service obligations in dispute with respect to amount and/or validity are not considered external payment arrears for program monitoring purposes.
  - Excludes arrears on external financial obligations of the government subject to rescheduling.
  - Failure to make payment on an obligation not considered debt (e.g., payment on delivery) will not give rise to debt.

### IV. Monetary policy consultation clause
- Inflation measurement:
  - Year-on-year inflation measured by headline CPI (INEC) for each test date using:
    - CPI*(t) = { CPI(t-2) + CPI(t-1) + CPI(t) } / 3
    - CPI*(t-12) = { CPI(t-14) + CPI(t-13) + CPI(t-12) } / 3
    - Year-on-year inflation = {CPI*(t) – CPI*(t-12)} / CPI*(t-12)
- Consultation triggers:
  - If observed year-on-year inflation falls outside the outer band limits of +/- 3 percentage points around the targets 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. The consultation would focus on (i) the stance of monetary policy and whether the Fund-supported program remains on track; (ii) the reasons for deviations, taking into account compensating factors; and (iii) proposed remedial actions. When such 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 targets for the relevant semi-annual test dates, the authorities will conduct a consultation with IMF staff on the reasons for the deviation and the proposed policy response.

### V. Indicative target on debt stock of the central government
- Debt definition:
  - “Debt” as defined in the Guidelines on Public Debt Conditionality in IMF Arrangements, Decision No. 15688-(14/107), understood as a current (not contingent) liability created under a contractual arrangement requiring one or more future payments in assets or services; includes loans, debt securities, bonds, commercial loans, buyers’ credits, and off-budget project loans.
- Conversion rules:
  - All foreign currency denominated debt converted into colones using program exchange rates in Table 1.
  - All domestic debt denominated in inflation indexed units (TUDES) converted into colones using the program rate in Table 1.
- Adjustor for COVID-19 emergency spending:
  - The performance criterion on debt stock of the central government will have one adjustor for 2021 and 2022.
  - The ceiling on debt stock will be adjusted upward by the full amount of any increase in COVID-19 emergency spending compared to budgeted amounts (transfers to health, targeted support, social assistance), provided additional expenditure is clearly identified and reflected in an appropriate document.
  - For 2021, the adjustor is capped at CRC 112 billion. For 2022, the adjustor is capped at CRC 128 billion.

### VI. Data reporting requirements and timelines
- Costa Rica shall provide the Fund with requested information on progress in achieving objectives and policies in the MEFP and Letters of Intent. Data providers: Ministry of Finance, IMAS, FODESAF, BCCR, and SUGEF.
- Formats:
  - Fiscal monitoring data provided in the format shown in Tables 2, 3, and 4.
  - External sector monitoring data provided in the format shown in Tables 5 and 6.
  - Data for monitoring the indicative target on treasury guarantees provided in the format shown in Table 7.
  - Financial sector monitoring data provided as described in paragraph 20.
- 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: Technical Memorandum of Understanding (TMU) — program monitoring framework for Costa Rica under the EFF (as provided in the supplied content).*

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

### 1criea2022001 - 18. Data relating to the external targets (Table 5) and monetary consultation band will be

### Data reporting schedules and periodicity
- 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, except for data on official reserve assets (Table 6), which 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.

### Financial sector reporting (Costa Rica)
- Financial soundness indicators of banks and cooperatives, bank by bank, group (public and private), and system level:
  - Data will be reported monthly, no later than four weeks after the end of each month.
- Anonymized bank by bank asset quality indicators, including by risk buckets (e.g., low, medium, high/viable, high/nonviable), and disaggregated by type of credit, economic sector, and currency:
  - Data will be reported on a monthly basis, no later than four weeks after the end of each month.
  - Such data on individual banks will be treated as strictly confidential and will not be published except in aggregate form.

### Tables and fiscal/financial reporting templates (inventory of major tables and items)
- Table 2. Costa Rica: Central Government Operations (In billions of colones) — key line items 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; Sales Tax; Consumption Tax; 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).
- Continuation of Table 2 — Expenditure and balances (In billions of colones):
  - Total Expenditure; No Interest Expense Total; Current expenses; Salaries; Wages and salaries; Social Security Contributions (CCSS, Worker Protection Act, Others); Purchase of Goods and Services; Interest Expenditure (Internal, External); Transfers (Private Sector, Pensions (including CCSS), Others, Public Sector, External); Capital Expenditure; Investment; Capital Transfers (Private, Public, External); Capitalization banks; Primary Balance; Overall Balance; Residual; Total Financing; Net Domestic Financing; Net Foreign Financing; Privatization.
- Table 3. Costa Rica: Central Government Financing (In billions of colones) — financing aggregates and subcomponents:
  - 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 and balances, Cash and Banks and balances, Net Loans); Central Government Financing (Amortization of government, Change in Government Securities and balances); Other domestic financing (Credit providers, Disbursements, Amoritizations, Var. Dep in other entities and balances, Other financ. internal, Exchange Losses, Net loans); Net Foreign Financing (Disbursements, Amortization, Var. Dep abroad and balances).
- Table 4. Costa Rica: Central Government Debt (In billions of colones) — debt stock and maturities:
  - Debt stock (Domestic: Bonds by coupon/type including Tasa basica, Zero coupon colones, Zero coupon dolares, Fixed coupon colones/dolares, Floating coupon colones/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 by Domestic and External and subcomponents 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 (In millions of U.S. dollars) — major aggregates:
  - 1. Total Inflows: Official sector disbursement (Program loans; IMF; World Bank; IDB; CABEI; ADF; CAF); Project loans and grants (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) with breakdown Official loans (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)1/; Net International Reserves (at program exchange rates)1/; 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 (In millions of U.S. dollars). 1/ As agreed for the purpose of monitoring the program.
- Table 7. Costa Rica: Priority Social Spending (In billions of Colons). 1/ As agreed for the purpose of monitoring the program.
  - Footnotes and program notes:
    - 2/ Crecemos program will be merged under Avancemos program starting in 2022.
    - 3/ Since 2020, the program reports only tertiary education scholarship information, with primary education scholarships information (that used to be reported under this program) consolidated under Crecemos.
    - 4/ Starting in 2022, this program will provide support to students enrolled in private institutions' training programs when the National Institute of Apprenticeship (INA) cannot provide the service directly.
  - Key social spending program categories and items listed:
    - Government; Foreign Assets (FA) (Without DA); Net International Reserves (5) - (9); Gross Official Reserves (3) + (4); Reserves managed by BCCR; Date; 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.
    - Social programs enumerated:
      - 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/
        - 2.2. 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 3/)
        - 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; 2.8.5. Training voucher program 4/)
        - 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

### Statement by Mr. Moreno and Ms. Lankester Campos on Costa Rica (March 25, 2022) — program purpose and assessment
- Authorities expressed gratitude to management and staff for engagement to conclude the first and second reviews under the Extended Fund Facility (EFF) arrangement and appreciation to Ms. Manuela Goretti, the Mission Chief and her team.
- Role of the EFF and Fund support:
  - The EFF has been critical to safeguard macroeconomic stability, ensure a strong economic recovery, and promote a greener, more inclusive growth over the medium term.
  - The EFF catalyzed additional financial support from other multilateral institutions and international capital markets.
  - IMF support through the program and the new SDR allocation bolstered the countries’ international reserve position, strengthened market confidence, and anchored fiscal consolidation efforts.
- The EFF program’s three key objectives:
  - (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.
- Performance under the program:
  - For the first and second reviews, the Costa Rican authorities have met all the end-July and end-December 2021 quantitative performance criteria by comfortable margins.
  - Fiscal outcomes were much better than anticipated, given prudent spending and the strong revenue overperformance.
  - After approval of the Public Employment Bill (a structural benchmark under the program), Fitch and Standard & Poor’s revised up their outlook on Costa Rican sovereign debt.
  - Costa Rica has actively engaged in the use of Fund technical assistance across multiple areas including fiscal and national accounts statistics, financial regulation and supervision, customs efficiency, revenue mobilization, central bank governance, and exchange market operations.
- Program timing and legislative context:
  - In view of the strong quantitative performance, macroeconomic policies implemented, progress on structural reforms, and considering legislative delays in program implementation, the Fund and Costa Rica consider it in their best interest to provide additional time for the incoming administration to adjust the reform agenda under the EFF-supported program.

### Background information and recent developments
- Institutional and structural features:
  - Costa Rica is one of only two countries in the Latin American region (along with Uruguay), and one of only 21 countries in the world, whose democracies are considered “full”, tied with Austria, according to the Economist Intelligence Unit’s Democracy Index.
  - It ranks high in the region on UNDP’s Human Development Index, classified within the very high range.
  - Three decades of economic transformation from agriculture-based to knowledge-intensive, service-oriented economy, with diversified industries including medical devices, ecotourism, and renewable power.
  - CENCE projects that the five renewable sources available to the Costa Rican matrix – water, geothermal, wind, biomass, and sun – would make up for 98% of national generation in 2022.
  - Costa Rica became the 38th OECD Member in May 2021 after an accession process that began in April 2015.
  - Authorities have adopted wide-ranging structural reforms aligned with OECD standards aimed at boosting growth potential, reducing inequality, improving living conditions, decarbonization, and resilience to climate change.
- Fiscal history:
  - Public spending has outpaced revenues over the last two decades; a long-standing fiscal deficit worsened after the Global Financial Crisis of 2008 and subsequent expansionary fiscal policy.
  - Government debt ratio, measured as a percentage of GDP, grew at one of the fastest rates in the region.
- Health and pandemic response:
  - Costa Rica has a strong primary health care public system.
  - By December 2020, authorities launched a large-scale vaccination campaign.
  - Fourteen months later, 74.1 percent of the population was fully vaccinated, and 25.7 percent had already received a booster dose.
  - Authorities aim to fully vaccinate all eligible population and apply booster vaccines to vulnerable groups by end-2022.
  - “Excess deaths” estimates show Costa Rica has had one of the lowest death tolls from Covid per one million inhabitants.

### Economic outlook and projections
- Recent growth and forecasts:
  - For 2021, GDP grew 7.6 percent (after a 4.1 percent contraction in 2020).
  - The Central Bank (BCCR) projects growth of around 4 percent in 2022 and 2023.
  - In January 2022, the monthly index of economic activity expanded 9.0 percent, y-o-y.
- Labor market:
  - Unemployment rate declined from a peak of 24.4 percent to 13.1 percent in January 2022, but remains slightly above pre-pandemic levels.
- Inflation:
  - Inflation accelerated during the last quarter of 2021 and ended the year at 3.3 percent.
  - The BCCR projects headline inflation to reach 5.9 percent and return to within the tolerance band of 3 percent plus-minus one percent in 2023, with core inflation remaining within the tolerance band in the two years.
- External risks:
  - Russia–Ukraine conflict not expected to have a large direct impact on Costa Rica’s economy (two countries account for small shares of exports, imports, and tourism), but indirect effects may be significant via higher commodity prices and lower global growth.
- Outlook anchoring factors:
  - (i) Continued strong external demand.
  - (ii) Vigorous domestic private demand, supported by credit conditions and stronger consumer and business confidence, as vaccination continues, despite deteriorating terms of trade.

### Fiscal policy stance and targets
- Past reforms and pandemic response:
  - Comprehensive fiscal reform approved December 2018: broadening the base for the value-added tax, higher rates of income tax, and a fiscal rule to limit expenditure growth.
  - In 2020, authorities increased health-related spending and introduced Bono Proteger to support vulnerable households while containing non-priority primary spending.
  - Monetary and prudential policies were adopted to lower interest rates, improve credit conditions, and ensure adequate functioning of financial markets.
- 2021 fiscal outcomes:
  - Primary deficit was 0.3 percent of GDP (3.4 percent in 2020), below the EFF target of 1.7 percent.
  - Overall deficit was 5 percent (8 percent in 2020).
  - These outcomes were explained by strong revenue overperformance (robust recovery, higher than expected yields from the 2018 fiscal reform and one-offs) and a decline in primary expenditure as a share of GDP.
  - February 2022: primary expenditure at its lowest in eleven years, at 2.5 percent of GDP; total revenue was 2.6 percent of GDP, the highest in the last seventeen years; delivering a primary surplus of 0.1 percent of GDP.
- Medium-term fiscal targets:
  - Authorities reaffirm commitment to fiscal consolidation while protecting the vulnerable and supporting sustainable recovery.
  - Target to achieve a primary balance of 1 percent of GDP by end-2023 and reach a debt-to-GDP ratio of 50 percent by 2035.
  - Specific near-term target: primary surplus of 0.7 percent of GDP by end-December (text truncated in source at this point).

*IMF staff report excerpt and program documentation (Costa Rica), March 25, 2022.*

### 2022. To achieve it,  they  are committed to implementing  f urther revenue and expenditure measures,

### 1criea2022001 - 2022. To achieve it,  they  are committed to implementing  f urther revenue and expenditure measures,

### Monetary policy
- The BCCR’s monetary policy approach is data-dependent and forward-looking, within an inflation targeting framework.
- Policy rate was reduced to its lowest ever of 0.75 percent to mitigate the pandemic’s impact without risking expectations.
- Inflation remained contained by international standards in 2021 despite external price pressures.
- BCCR started normalizing its rate in December 2021 with three consecutive rate increases: 50 basis points in December 2021, 50 basis points in January 2022, and 75 b.p. in March 2022.
- The central bank announced it will continue to raise its policy rate in 2022 toward a neutral stance, with liquidity management supporting policy normalization.
- The Central Bank reiterated its commitment to the inflation target, explained its outlook for inflation, risks around the outlook, and the implications for monetary policy.
- Authorities are vigilant about the tightening of global financial conditions and risks posed by sustained global price pressures, worsened by the war in Ukraine.

### Foreign-exchange (FX) market
- FX pressures have arisen from higher commodity prices, transport costs, and the cost of imports in general.
- Internal factors contributing to FX pressures include higher demand from the non-financial public sector (NFPS) to meet FX-denominated debt maturing and portfolio diversification into foreign assets by pension funds.
- By the end of 2021, the exchange rate had depreciated 4.4 percent.
- The BCCR’s participation in the FX market was limited to limiting abrupt exchange rate movements without changing its trend and to meeting the FX needs of the NFPS.

### Structural reforms and fiscal measures
- Costa Rica has a comprehensive roadmap for structural reforms to align public governance and policies with international best practices, foster transparency, efficiency, and growth, reduce inequality, and protect the most vulnerable.
- The latest structural reform is the public employment law approved on March 7th, 2022:
  - Creates a single pay scale across the public sector, eliminating salary components such as bonuses and annuities.
  - Improves fairness of public compensation and reduces the high public-private wage premium.
  - Faced strong opposition from public sector unions and some members of Congress; delayed by collective action disagreements, legal consultations, and two reviews by the Constitutional Court.
  - Approved by a qualified majority in Congress in early March and will enter into force in March 2023, with preparations already started for the introduction of the single pay spine and related reforms.
  - Government estimates savings of 0.7 percent of GDP per year in reduced wages during the first years of implementation.
  - Wages count for almost one third of central government spending.
- Structural fiscal program also envisages gains from:
  - Reforms to public procurement.
  - Modernization of the tax and customs administration.
  - Public financial management reforms.
- Ongoing work to expand the Medium-Term Fiscal Framework, MTFF, to the nonfinancial public sector by end April 2022.
- Efforts underway to operationalize the Fiscal Council and implement a plan to phase in gender budgeting.
- Capacity building and IMF technical assistance have been instrumental and are critical for success.
- The program contemplates protection of capital expenditure and well targeted social spending to address critical infrastructure needs and support the most vulnerable.
- The BCCR completed draft amendments to its Organic Law in August 2021; these are expected to be submitted to the Legislative Assembly by end-December 2022 to:
  - Clarify the Central Bank’s objectives.
  - Provide for a clear allocation of functions among its decision-making bodies.
  - Strengthen institutional, functional, personal, and financial autonomy.
  - Enhance transparency and accountability.

### Climate change and related institutional actions
- Authorities reiterated commitment to climate change reforms, including measures to reduce greenhouse gas emissions and strengthen adaptation capacity.
- Specific commitments under the National Decarbonization Plan:
  - Reduce greenhouse gas emissions to a net absolute maximum of 9.11 million tons of carbon dioxide equivalent (CO2e) by 2030.
  - A maximum net emissions budget in the period 2021 to 2030 of 106.3 million tons of carbon dioxide equivalent (CO2e).
  - Achieve zero net emissions by 2050.
- BCCR established the Group for Strategic Analysis of Climate Change (GAECC) and developed a roadmap for 2021-2024 with four key action areas:
  - Establishing reliable and comparable data.
  - Strengthening modeling and analytical capacity for scenario analysis.
  - Promoting climate-change risk management in the financial system.
  - Greening international reserves.

### Political assurances and electoral context
- Presidential elections took place on February 6th, 2022.
- Former president José María Figueres won with 27.3 percent of the vote; Rodrigo Chaves received 16.7 percent.
- Figueres and Chaves were to contest a second round on April 3rd.
- Both candidates strongly agree on the need to continue fiscal consolidation, the importance of the EFF program, and their commitment to the program’s objectives.
- Candidate statements:
  - José María Figueres (press release, March 1st, 2022): reiterated commitment to IMF agreement objectives, including ensuring debt sustainability, with a primary surplus of at least 1% of GDP by 2023 for the Central Government.
  - Rodrigo Chaves (interview, February 28th, 2022): aims to help debt sustainability, reach a primary balance of at least 1 percent of GDP by 2023, maintain monetary and financial stability, and promote strong inclusive growth that considers the climate agenda.

*Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1criea2022001.pdf*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1criea2022001.pdf_