## 1criea2022002

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### Executive summary — context and headline figures
- New administration took office in May 2022 and confronted a cyberattack on several government systems and global shocks from the commodity price shock, slowing trading partner growth, and tightening financial conditions.
- Authorities reaffirmed commitment to the Fund-supported program and requested an RSF arrangement to support climate resilience and zero-carbon transition:
  - Requested RSF access: SDR 554.1 million (150 percent of quota).
- Key macroeconomic snapshots:
  - Real GDP expanded by 7.8 percent in 2021.
  - Real GDP growth: 4.3 percent (2022 forecast) and 2.9 percent (2023 forecast).
  - Unemployment fell to 11.8 percent in August (from a peak of 24 percent).
  - Headline inflation: 12.1 percent in August 2022; 10.4 percent (headline) and 6.5 percent (core) in September.
  - Current account deficit: widened to 3.1 percent of GDP in 2022H1 (annualized) from 1.8 in 2021H1.
  - Gross international reserves: US$6.2 billion in 2022H1 (75 percent of ARA); recovered to US$7.6 billion in Q3 (91 percent of ARA).
  - Exchange rate: appreciated about 2 percent y-t-d against the U.S. dollar by end-September after >7 percent depreciation in 2022H1.
  - REER appreciated by 4.7 percent between December 2021 and August 2022.

### Recent developments — activity, labor, inflation, and balance-of-payments
- Growth and activity:
  - Real GDP growth decelerated from 8.4 percent (y-o-y) in 2022Q1 to 6.5 percent in Q2; high-frequency indicators point to a broad-based slowdown thereafter.
- Labor market:
  - Unemployment: peak 24 percent; 11.8 percent in August; participation and employment rates not back to 2019 levels.
- Inflation:
  - Headline inflation rose from 3.3 percent (y-o-y) in December 2021 to 12.1 percent in August 2022.
  - Food annual growth in September: 20.3 percent; Fuels annual growth in September: 31.3 percent.
  - Contribution to annual inflation in September: food 42.4 percent; fuels 15.9 percent.
- External sector and reserves:
  - International arrivals: 71 percent of 2019 levels in 2022H1.
  - End-September indicative target breach narrowed to US$48.6 million.
  - In August, BCCR drew on a US$1.1 billion credit line from the Latin American Reserves Fund (FLAR).
- Financial sector and credit:
  - Private sector credit grew 2 percent (y-o-y, FX adjusted) in July.
  - FX borrowing continues to decline.
  - NPLs below 3 percent; broader credit-quality indicator 5.6 percent in August.
  - Loan loss provisions at 195 percent of NPLs; liquidity and capital well above regulatory minima.

### Outlook and risks
- Staff projections and assessments:
  - GDP growth: 4.3 percent (2022) and 2.9 percent (2023).
  - Headline inflation expected to return towards BCCR’s target of 3 percent by late 2024.
  - 2021 cyclically adjusted current account assessed at -2.3 percent of GDP; current account norm at -2.8 percent of GDP.
  - Current account deficit expected to increase to 4.6 percent of GDP in 2022, then fall back to around 3 percent of GDP over the medium term.
- Downside risks:
  - Further commodity price shocks, deeper global slowdown, more entrenched domestic inflation, sharper-than-expected global monetary tightening, natural disasters, resurgence of COVID-19.
- Upside potential:
  - Reforms could create fiscal space to increase investment, boost job creation, and improve climate resilience.

### Monetary and financial stability — actions and guidance
- Monetary tightening and instruments:
  - BCCR increased policy rate from 0.75 percent to 9 percent between December 2021 and October 2022.
  - Reserve requirements increased by 3 percentage points in July 2022 (from 12 percent to 15 percent for local currency deposits).
  - Ex ante real policy rate rose 300-500 bps (depending on end-September inflation expectations measure).
- MPCC outcomes and consultation:
  - Inflation breached the MPCC outer band in June and September, triggering Board consultation.
  - Policy guidance: further policy rate increases likely to ensure inflation returns to MPCC band by H2 2023 and to center of the band by 2025.
- FX and reserves management:
  - Higher-than-expected NFPS FX demand led reserves to fall below NIR floor at end-June.
  - BCCR rebuilding reserves via systematic FX purchases and multilateral funding; reforms to incentivize NFPS market-based FX use.
  - Measures to deepen FX market: revisit Monex parameters, develop FX derivatives, review banks’ net open position limits, supervisory actions to disincentivize dollarization.
- Institutional and supervisory reforms:
  - Amendments to strengthen BCCR governance and clarify main objective as maintaining low and stable inflation (to be submitted to Legislative Assembly by end-December 2022).
  - Supervisors tightening definition of unhedged borrower and phasing in higher capital requirements on FX lending to unhedged borrowers.
  - Legal and regulatory framework for consolidated supervision largely complete; focus on implementation.
  - New regulations on cyber risk resilience being prepared.
- Crisis management and competition:
  - CONASSIF reviewing deposit insurance and bank resolution law amendments; aim to submit legislation by end-2023.
  - Executive Branch considering legal changes to remove regulatory asymmetries between public and private banks and eliminate quasi-fiscal contributions of state-owned banks.

### Fiscal performance, framework, and RSF-linked fiscal priorities
- Fiscal performance and outlook:
  - End-June primary surplus exceeded program target by 1 percent of GDP.
  - Authorities expected to exceed end-2022 primary balance target: projected primary surplus of 1.1 percent of GDP by end-2022 (above 0.7 percent target) after one-off transfers of 0.4 percent of GDP.
  - 2023 budget targets primary surplus of 1.3 percent of GDP.
  - Public debt projected to decline to 62 percent of GDP in 2027.
- Fiscal rule and reforms:
  - July 2022 amendment: spending ceilings based on previous year's original budget rather than execution.
  - Medium-term revenue strategy to increase progressivity and be growth-friendly: removal of regressive VAT exemptions; simplify PIT; feebate scheme for low-emission vehicles; periodic review of tax expenditures.
- Public investment and climate-related costs:
  - PIMA found lower efficiency scores, notably in capital budget allocation and execution.
  - Annual costs to scale up environmentally conscious investment and reduce climate-related infrastructure loss estimated at around 0.5–0.7 percent of 2021 GDP in 2022–26, to be financed within existing budget envelope.
  - Central government debt and financing needs:
    - Gross financing needs estimated to decline from about 11½ percent of GDP in 2023 (including 1½ percent of GDP Eurobond repayment) to about 8 percent in 2027.
    - Authorities to centralize public debt management by end-June 2023 (proposed SB).

### Cyberattack (Box 1) — impacts and response
- Timeline and immediate response:
  - April–May 2022: ransomware attacks affected revenue, customs, and social security systems.
  - Government did not pay ransom; shut down many systems; critical taxpayers’ systems fully restored with international assistance; some back-end systems pending.
- Contingency measures:
  - Large taxpayers self-assessed using manual forms; smaller taxpayers used an alternative digital payment system.
  - Contingency VAT solutions allowed much of April–May losses to be recouped later.
  - Customs system temporarily replaced by manual processes to avoid import bottlenecks.
  - Government liquidity sufficient to meet obligations; technical difficulties in wage and payment transfers minimized.
- Longer-term implications:
  - Cybersecurity indicators show Costa Rica relatively well prepared but below OECD average.
  - Administration reinforcing IT security through the National Cybersecurity Strategy and an Incident and Response Center; work ongoing to strengthen payments-system security and regulatory framework for cyber risk.

### Resilience and Sustainability Facility (RSF) — objectives, reform measures, and sequencing
- RSF purpose:
  - Support assessment of climate risks, decarbonization, infrastructure resilience, and greening of financial sector; catalyze official and private climate financing.
- Proposed RSF access and disbursement schedule (Table 9 summary):
  - Total: 554.101 millions of SDR; 150.00 percent of Quota.
  - Disbursements of 46.175 millions of SDR (12.50 percent of Quota) tied to implementation reviews for 12 Reform Measures across March 15, 2023; October 15, 2023; and March 15, 2024.
- RSF Reform Measures (12 RMs) across four priority areas (selected highlights):
  - Integrating climate risks into fiscal planning: guidelines for climate budget tagging (end-February 2023); expand MTFF quantitative analysis to include transition risks (end-September 2023).
  - Strengthening public investment and infrastructure resilience: include social cost of carbon in appraisal (end-September 2023); climate criteria in project selection (end-December 2023); integrate climate adaptation into urban planning (end-February 2024).
  - Supporting decarbonization: submit feebate bill for vehicles (end-September 2023); review tax incentives with negative environmental effects (end-February 2024); simplify administrative procedures for private renewable generation (end-December 2022).
  - Greening reserves and financial sector resilience: BCCR to publish “greenness” indicators of reserves (end-February 2023); create climate-hazard data repository covering 35 percent of credit portfolio (end-February 2023); incorporate climate effects in top-down stress test (end-February 2024); CONASSIF to require socioenvironmental risk assessments in banks (end-September 2023).

### RSF and climate financing — catalytic role and available concessional support
- RSF resources expected to replace more expensive domestic budget financing and catalyze official and private climate financing.
- Identified concessional financing sources:
  - more than US$115 million in grants.
  - approximately US$1.5 billion in loans from development partners.
- Authorities passed legislation to support issuance of sustainability-focused securities; supervised entities integrating ESG in investment policies and planning ESG bond issuance.
- IDB and UN exploring special purpose vehicles and guarantee schemes to mobilize private sector ESG investments, including domestic pension funds.
- Sovereign ESG ambitions:
  - Aim to be recognized as an ESG-indexed sovereign and consider issuance of thematic bonds tied to forestry coverage, ecological integrity, and biodiversity.

### Program financing, capacity to repay, and buffers
- Program financing table (selected lines, in millions of U.S. dollars):
  - Financing need: 3,040 2,904 953
  - Reserve accumulation: 1,320 454 664
  - Underlying BOP need 1/: 1,720 2,450 289
  - Official multilateral financing: 3,040 2,904 953
  - IMF: 555 1,040 523
    - EFF: 555 549 276
    - RSF: 0 49 124 7
  - Latin American Reserve Fund: 1,100 0 0
  - Memorandum: Gross international reserves: 8,241 8,695 9,359; In percent of the ARA metric: 99 100 102
- Capacity to repay and Fund exposure:
  - Total Fund Credit Outstanding peaks at 3.4 percent of GDP, 8.0 percent of exports, or 523 percent of quota (323 percent of quota excluding RSF credit outstanding) in 2024 with downward trend thereafter.
  - Inclusion of RST resources does not strongly increase Costa Rica’s total debt service to the Fund; near-term increase due to repurchases of the 2020 RFI purchase.
  - Peaks for credit outstanding and debt service with RST resources are at or below the 25th percentile of comparators.
- Contingency and flexibility:
  - Program has built-in buffers; if revenues underperform, authorities ready to reprioritize non-critical spending and propose temporary tax measures.
  - Plan to return to international bond financing; additional financing could be mobilized domestically and from regional partners.

### External sector assessment — NIIP, current account, and reserves
- NIIP and liabilities:
  - NIIP projected at -60.8 percent of GDP in 2021.
  - Liabilities composition: FDI 69 percent; Non-portfolio external debt 19 percent; Portfolio external debt 13 percent.
  - External debt: 51 percent of GDP in 2021; projected peak at 57 percent in 2024 then decline below 56.
  - About 14 percent of external debt at short-term maturity; nearly all external debt denominated in foreign currency.
- Current account and gaps (2021):
  - CA-Actual: -3.3 percent of GDP.
  - Adjusted CA (after pandemic and pension outflows): -2.3 percent of GDP.
  - CA Norm: -2.8 (CA model) and -3.8 (REER level model); adjusted CA Norm: -2.8 to -3.8.
  - CA Gap: 0.5 (CA model), -2.5 (REER index model), 1.5 (ES model).
- Reserves and FX interventions:
  - GIR in 2021: US$6,921 million (94 percent of ARA metric).
  - GIR fell by US$310 million in 2021; BCCR net sales ~US$270 million until end-September 2022; GIR at US$7.6 billion by end-September 2022 boosted by US$1.1 billion FLAR loan.
  - Adequacy: GIR at 94 percent of ARA in 2021; projected to return above 100 percent threshold in 2023–2024.

### Climate change challenge — physical impacts, fiscal implications, and transition
- Physical risks and historical damages:
  - Agriculture ~5 percent of GDP and ~one-third of rural employment.
  - EM-DAT: severe storm or flood every five years on average since 1988 (~20 percent per year).
  - Damage from rains and droughts averaged 0.7 percent of GDP in 1998–2018; Tropical Storm Nate (2017) damage ~1 percent of GDP.
  - High-risk scenario: damage could rise to 1.6 to 2.5 percent per year over the medium term.
- Investment in resilient infrastructure (modeling results):
  - Resilient public investment estimated 25 percent more expensive than non-resilient.
  - DSGE model: resilient public investment of about 1.6 percent of GDP (additional fiscal cost 0.4 percent of GDP) yields long-term GDP level increase of 3 percent.
  - Investment in resilience yields gross fiscal gains ~0.5 percent of GDP per year; long-run net fiscal gains ~0.1 percent of GDP.
- Decarbonization and transition costs:
  - PEN 50: decarbonization projects among 11 highest-priority projects; costs ~almost 5 percent of GDP.
  - Full implementation of National Decarbonization Plan expected benefits ~$41 billion after netting out upfront costs of $37 billion.
  - Fiscal implications: fuel tax revenue losses ~0.4 percent of GDP per year between 2023 and 2050 from transport decarbonization; feebates and other green taxes needed to offset losses.
  - Net job creation modest: ~0.25 percent of labor force by 2035; transitional impacts concentrated in poorer, lower-skilled sectors.
- Climate finance mobilization:
  - Grants and prizes > US$115 million; development partner support including US$1.1 billion by World Bank for 2022–2024 and a US$400 million Policy Based Loan by IDB/AFD/Korean facility.
  - Costa Rica started receiving disbursements from Carbon Partnership Facility ERPA in August 2022; first Green Climate Fund disbursement January 2022.

### Staff appraisal and recommendations
- Macroeconomic assessment:
  - Despite multiple shocks, authorities taking important steps to strengthen the reform program; global headwinds slowing activity amid elevated inflation.
- Monetary policy recommendations:
  - BCCR’s tightening warranted; policy should remain data-dependent and forward-looking with clear communication.
  - Continue to strengthen reserves, deepen FX market, and promote exchange rate flexibility; press ahead with legal amendments to strengthen BCCR governance and autonomy.
- Fiscal policy recommendations:
  - Continue steady fiscal consolidation through revenue gains and prudent spending.
  - Advance reforms to increase fairness and progressivity of tax system, improve spending equity and efficiency, and strengthen debt management.
  - Re-examine fiscal rule operational aspects while preserving its role.
- Social and structural policies:
  - Strengthen social protection targeting and delivery, incentivize formal employment, improve education quality, and boost female labor force participation.
- Financial supervision:
  - Continue strengthening bank supervisory and regulatory powers and the legal framework for resolution and deposit insurance.
  - Reforms to level the playing field between public and private banks and enhance competition are recommended.

### Monitoring, conditionality, and program instruments
- Program monitoring and targets:
  - Performance monitored via PCs, ITs, SBs, and RMs; definitions specified in the TMU.
  - MPCC bands and test dates defined; outer band breaches trigger Board consultation.
- Structural benchmarks and status highlights:
  - MTFF and MTDS approved and published (met).
  - Roadmap to enhance infrastructure resilience to climate change (met).
  - Public Employment Bill approved March 7, 2022; implementation SB ongoing for end-March 2023.
  - Proposed SBs: centralize debt functions; submit bank resolution and deposit insurance amendments by end-December 2023.
- Data, reporting, and program exchange rates (program exchange rates as of September 13, 2022):
  - Colones to the U.S. dollar 635.725
  - U.S. dollar to the SDR 1.3068
  - Gold price per troy ounce (U.S. Dollar) 1,703

*Source: IMF staff report excerpt provided.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- New administration took office in May 2022 and confronted:
  - A cyberattack on several government systems.
  - The impact of the commodity price shock, slowing trading partner growth, and tightening financial conditions.
- After a strong rebound in 2021, global headwinds are weighing on activity while inflationary pressures are elevated.
- Authorities reaffirmed commitment to the Fund-supported program and are pursuing reforms consistent with program objectives.
- Authorities are requesting a Resilience and Sustainability Facility (RSF) arrangement to support climate resilience and zero-carbon transition.
- Proposed RSF access: SDR 554.1 million (150 percent of quota).

### Recent developments
- 2021 recovery:
  - Real GDP expanded by 7.8 percent in 2021.
- Growth trajectory in 2022:
  - Real GDP growth decelerated from 8.4 percent (y-o-y) in 2022Q1 to 6.5 percent in Q2.
  - High frequency indicators point to a broad-based slowdown in the remainder of the year.
- Labor market:
  - Unemployment fell from a peak of 24 percent to 11.8 percent in August.
  - Participation and employment rates have not returned to 2019 levels.
- Inflation:
  - Headline inflation increased from 3.3 percent (y-o-y) in December 2021 to 12.1 percent in August 2022.
  - Headline and core inflation at 10.4 and 6.5 percent, respectively, in September.
- External sector and reserves:
  - Current account deficit widened to 3.1 percent of GDP in 2022H1 (annualized), compared to 1.8 in 2021H1.
  - International arrivals were 71 percent of 2019 levels in 2022H1.
  - Gross international reserves fell to US$6.2 billion in the first half of 2022 (75 percent of the IMF’s Reserve Adequacy (ARA) metric).
  - Reserves recovered to US$7.6 billion in the third quarter (91 percent of the ARA metric).
  - End-September breach of the indicative target narrowed to US$48.6 million.
  - In August, BCCR drew on a US$1.1 billion credit line from the Latin American Reserves Fund.
- Exchange rate and credit:
  - As of end-September, the exchange rate had appreciated by about 2 percent y-t-d against the U.S. dollar, after depreciating by over 7 percent in 2022H1.
  - REER appreciated by 4.7 percent between December 2021 and August 2022.
  - Private sector credit grew by 2 percent (y-o-y, foreign exchange (FX) adjusted) in July.
  - FX borrowing (FX adjusted) continues to decline.
- Financial markets:
  - EMBI spreads fell as electoral-related uncertainty was resolved.
- Banking sector:
  - NPLs below 3 percent; broader credit-quality indicator at 5.6 percent in August.
  - Loan loss provisions at 195 percent of non-performing loans.
  - Liquidity and capital well above regulatory minima.

### Outlook and risks
- Growth projections:
  - GDP growth expected to slow to 4.3 percent in 2022 and 2.9 percent in 2023.
- Inflation outlook:
  - Headline inflation expected to continue to fall, returning towards the BCCR’s target of 3 percent by late 2024.
- External position:
  - 2021 cyclically adjusted current account assessed at -2.3 percent of GDP; current account norm at -2.8 percent of GDP.
  - Current account deficit expected to increase to 4.6 percent of GDP in 2022, falling back to around 3 percent of GDP over the medium term.
- Downside risks:
  - Further commodity price shocks or deeper global slowdown.
  - More entrenched domestic inflation and/or sharper-than-expected global monetary tightening.
  - Exposure to natural disasters and potential resurgence in COVID-19.
- Upside potential:
  - Reforms could create fiscal space to increase investment, boost job creation, and improve climate resilience.

### Program performance and policy discussions

A. Safeguarding Monetary and Financial Stability
- Monetary policy tightening:
  - BCCR increased policy rate from 0.75 percent to 9 percent between December 2021 and October 2022.
  - Reserve requirements increased by 3 percentage points in July.
  - Ex ante real policy rate rose 300-500 bps (depending on the end-September measure of inflation expectations).
  - Inflation exceeded the outer band of the Monetary Policy Consultation Clause (MPCC) in June and September, triggering a Board consultation.
- Policy guidance:
  - Further increases in the policy rate will likely be needed at coming meetings to ensure inflation returns to the MPCC band by the second half of 2023 and to the center of the band by 2025.
- FX and reserves management:
  - Higher-than-expected FX demand from NFPS imports led reserves to fall below the NIR floor at end-June.
  - BCCR rebuilding reserves via systematic FX purchases and drawing on multilateral funding.
  - Reforms underway to incentivize NFPS entities to manage FX needs more efficiently and rely more on market-based transactions.
  - Measures to deepen FX market: revisiting Monex operating parameters, developing FX derivatives, reviewing banks’ net open position limits, and supervisory actions to disincentivize dollarization.
- Institutional and supervisory reforms:
  - Amendments to strengthen BCCR governance and operational framework, to be submitted to the Legislative Assembly by end-December 2022, including clarifying BCCR’s main objective as maintaining low and stable inflation.
  - Supervisors enhancing stress-testing and tightening definition of unhedged borrower; regulation to require gradually higher capital requirements on FX lending to unhedged borrowers.
  - Legal and regulatory framework for consolidated supervision largely complete; focus shifting to implementation.
  - New regulations to address cyber risks and increase resilience to cyber incidents are being prepared.
- Crisis management and banking competition:
  - CONASSIF reviewing amendments to deposit insurance and bank resolution law; aim to submit legislation to the National Assembly by end-2023 (a proposed structural benchmark).
  - New administration considering legal changes to remove regulatory asymmetries between public and private banks, eliminate quasi-fiscal contributions of state-owned banks, and the requirement that private banks transfer part of deposits to the Development Bank System.

B. Strengthening Fiscal Institutions and Preserving Fiscal Sustainability
- Fiscal performance:
  - Fiscal targets were met by a comfortable margin.
- Structural benchmarks:
  - SBs on a Medium-Term Fiscal Framework, Debt Strategy, and a roadmap on enhancing climate resilience have been met.
  - SB to adjust social security contributions for part-time workers was not met but approved with a delay.
- Fiscal reform priorities outlined by the authorities:
  - Continue fiscal consolidation to preserve debt sustainability.
  - Enhance efficiency of government spending.
  - Advance a more progressive tax system, higher social spending, lower informality, and greater female economic empowerment to support inclusive growth.
- RSF request:
  - Authorities request international support through an RSF arrangement to build climate resilience and transition to a zero-carbon economy.
  - Access proposed above the norm at SDR 554.1 million (150 percent of quota) to help catalyze further official and private financing.

*Approved by Nigel Chalk (WHD) and Daria Zakharova (SPR). Discussions held remotely during September 20-23, 2022 and in person in San José from September 27 to October 3, 2022.*

### 16.      The fiscal targets were comfortably met despite the cyberattack disruption (Box 1).

### 16.      The fiscal targets were comfortably met despite the cyberattack disruption (Box 1)

### Fiscal performance and near-term outlook
- The end-June primary surplus exceeded the program target by 1 percent of GDP.
- Taxes on income and imports were boosted by growth in economic activity, high inflation and greater-than-expected yields from the 2018 tax reform.
- Spending was restrained by the fiscal rule, falling as a percent of GDP.
- At end-June, public debt was well below the program target.
- Aside from delays in data reporting, there appears to have been little measurable after-effects of the cyberattacks that temporarily disabled government systems during the second quarter of the year.
- The authorities are expected to exceed their end-2022 primary balance target.
  - An additional 0.1 percent of GDP of social spending—including conditional cash transfers and temporary food vouchers—was allocated to support the most vulnerable.
  - Primary spending is projected to decline due to lower-than-expected capital spending and despite a one-off debt payment to the social security fund of 0.2 percent of GDP.
  - Stronger-than-expected tax collection and one-off transfers (0.4 percent of GDP) from recently consolidated entities are expected to result in a primary surplus of 1.1 percent of GDP by end-2022 (above the 0.7 percent of GDP target).
- One-off factors contribute only 0.1 percent of GDP towards the fiscal overperformance.
- The 2023 budget targets a primary surplus of 1.3 percent of GDP.
  - Non-interest nominal spending is flat relative to 2022 and wage constraints remain in place, in line with the fiscal rule.
  - The budget includes a 9 percent increase on social spending relative to the previous budget.
  - The phasing in of rules for corporate taxation and phasing out of reduced VAT rates for tourism and construction will add to revenues in 2023.

### Box 1 — Cyberattack targeting Costa Rica’s government: impacts and response
- April and May 2022: multiple government institutions affected by ransomware attacks, including revenue, customs, and the social security system.
- The government did not pay the ransom and shut down many information systems to limit damage and risk of further attacks.
- Critical taxpayers’ systems were fully restored with assistance from international governments and private companies; some back-end systems remain to be restored.
- Contingency measures implemented by the Ministry of Finance:
  - Large taxpayers self-assessed taxes using a form integral to the former manual process.
  - Smaller taxpayers resumed payments through an alternative digital payment system that was set up.
  - Contingency solutions for VAT allowed much of the losses incurred in April and May to be recouped in the following months.
  - Government liquidity was sufficient to meet obligations; technical difficulties in paying wages and transferring payments were minimized.
  - The customs information system was replaced by a manual process to mitigate the risk of import bottlenecks.
- The attack highlighted the urgency of cyber preparedness:
  - Cybersecurity indicators suggest Costa Rica is relatively well prepared but is still below the OECD average.
  - The administration has been reinforcing IT security through the National Cybersecurity Strategy and the Information Crime Incident and Response Center.
  - Work is ongoing to strengthen the security of the payments system and improve the regulatory framework for cyber risk.

### Fiscal framework, reforms, and public expenditure priorities
- The fiscal rule continues to anchor debt sustainability but operational constraints exist.
  - In July 2022 the fiscal rule regulation was amended to base spending ceilings on the original budget for the previous year, rather than execution, addressing a shortcoming that penalized under-execution and disincentivized savings.
  - Authorities are considering further reforms to the fiscal rule legislation with IMF TA to clarify its perimeter and facilitate reallocation within spending ceilings while maintaining broad coverage.
- A medium-term revenue strategy is being designed to increase progressivity and make the tax system more growth-friendly:
  - Some regressive VAT exemptions will be removed.
  - Personal income tax will be simplified by reducing exemptions and equalizing the tax burden between employees and the self-employed through a single, more progressive tax schedule.
  - A feebate scheme to accelerate the transition towards low-emission vehicles is being developed.
  - The Legislative Assembly approved a new law to require periodic review of tax expenditures.
  - A new Customs Law is intended to increase revenue, facilitate trade, and deter fraud through risk-based enforcement.
- Government priorities to improve equity and efficiency of spending:
  - A revamped Medium-Term Fiscal Framework for the nonfinancial public sector was published in April and updated in September ahead of the 2023 budget.
  - The Public Employment Bill is expected to be fully implemented by end-March 2023.
  - A new public procurement law will strengthen transparency and accountability.
  - Efforts to consolidate public services and restructure line ministries are underway.
  - New gender budgeting initiatives will support equity in government spending.

### Public investment, climate adaptation, and debt dynamics
- Public Investment Management Assessment (PIMA) found lower efficiency scores compared to peers, especially in capital budget allocation and execution, leading to weaker quality infrastructure.
- Authorities intend to strengthen capital project appraisal and selection, incorporating climate change and resiliency considerations.
- Annual costs to scale up environmentally conscious investment and reduce climate-related infrastructure loss are estimated at around 0.5–0.7 percent of 2021 GDP in 2022–26, to be financed within the existing budget envelope through a mix of public and private resources.
- Costa Rica’s sovereign stress risk and debt path:
  - Central government debt is projected to decline to 62 percent of GDP in 2027.
  - Gross financing needs are estimated to decline from about 11½ percent of GDP in 2023 (including a 1½ percent of GDP repayment on a maturing Eurobond) to about 8 percent in 2027.
  - The authorities updated their Medium-Term Debt Management Strategy to incorporate contingent liabilities and will centralize all public debt management within a single entity by end-June 2023 (a proposed SB).
  - Plans include extending the Treasury Single Account to decentralized and autonomous public entities and seeking legislative approval of a multi-year borrowing plan through Eurobond issuances.

### Climate change agenda and Resilience and Sustainability Facility (RSF) measures
- Four key RSF-linked policy areas and specific proposed Reform Measures (RMs) and timelines:
  - Integrating Climate Risks into Fiscal Planning:
    - Expand quantitative analysis in the MTFF to incorporate transition risks (proposed RM for end-September 2023).
    - Issue guidelines for climate budget tagging (proposed RM for end-February 2023) and develop associated financial management information systems.
  - Strengthening Public Investment and Infrastructure Resilience:
    - New appraisal guidelines to assess projects’ climate impact by incorporating the social cost of carbon (proposed RM for end-September 2023).
    - Incorporate clear climate criteria into new project selection (proposed RM for end-December 2023).
    - Integrate climate adaptation into urban planning using a common methodology (proposed RM for end-February 2024).
  - Supporting Decarbonization:
    - Submit a bill to introduce a feebate scheme tied to emissions (proposed RM for end-September 2023).
    - Review existing tax incentives with negative environmental effects (proposed RM for end-February 2024).
    - Introduce measures to incentivize electrification of transport and expand charging centers for electric buses.
    - Simplify administrative procedures to encourage private participation in power generation from renewables (proposed RM for end-December 2022).
  - Greening Reserves and Strengthening Financial Sector Resilience:
    - BCCR will increase exposures to issuers with better environmental credentials and publish environmental indicators of its investment portfolio in their 2022 Annual Report (proposed RM for end-February 2023).
    - BCCR is building a data repository to outline climate hazard effects on banks’ lending exposures covering 35 percent of total credit portfolio by end-February 2023 (proposed RM) and expanding over time.
    - BCCR will incorporate climate effects on banks’ credit risk in its “top-down” stress test (proposed RM for end-February 2024).
    - CONASSIF will require socioenvironmental and climate change risks to be incorporated into banks’ credit portfolio assessments (proposed RM for end-September 2023).
- The authorities requested an RSF arrangement to coincide with the period remaining under the EFF arrangement:
  - Requested RSF access: SDR 554.1 million (150 percent of quota).
  - The RSF arrangement is intended to provide resources to reduce vulnerabilities, create buffers for future shocks, substitute for more expensive financing, and support the reform agenda through implementation of the proposed RMs.

*Source: IMF staff report excerpt provided.*

### 30.      RSF resources are expected to replace more expensive domestic budget financing and

### 1criea2022002 - 30.      RSF resources are expected to replace more expensive domestic budget financing and

### RSF resources, climate financing, and market development
- RSF resources are expected to replace more expensive domestic budget financing and catalyze new official and private sector climate financing.
- Identified concessional financing for climate adaptation:
  - more than US$115 million in grants
  - approximately US$1.5 billion in loans from development partners
- Authorities have passed legislation to support issuance of securities focused on sustainability.
- Supervised entities are undertaking:
  - incorporating sustainable or responsible components in their investment policies
  - integrating ESG into their risk management
  - planning to issue ESG bonds
  - voluntarily disclosing ESG actions
- To catalyze more private financing, the IDB and UN are exploring the use of special purpose vehicles and guarantee schemes to promote ESG investments by the private sector, including domestic pension funds.
- Sovereign ESG ambitions:
  - Costa Rica aims to be recognized as an ESG-indexed sovereign
  - considering issuance of thematic bonds to international investors with key performance indicators related to forestry coverage, ecological integrity and biodiversity

### Program conditionality under the EFF and RSF arrangements
- EFF Quantitative Targets and Structural Benchmarks:
  - Authorities requested a waiver of nonobservance of the end-June QPC on the NIR in light of the commodity price shock and corrective actions to rebuild reserve buffers by the BCCR.
  - Indicative targets on CG debt for end-December 2022 and March 2023 are being reset to accommodate an expected front-loading of debt issuance to build up liquidity buffers.
  - The MPCC has been left unchanged since it is aligned with the central bank’s inflation target.
  - New PCs and ITs have been proposed for June-December 2023 (MEFP, Table 1).
  - Two new SBs have been proposed (MEFP, Table 2):
    - (i) to improve crisis resolution, the government is to submit legal amendments of the framework on bank resolution and deposit insurance to the Legislative Assembly;
    - (ii) to strengthen debt management, the government will submit a bill to centralize debt-related functions.
- RSF Reform Measures:
  - Twelve RMs have been proposed under the RSF arrangement (MEFP, Table 3) covering four reform priority areas:
    - (i) Integrating climate issues into fiscal planning through climate budget tagging and an expansion of the fiscal risk analysis in the MTFF to include transition risks.
    - (ii) Strengthening public investment and infrastructure resilience to climate change through enhancements to project appraisal, project selection, and urban regulatory plans.
    - (iii) Supporting decarbonization by facilitating more private-sector power generation from renewables, introducing feebates to incentivize the purchase of low-pollution vehicles, and reviewing tax incentives that have negative environmental effects.
    - (iv) Publishing indicators of the “greenness” of BCCR reserves, creating a data repository of climate hazards and banking sector vulnerabilities, incorporating climate information in banks’ stress tests, and approving regulations on best practices for banks’ management of socioenvironmental and climate change risks.
  - The scope and timeline of the reforms are described as ambitious but feasible given Costa Rica’s climate change track record.

### Capacity to repay and program financing
- Capacity to repay remains adequate over the medium to long run and the program is fully financed.
- Access under the EFF is helping meet existing balance-of-payments needs and will continue to be used for direct budget support.
- Proposed access under the RSF arrangement will be used for direct budget support and provide more affordable financing at longer maturities, further improving capacity to repay.
- Capacity to Repay indicators (Annex IV and Table 7):
  - Total Fund Credit Outstanding peaks at 3.4 percent of GDP, 8.0 percent of exports (of goods and services), or 523 percent of quota (323 percent of quota excluding the RSF credit outstanding) in 2024, with a downward sloping trend thereafter.
  - Inclusion of RST resources does not strongly increase Costa Rica’s total debt service to the Fund; the near-term increase is due to repurchases of the 2020 Rapid Financing Instrument (RFI) purchase.
  - Costa Rica’s largest peaks for both credit outstanding (as percent of GDP) and debt service to the Fund with RST resources are at or below the 25th percentile of comparators.
- Program financing table (In millions of U.S. dollars):
  - Financing need: 3,040 2,904 953
  - Reserve accumulation: 1,320 454 664
  - Underlying BOP need 1/: 1,720 2,450 289
  - Official multilateral financing: 3,040 2,904 953
  - IMF: 555 1,040 523
  - EFF: 555 549 276
  - RSF: 0 49 124 7
  - Other multilateral creditors: 2,485 1,864 430
  - World Bank: 368 372 119
  - Inter-American Development Bank: 693 439 186
  - CAF Development Bank for Latin America: 0 5 000
  - Central American Bank for Economic Integration: 323 553 125
  - Latin American Reserve Fund: 1,100 0 0
  - Unidentified financing: 0 0 0
  - Memorandum items:
    - Capital market access: 0 1,500 1,500
    - Gross international reserves: 8,241 8,695 9,359
    - In percent of the ARA metric: 99 100 102
  - Source: IMF staff estimates.
  - Note: 1/ Net of private sector and bilateral financing.

### Risks, buffers, and contingency measures
- Downside risks, particularly from a more challenging external environment:
  - External risks include further increases in commodity prices, a global slowdown, and tighter financial conditions.
  - The program has flexibility to accommodate negative spillovers from global developments.
  - A return to financing through international bonds is planned; additional financing could be mobilized domestically and from regional partners if downside risks materialize.
  - The program has built-in buffers to respond to external shocks while meeting program objectives and ensuring capacity to repay the Fund remains adequate.
- If revenues underperform, authorities are ready to:
  - reprioritize non-critical spending
  - propose temporary tax measures as needed
- Political and implementation risks:
  - The government’s minority in the Legislative Assembly poses implementation risks for legislative reforms, mitigated by ongoing efforts to build broad-based consensus.
- Climate change risk:
  - Climate change poses an important risk; authorities’ ongoing policy efforts aim to strengthen resilience to future climate-related shocks.

### Staff appraisal and policy recommendations
- Macroeconomic context:
  - Despite multiple shocks, authorities are taking important steps to strengthen Costa Rica’s economic reform program.
  - Global headwinds have started to slow economic activity after a strong rebound in 2021, amid elevated inflationary pressures.
- Monetary policy:
  - The BCCR’s decisive move to tighten monetary policy was warranted.
  - Monetary policy should continue to be data-dependent and forward-looking, supported by clear and transparent communication.
  - BCCR is taking steps to strengthen its reserve position, deepen the FX market, and promote exchange rate flexibility.
  - Important legal amendments are underway to strengthen the BCCR’s governance, autonomy, and operational framework.
- Fiscal policy:
  - A steady fiscal consolidation should continue through revenue gains and prudent spending.
  - Authorities are on track to exceed their end-2022 primary balance target and submitted a prudent 2023 budget to further strengthen debt sustainability.
  - Recommended actions include reforms to increase fairness and progressivity of the tax system, improve equity and efficiency of government spending, and strengthen debt management.
  - There is scope to re-examine the fiscal rule while preserving its role in containing spending and reducing debt.
- Social and structural policies:
  - Authorities are committed to strengthen social protection and foster a more dynamic and equitable economy.
  - Targeted support to alleviate the impact of inflation on the most vulnerable has been appropriately provided.
  - Additional resources for effective social assistance, actions to enhance targeting and delivery, measures to incentivize formal employment, improvements in education quality, and boosting female labor force participation are supported.
- Financial supervision:
  - Supervisory authorities are proactively monitoring the financial system.
  - Ongoing efforts to strengthen bank supervisory and regulatory powers and enhance the legal framework for bank resolution and deposit insurance are critical.
  - Authorities should press ahead with reforms to level the playing field between public and private banks, enhance bank competition, and improve access to finance.

*Source: IMF staff report (Costa Rica).*

### 39.      Staff supports the authorities’ request for an RSF arrangement and recommends

### 1criea2022002 - 39.      Staff supports the authorities’ request for an RSF arrangement and recommends

### Staff recommendation and program actions
- Staff supports the authorities’ request for an RSF arrangement and recommends completion of the third review under the EFF.
- Staff supports completion of the monetary policy consultation.
- Staff supports the request for a waiver of nonobservance of a performance criterion.

### Purpose and expected effects of the RSF arrangement
- The RSF arrangement would support Costa Rica’s efforts to:
  - assess climate risks,
  - decarbonize its economy,
  - strengthen infrastructure resilience,
  - green the financial sector.
- The RSF arrangement is expected to catalyze further climate financing from official and private sector sources.

### Program context and implementation sequencing
- The recommendation to complete the third review under the EFF is supported by “strong performance to date and the authorities’ continued commitment to strong policies and reforms.”
- RSF disbursements are tied to implementation reviews. Table 9 (Proposed Access Under the Resilience and Sustainability Facility) specifies scheduled availability and conditions:
  - March 15, 2023: 46.175 millions of SDR; 12.50 percent of Quota — Reform measure 1 implementation review
  - March 15, 2023: 46.175 millions of SDR; 12.50 percent of Quota — Reform measure 2 implementation review
  - March 15, 2023: 46.175 millions of SDR; 12.50 percent of Quota — Reform measure 3 implementation review
  - March 15, 2023: 46.175 millions of SDR; 12.50 percent of Quota — Reform measure 4 implementation review
  - October 15, 2023: 46.175 millions of SDR; 12.50 percent of Quota — Reform measure 5 implementation review
  - October 15, 2023: 46.175 millions of SDR; 12.50 percent of Quota — Reform measure 6 implementation review
  - October 15, 2023: 46.175 millions of SDR; 12.50 percent of Quota — Reform measure 7 implementation review
  - October 15, 2023: 46.175 millions of SDR; 12.50 percent of Quota — Reform measure 8 implementation review
  - March 15, 2024: 46.175 millions of SDR; 12.50 percent of Quota — Reform measure 9 implementation review
  - March 15, 2024: 46.175 millions of SDR; 12.50 percent of Quota — Reform measure 10 implementation review
  - March 15, 2024: 46.175 millions of SDR; 12.50 percent of Quota — Reform measure 11 implementation review
  - March 15, 2024: 46.175 millions of SDR; 12.50 percent of Quota — Reform measure 12 implementation review
  - Total: 554.101 millions of SDR; 150.00 percent of Quota

### Program linkage to the Extended Fund Facility (EFF)
- Staff recommends completion of the third review under the EFF alongside RSF approval, reflecting coordination between resilience/sustainability objectives and broader fiscal/structural reform commitments under the EFF.

*Source: Excerpt from IMF staff document 1criea2022002 (page text and Table 9).*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall Assessment
- The external position of Costa Rica in 2021 was broadly in line with the level implied by fundamentals and desirable policies.
- Headline current account (CA) in 2021: -3.3 percent of GDP.
- After adjusting for temporary tourism shock, other pandemic-related factors, and pension outflows diversifying abroad, staff finds a cyclically adjusted CA of -2.3.

### Potential Policy Responses
- Authorities’ fiscal consolidation and BCCR’s data-dependent monetary policy approach should continue to support external sustainability.
- Structural agenda to boost business creation and attract investment is expected to help rebalance the external position in the medium-term.

### Foreign Assets and Liabilities: Position and Trajectory
- NIIP trend and projection:
  - NIIP has been trending down slowly, reflecting yearly CA deficits.
  - NIIP projected at -60.8 percent of GDP in 2021.
- Liabilities composition:
  - FDI: 69 percent of total liabilities.
  - Non-portfolio external debt: 19 percent.
  - Portfolio external debt: 13 percent.
- External debt:
  - External debt was 51 percent of GDP in 2021.
  - Projected to peak at 57 percent of GDP in 2024, then decline below 56.
  - About 14 percent of external debt is at short-term maturity.
  - Nearly all external debt is denominated in foreign currency.
- 2021 balance-sheet snapshot (percent of GDP):
  - NIIP: -60.8
  - Gross Assets: 59.4
  - Debt Assets: 29.8
  - Gross Liab.: 120.2
  - Debt Liab.: 36.2
- Assessment:
  - The substantial share of FDI in liabilities mitigates potential risks from the large net debtor position.
  - Declining public sector external debt in the medium-term would indicate a trend towards sustainability.
  - The positive CA gap indicates the CA is higher than the level required to stabilize the NIIP.

### Current Account
- Background and drivers:
  - Current account deficit widened to 3.3 percent of GDP in 2021 from 1 percent in 2020.
  - 2021 deficit elevated above the five-year average of 2.6 percent.
  - Widening mainly due to a rise in import prices and a slow recovery of tourism.
  - Tourism produced 6.7 percent of exports in 2021 compared to nearly 17.5 percent of exports in 2019.
  - Goods export growth in 2021 supported primarily by manufacturing.
  - Tourism sector expected to recover slowly, supporting CA improvement over the medium term.
- Model-based assessments:
  - EBA current account (CA) model suggests a current account gap of 0.5 percent of GDP in 2021 after adjustors for temporary pandemic impact and excess pension outflows.
  - In 2020, the gap was 2.3 percent of GDP.
  - Policy gap in 2021 mostly driven by the relatively stronger global fiscal expansion in response to the COVID-19 shock.
  - EBA external sustainability (ES) model indicates a current account gap of 1.5, meaning the current account deficit is already smaller than the level needed to stabilize net foreign assets at the 2021 level.
- Adjustments and norms (EBA Model Estimates, 2021, in percent of GDP unless otherwise indicated):
  - CA-Actual: -3.3
  - Cyclical Contributions (from model): -0.3
  - Temporary factors related to the pandemic: -2.5
  - Excess pension outflows: 1.8
  - Adjusted CA: -2.3
  - CA Norm (from model): -2.8 (CA model) and -3.8 (REER level model)
  - Adjusted CA Norm: -2.8 to -3.8
  - CA Gap: 0.5 (CA model), -2.5 (REER index model), 1.5 (ES model)
  - o/w Policy gap: 0.9
  - Elasticity: -0.28
  - REER Gap (in percent): -1.8 (CA model), -10.8 (REER index model), 8.9 (REER level model)
- Note on pandemic adjustments:
  - These include adjustments for travel: 2.2, transport: 0.5, and household consumption composition: -0.2.

### Real Exchange Rate
- Background:
  - REER and NEER have been depreciating over the last five years, except for a sharp appreciation just before the pandemic.
  - REER declined by 4.3 percent in 2021.
  - NEER declined by 2.6 percent in 2021.
  - In H1 2022, REER and NEER declined by 2.7 percent and 5.2 percent respectively, but recovered by 7.6 percent and 5.8 percent in July and August.
  - Exchange rate volatility partly smoothed by BCCR’s requirement to meet all SOE FX demand outside the FX market.
- Assessment:
  - EBA CA model estimates a REER gap of -1.8 percent using an elasticity of -0.28.
  - REER index and level models (newly applied after 2022 EBA revisions) indicate gaps of -10.8 and 8.9, respectively.
  - The fit of the REER index/level models is not as good as the CA model; assessment is based on the CA model.

### Capital and Financial Accounts: Flows and Policy Measures
- Background and flow composition:
  - Capital flows dominated by FDI inflows for many years.
  - In 2021, inward FDI rose sharply relative to pre-pandemic levels due to improving competitiveness and near-shoring trends.
  - Inward FDI accounted for 83 percent of net inward capital flows (debits) in 2021.
  - Net FDI (debit and credit) amounted to 146 percent of the CA.
  - Costa Rica maintains relatively low restrictions on FDI relative to OECD peers.
  - Low size and liquidity of the local currency bond market and limited non-resident participation constrain portfolio capital inflows.
  - In normal times, net inward debt portfolio flows represented 20 percent of net inward capital flows on average 2013-17, and total net debt portfolio flows accounted for 33 percent of net capital flows.
- Pension fund outflows:
  - Most domestic pension funds are allowed to hold up to half of their assets overseas, but until May 2020 average external asset holdings were only 30 percent of total.
  - Capital outflows from pension funds grew dramatically: US$1.9 billion (2.9 percent of GDP) in 2021 and US$830 million in H1 2022.
- Assessment:
  - External financing structure provides resilience, with FDI more than covering CA deficit in normal years.
  - Investments abroad by large pension funds exerted strong pressure on the exchange rate since May 2020, but outflows eased in July and August 2022.
  - Share of external assets in H1 2022 suppressed by large negative valuation changes, but headroom remains for about 9 percent more of assets to flow overseas.
  - At the 2021 pace, diversification process could continue until roughly end-2024.

### FX Intervention and Reserves Level
- Gross international reserves (GIR):
  - GIR fell by US$310 million in 2021, reaching US$6.9 billion.
  - GIR in 2021 equaled 94 percent of the IMF’s ARA metric for countries with floating exchange rates (ARA metric (floating): 94, benchmark 100-150).
- BCCR operations and recent flows:
  - Until end-September 2022, BCCR sold directly about US$270 million on a net basis, in addition to other reserve changes.
  - By end-September 2022, GIR stood at US$7.6 billion.
  - A US$1.1 billion loan from the Latin American Reserve Fund (FLAR) in Q3 2022 boosted reserves.
  - BCCR operates within a managed floating regime, limiting FX intervention to episodes of exchange rate volatility.
  - BCCR acts as intermediary for SOEs to smooth large FX transactions.
  - In 2021:
    - Intervention to address volatility amounted to US$36 million in net FX sales.
    - Intervention on behalf of SOEs amounted to US$1,304 million in net purchases.
- Adequacy metrics (Gross International Reserves, 2021):
  - Millions of US dollars: 6,921
  - ARA metric (floating): 94 (benchmark 100-150)
  - Short-term debt at remaining maturity: 114 (benchmark 100)
  - Broad money: 21 (benchmark 20)
  - Months of next year's imports: 3.23
- Assessment:
  - Gross FX reserves fell somewhat below the 100 percent of ARA adequacy metric at 94 percent in 2021.
  - Reserves projected to return above the 100 percent threshold in 2023 and remain there through 2024.
  - A successful return to markets would boost reserves further above the conservative baseline assumptions.
- Footnote on excess pension flows adjustor methodology:
  - Excess pension flows were calculated by subtracting future “steady state” pension outflows and 2021 BCCR intervention directed at counteracting the outflows from the 2.9 percent of GDP pension outflows in 2021.
  - Pre-pandemic flows of about US$400 million per year (0.6 percent of GDP) proxied for steady state flows and all central bank intervention (0.5 percent of GDP in 2021) proxied for pension-directed FX intervention.
  - The adjustor is assumed to be a 2-3-year phenomenon and treated as a temporary adjustment to the cyclically adjusted current account.

*Source: Annex I. External Sector Assessment (content unit: 1criea2022002) from the provided IMF PDF content.*

### Annex II. Figure 5. Costa Rica: Realism of Baseline Assumptions

### Annex II. Figure 5. Costa Rica: Realism of Baseline Assumptions

### Realism assessment — summary findings
- "Realism analysis does not trigger major concerns."
- The improvement in the primary balance is underpinned by program commitments, which "have thus far been exceeded."
- The baseline does not include yields from recently implemented tax compliance measures or savings from "the public employment bill's implementation."
- The risk premium is expected to decline due to more favorable multilateral financing sources, "especially in 2023," and less pressure on local markets.
- "GDP growth projections are in line with recent averages and those implied with fiscal multipliers, though strong growth in 2022 is based on observed outturns."

### Comparator and percentile information (color code and ranks)
- Color-code percentiles used in charts:
  - > 75th percentile
  - 50-75th percentile
  - 25-50th percentile
  - < 25th percentile
- Output-gap revision percentile definition: Percentile rank of the country's output gap revisions (defined as the difference between real time/period ahead estimates and final estimates in the latest October WEO) in the total distribution of revisions across the data sample.
- Example percentile ranks shown:
  - 3-year adjustment above 75th percentile: "2 ppts of GDP"
  - 3-year debt reduction above 75th percentile: "5.9 ppts of GDP"
  - Percentile rank examples: "75" and "64" are reported for specific measures.

### Public debt–creating flows, fiscal adjustment and interest-rate rule
- Laubach (2009) rule note: a linear rule "assuming bond spreads increase by about 4 bps in response to a 1 ppt increase in the projected debt-to-GDP ratio."
- Charts/metrics indicated (labels preserved):
  - Public Debt Creating Flows (Percent of GDP)
  - Debt Issuances (bars, debt issuances (RHS, %GDP); lines, avg marginal interest rates (LHS, percent))
  - 3-Year Debt Reduction (Percent of GDP)
  - 3-Year Adjustment in Cyclically-Adjusted Primary Balance (percent of GDP)
  - Fiscal Adjustment and Possible Growth Paths: Real GDP Growth (lines, real growth using multiplier (LHS); bars, fiscal adj. (RHS) (in percent))

### Fiscal multipliers and growth scenarios presented
- Fiscal multiplier scenarios shown:
  - Multiplier = 0.5
  - Multiplier = 1
  - Multiplier = 1.5
- Baseline and multiplier-implied growth comparisons are presented together with fiscal adjustment (labels preserved).

### Short-run indicator comparisons (past 5 years vs next 5 years)
- Chart labels comparing changes in:
  - Primary deficit
  - Real interest rate
  - Real GDP growth
  - Exchange rate depreciation
  - SFA
  - Change in public sector debt
- Horizontal axis ranges and chart ticks preserved where shown (examples in figures): -30, -25, -20, -15, -10, -5, 0, 5, 10, 15, 20.

### Other annotated numeric markers preserved from figure
- Distribution axis ticks and examples: -7.5 -6.5 -5.5 -4.5 -3.5 -2.5 -1.5 -0.5 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5
- Debt issuance term buckets shown: "5+ yr term", "1-5 yr term", "<1 yr term"
- Debt reduction / adjustment numeric markers shown on charts:
  - "3-year adjustment above 75th percentile (2 ppts of GDP)"
  - "3-year debt reduction above 75th percentile (5.9 ppts of GDP)"

*Source: IMF Staff.*

### Annex III. Costa Rica’s Climate Change Challenge

### Annex III. Costa Rica’s Climate Change Challenge

### Physical climate impacts and recent disaster experience
- Floods are the most prevalent natural hazard and are set to become more common as storms become more frequent and intense.
- The trend of increasing long droughts is expected to continue and the incidence of extreme temperatures is expected to increase.
- More gradual physical effects include higher average temperatures, loss of biodiversity, ocean acidification, and rising sea levels.
- Reforestation and ecosystem restoration can reduce flooding and act as a carbon sink.

Key statistics and incidents
- Agriculture represents about 5 percent of GDP and almost one-third of rural employment.
- EM-DAT data: Costa Rica has suffered a severe storm or flood every five years on average since 1988 (i.e., a probability of around 20 percent per year).
- Damage from rains and droughts averaged 0.7 percent of GDP in 1998-2018; about half of that damage was to transport infrastructure.
- Estimated damage from Tropical Storm Nate in 2017 was equivalent to 1 percent of GDP.
- Storms can cause additional damage, with average capital and output costs of about 0.5 percent of GDP over the same period.
- In a high-risk scenario, damage could rise to 1.6 to 2.5 percent per year over the medium term.

### Economic and financial risks from physical climate change
- Altered rainfall patterns and rising temperatures can change areas suitable for crops and livestock.
- Droughts reduce available water for drinking, sanitation, and hydroelectric power—affecting Costa Rica’s near-complete use of renewable electricity generation.
- Flooding and tidal flooding exacerbated by rising sea levels can damage roads and infrastructure, reducing tourism and FX receipts.
- Physical risks affect the financial sector; authorities are refining stress tests to capture physical risks and to map loan exposures by location of underlying activity rather than loan origination.
- Climate change interacts with other shocks (e.g., COVID-19 reduced tourism and funding for conservation), eroding the coping capacity of the poorest.

### Investment in resilient public infrastructure: modeling results and fiscal implications
- Expert estimate: resilient public investment is 25 percent more expensive than non-resilient public investment.
- Staff DSGE model calibrated for Costa Rica assumes the share of resilient public capital stock rises from 0 to 80 percent in the long run and that resilient infrastructure reduces damages by climate-related natural disasters to 20 percent while maintaining historical investment rates.
- Model outputs:
  - Public investment in resilient infrastructure of about 1.6 percent of GDP (at an additional fiscal cost of 0.4 percent of GDP) yields a long-term increase in the level of GDP of 3 percent.
  - Investment in resilience would yield gross fiscal gains of about 0.5 percent of GDP per year.
  - Long-run steady state net fiscal gains of about 0.1 percent of GDP.

Rationale for gains (model interpretation)
- Gains arise from three additive components:
  - Lowering reconstruction spending after each event (stock saving).
  - Limiting the decline in output and employment after a shock and thus reducing tax revenue losses (flow saving).
  - Generating a higher steady-state level of output, consumption, and employment and therefore of tax revenues.

### Decarbonization, transition costs, and distributional considerations
- Costa Rica’s National Strategic Plan 2050 (PEN 50): among 11 highest-priority projects, decarbonization projects represent the largest share of the portfolio, with costs estimated at almost 5 percent of GDP.
- Full implementation of the National Decarbonization Plan is expected to yield benefits in the order of $41 billion, after netting out upfront costs of $37 billion.
- Sectoral outcomes:
  - Livestock, forestry, and agriculture would have the largest decarbonization and economic gains.
  - Private and public transport would have large gains.
  - Freight, industry, and waste management: negligible economic gains but significant decarbonization gains.
- Fiscal implications of transport decarbonization:
  - Reduced reliance on fuel for transport could cause revenue losses from fuel taxes of 0.4 percent of GDP per year between 2023 and 2050.
  - Lower vehicle ownership and exemptions on electric cars would reduce registration revenues; VAT from electricity sales and import tax gains from electrification could partially offset losses (conditional on phasing out existing import duty exemptions on electric vehicles).
  - Other green taxes would be required to offset expected revenue losses and support mitigation.

Just transition and social impacts
- Job impacts: net job-creating potential is modest—around one-quarter of one percent of the labor force by 2035.
- Sectors with slower job growth due to the transition include agriculture and fishing and mining and quarrying; these sectors tend to employ poorer and lower-skilled workers.
- Transition risks from global mitigation: higher international jet fuel costs or reduced demand for flying could reduce tourism, disproportionately affecting women and poorer coastal regions.
- Policy measures to mitigate distributional and transition risks:
  - Address skills mismatches and increase mobility.
  - Generate alternative employment opportunities.
  - Ensure the social safety net can support the transition.
  - Link forms of social assistance to conservation or mitigation efforts (e.g., payments tied to forest preservation).

### Costa Rica’s climate achievements and external financing
- International recognitions and targets:
  - ND-GAIN index: Costa Rica ranked 61st out of 182 countries for climate change vulnerability and readiness.
  - Awarded the United Nations’ “Champion of the Earth” in 2019.
  - Climate Action Tracker assessment: “fair share target” and “policies and actions” consistent with limiting global warming to 1.5°C.
  - Nationally Determined Contribution aims to bring 2030 emissions (9 million tons of carbon dioxide equivalent) back to around 2010 levels.
- Results and financing:
  - Costa Rica started receiving disbursements from the Carbon Partnership Facility under the Emission Reductions Purchase Agreement (ERPA) in August 2022 following confirmed emissions reductions from improved tree cover.
  - Costa Rica reversed forest decline and doubled forest area; awarded the “Earthshot Prize” in 2021.
  - Received a first disbursement from the Green Climate Fund in January 2022.
  - Grants and prizes amount to over US$115 million and complement development partner support including:
    - US$1.1 billion by the World Bank for 2022-2024.
    - A Policy Based Loan of US$400 million provided by the IDB, French Development Agency, and Korean Infrastructure Funding Facility.
  - Authorities plan public-private partnerships to finance most priority PEN 50 investments and to gain Environmental, Social, and Governance (ESG) status to attract private financing.

### Program financing requests and fiscal program targets (as stated by authorities)
- Request for completion of the Third Review of the Extended Arrangement under the EFF and the purchase of SDR 206.23 million.
- Request for a waiver on the nonobservance of the end-June 2022 Net International Reserves (NIR) quantitative performance criterion.
- Request access under the Resilience and Sustainability Facility (RSF) totaling SDR 554.1 million (150 percent of quota) for the remaining duration of the Extended Arrangement, to be provided for direct budget support.
- Fiscal program targets highlighted by authorities:
  - Primary surplus of about 1.3 percent of GDP by end-2023.
  - Debt-to-GDP ratio of 50 percent of GDP by end-2035.

*Source: Annex III. Costa Rica’s Climate Change Challenge (selected excerpts).*

### 2. Our economic reform program aims at securing macroeconomic stability, while

### 2. Our economic reform program aims at securing macroeconomic stability, while fostering an inclusive, green, and sustainable recovery from the pandemic

### Macroeconomic developments and outlook
- Policy and reform efforts anchored on three pillars:
  - (i) gradually implementing equitable fiscal reforms to protect the most vulnerable, while ensuring debt sustainability;
  - (ii) maintaining monetary and financial stability, strengthening the central bank’s autonomy and governance, and addressing financial vulnerabilities;
  - (iii) advancing structural reforms to facilitate inclusion, boost labor productivity, and fight climate change.
- Recent performance and outlook:
  - Real GDP recovered by 7.8 percent in 2021.
  - Real GDP growth is forecast to be 4.3 percent in 2022 and 2.9 percent in 2023.
  - Over the medium term, economic growth is expected to return to its potential of around 3 percent.
  - Inflation stood at 10.4 percent y/y in September, above the BCCR’s 2-4 percent tolerance band.
- External and downside risks highlighted:
  - Higher global commodity prices, weak recovery in tourism, capital outflows from local pension funds, deterioration in terms of trade.
  - Downside risks include further supply shocks from commodity prices, a deeper-than-expected global slowdown, a further tightening of financial conditions, the ongoing pandemic, and possible natural disasters.

### Program performance
- Fiscal and reserve targets:
  - End-June Quantitative Performance Criterion (QPC) on the central government (CG) primary balance and debt stock were met by a comfortable margin.
  - End-September indicative fiscal targets are expected to have been met by a good margin (final data delayed).
  - End-June QPC and end-September IT on net international reserves were missed, largely due to the commodity price shock; on track to meet the end-December QPC.
- Monetary Policy Consultation Clause (MPCC) outer band:
  - Breached by 2.6 and 5.3 percentage points in June and September, respectively.
  - A letter from the central bank explaining the deviation was attached in accordance with the required Board consultation.
- Continuous performance criteria observed:
  - Non-accumulation of new external arrears.
  - Non-imposition/intensification of restrictions on current international payments and transfers.
  - Non-imposition/modification of multiple currency practices (MCPs).
  - Non-introduction/intensification of import restrictions for BOP reasons.
  - No conclusion of bilateral payments agreements inconsistent with Article VIII obligations.
- Structural benchmark progress:
  - End-April structural benchmarks met: Cabinet approved and published a Medium-Term Fiscal Framework for the entire Non-Financial Public Sector (NFPS) and approved and published a Medium-Term Debt Strategy (MTDS).
  - End-September structural benchmark met: developed a roadmap to enhance infrastructure resilience to climate change.
  - Structural benchmark to approve a plan to adjust the minimum contribution base for part-time workers was not met by end-June 2022 but the plan was approved in September.
  - Steady progress towards submitting amendments to the BCCR Law to the Legislative Assembly, as planned by end-December 2022.

### Fiscal policy — fiscal stance and targets
- Objectives:
  - Meet critical social and health needs, support the recovery, and secure debt sustainability.
- Historical context:
  - Fiscal balance deteriorated sharply over the past decade due to a permanent increase in current spending following the global financial crisis.
  - A comprehensive fiscal reform bill was approved in December 2018 to rein in spending and strengthen revenue, placing public debt on a declining trajectory over the medium term.
- Program fiscal targets and trajectories:
  - Target primary balance of about 1.3 percent of GDP by end-2023.
  - Target debt-to-GDP ratio of 50 percent by 2035.
  - Plan to implement additional progressive income and expenditure measures during the program period to foster inclusive and sustainable growth and deliver a faster decline in debt.

### Fiscal framework and tax reform (2018 reform and subsequent changes)
- Fiscal rule:
  - Ties down nominal spending growth; includes tight restraints on public sector remunerations.
  - Enables reallocation of earmarked revenues and legally mandated spending (except those mandated by the Constitution) if debt exceeds 50 percent of GDP.
  - Implementing regulation change in June 2022: spending ceilings for execution will be based exclusively on the previous year’s original budget rather than previous year’s execution.
  - Plans to submit legislative amendments: first legislative proposal submitted in early September; plan to submit amendments through motions at the legislative committee level by end-November 2022 with IMF TA support.
  - Ongoing analysis of complementary reforms to the budget process and Medium-term fiscal framework.
- Tax reform highlights:
  - VAT replaced the General Sales Tax.
  - Income taxation strengthened through:
    - globalization and harmonization of capital income and gains tax at a 15 percent rate;
    - phasing-in of new rules for corporate income taxation (CIT);
    - increasing progressivity of personal income taxation (PIT) with additional brackets of 20 and 25 percent for employment income.

### Fiscal measures and execution in 2022
- End-June outcomes and end-December projection:
  - End-June primary balance was CRC 577 billion, compared to a program target of CRC144 billion.
  - Projected primary surplus of CRC478 billion by end-December 2022 (or about 1.1 percent of GDP), above the CRC287 billion target.
- Revenue measures implemented:
  - Despite a cyberattack in late April, tax revenue performance remained strong in H1 2022, especially for income tax, aided by contingency plans for large taxpayers.
  - Ongoing yields from 2018 tax reform (scheduled VAT increases on construction-related services and tourism and the capital income tax).
  - Delayed scheduled inflation adjustment to the fuel tax for six months until December 2022 to mitigate impact of global commodity price shock.
  - Commitment to advance progressive and growth-friendly tax bills (MEFP¶8).
  - Use of one-off revenues from transfer of surpluses accumulated by decentralized entities before incorporation into the central government to accelerate debt reduction.
- Spending measures implemented:
  - Fiscal rule envisages tighter spending constraints for 2022-2025 because debt ratio exceeded 60 percent of GDP in 2020 and 2021.
  - Total spending set to grow by around 2 percent in 2022 (after excluding emergency spending).
  - Primary spending estimated to fall by around 1.5 percent of GDP in 2022.
  - Spending restraint based on wage constraints from 2018 fiscal reform (freeze in base salaries, annuities, and new hiring; elimination of vacancies).
  - Additional measures until September 2022 included:
    - annual nominal reductions of temporary wage components by 8.5 percent;
    - freezes in pensions of public sector retirees and current transfers to the public sector excluding transfers to the Social Security Fund (CCSS);
    - cuts in non-pension private transfers, non-CCSS public transfers, and transfers with external resources;
    - annual nominal reduction in spending on goods and services.
  - Regulation related to some constraints abrogated in September 2022 to provide more budget flexibility; MOF circular issued in November 2021 continues to ensure tight spending controls.
  - Monthly monitoring and adjustment of appropriations to line ministries.
  - Under-execution of capital spending due to delays, reprioritization of capital projects, and unused guarantee fund resources.
  - Supplementary budgets issued; FODESAF resources excluded from fiscal rule; operational efficiencies identified; reallocations from IMAS commercial activities to mitigate higher prices on vulnerable groups.
  - Additional social support measures: an additional 0.1 percent of GDP including CRC 20 billion (of which CRC 8 billion will accrue in 2022) for temporary food support, CRC 13 billion to assist minors, and CRC 11 billion for conditional cash transfers under existing programs.
  - A temporary scheme to limit gasoline price increases under consideration by the Legislative Assembly; if pursued, would be limited to duration not exceeding 9 months, fiscal cost capped at CRC 3 billion (or less than 0.01 percent of GDP), and covered by the fiscal rule spending ceiling.

### Fiscal program for 2023
- Targets:
  - Primary surplus target of at least CRC 609 billion by end-December 2023 (or about 1.3 percent of GDP).
- Revenue measures planned:
  - Commitment to improving revenue mobilization through a more equitable and efficient tax system (MEFP ¶10).
  - Review of personal income tax (PIT) conducted in September 2022 with IMF TA support.
  - Submission by end-December 2022 of a tax bill to reform the PIT to:
    - increase horizontal and vertical equity by taxing income of employed, pensioners, and self-employed individuals under a single recalibrated schedule;
    - fully harmonize the PIT rate on capital income and gains;
    - broaden the tax base by including dividends distributed by firms in free zones and removing the progressive schedule within the CIT while maintaining the existing regime for small and medium enterprises;
    - broaden the tax base by including capital income earned abroad by Costa Rican residents.
  - Bill expected to be approved by end-September 2023.
  - Annual yield of the reform estimated to be at least 0.1 percent of GDP.
  - Adopted legal framework to periodically appraise tax expenditures and remove those no longer serving their intended purpose.
  - Plans to remove lenient VAT treatment of airfares and tax exemption on car rentals via legislation expected to be submitted by end-November 2022.
  - Continue scheduled phase-out of reduced VAT rates to the tourism sector and construction services.
  - Additional income tax yields from enforcement of thin capitalization rules expected to generate a yield of 0.1 percent of GDP.
  - Introduction of a revenue neutral scheme of feebates to incentivize replacement of high-polluting private vehicles (MEFP ¶41).
  - Overall net yields on the revenue side on an annual net basis estimated at about 0.2 percent of GDP.
- Spending measures and composition:
  - 2023 budget envisages total spending growth of 2.6 percent in 2023 (after accounting for emergency spending).
  - Given projected increases in the interest bill, this implies zero growth in budgeted primary spending.
  - Proposed 2023 budget increases social spending by more than CRC 60 billion (9 percent) compared to the 2022 budget.
  - Commitment to reallocate unexecuted resources through subsequent budgets to add another CRC 60 billion to maintain social spending as a share of GDP relative to 2022, channeling resources to main cash transfer and childcare programs.
  - Reallocation of spending away from legally mandated uses when debt-to-GDP ratio is above 50 percent, as approved under the 2018 fiscal reform (exemption for Constitution-mandated items).
  - Commitment to remain current on payment obligations and not accumulate spending arrears.
  - Approval of external loans by multilateral partners and planned multi-year Eurobond issuance, together with improved market conditions and debt management efforts, are critical to contain interest expenditure.

### Contingency and flexibility in the program
- Built-in flexibility for COVID-19 related uncertainty:
  - If revenues underperform, propose temporary tax measures and reprioritize non-critical spending to keep primary target within reach.
  - Program allows for an adjustor to accommodate increased COVID-19 emergency spending up to a cumulative 0.2 percent of GDP in the remainder of 2022 and 2023 for health services, targeted support to households and businesses, or enhanced social assistance.
  - Commitment to save any revenue over-performance in 2022 and outer years to accelerate debt reduction plans.
- Other upside measures and reforms to support medium-term consolidation:
  - Planned income tax reform and additional rationalization of tax expenditure (MEFP ¶11).
  - Ambitious reform of public-sector employment (MEFP ¶13) to support low nominal spending growth; freeze in the basic wage and accrual of annuities to be extended beyond 2025 in line with the fiscal rule and the Public Employment Bill (PEB).
  - Modernization and strengthening of social safety net.
  - Expected efficiency gains through consolidation of ministries and institutions as part of public sector reform.
  - Planned asset sale program.
  - Greater revenue mobilization from modernization of tax and customs administration (MEFP ¶12) and PFM reforms (MEFP ¶15).
  - These reforms provide important upsides to tackle current debt and financing challenges faster than expected under the program.

*Source: 1criea2022002 - 2. Our economic reform program aims at securing macroeconomic stability, while*

### 11. We are developing a medium-term revenue strategy to move towards a more

### 11. We are developing a medium-term revenue strategy to move towards a more

### Medium-term revenue strategy: tax policy reforms
- Reform the PIT to a single recalibrated progressive tax schedule taxing wages earned by employees, profits from the self-employed, and pensions (MEFP ¶8).
- Broaden the base by taxing dividends distributed by firms in Free Zones and passive capital income earned abroad by Costa Rican residents.
- Further broaden the tax base by removing services taxed with reduced VAT rates and conducting systematic and regular cost-benefit analysis of tax exemptions to remove outdated or ineffective exemptions, including a thorough review of those that have a negative environmental impact with the aid of IMF TA.
- Remove the progressive tax schedule within the corporate income tax (CIT).
- Revise current incentives under the Free Zones to move in line with the new international taxation architecture (Pillar 2).
- Support the environmental agenda by introducing and periodically recalibrating feebates to support the transition to low emission vehicles and safeguarding revenues consistent with IMF advice.
- Consider increasing taxpayers’ incentives to contribute to social security schemes by allowing for a capped deduction of mandatory social security contributions from the PIT base.

### Strengthening revenue administration
- Tax Compliance Improvement Plan (approved December 2021, structural benchmark) with IMF TA support:
  - Strengthen compliance strategies through large-scale automated cross-matching of information to detect inaccurate reporting.
  - Revamp audit programs focused on VAT on services and erosion of CIT bases.
- Implementation timeline and actions:
  - Rollout delayed by hacking of tax and customs main collection systems; resumed implementation of different compliance risk mitigation strategies in August 2022 with quarterly monitoring based on quantitative and qualitative indicators.
  - By end-December 2022: strengthen integrity of taxpayers’ registry, with IMF TA, and produce risk assessments of VAT, international taxation, and large taxpayers.
  - By end-November 2022: develop a guideline (ficha) to undertake risk assessments of large net-wealth taxpayers.
  - By end-March 2023: deploy the National Integrated Risk Management Systems to enhance information-driven enforcement, using administrative and third-party information including automatic exchange of information on financial accounts (CRS), Country-by-Country (CbC) reports, and effective use of corporation shareholders and beneficial owners’ registers when warranted.
  - By end-December 2023: formulate a complete impact evaluation assessment framework to identify compliance improvement gains.
- Customs modernization:
  - New Customs Law approved in May 2022, with IMF TA support, to promote trade facilitation and improve revenue collection through risk-based enforcement.
  - Implementing regulation expected to be finalized and enter into force by end-November 2022.
- Digital transformation:
  - MOF’s Hacienda Digital para el Bicentenario (supported by the World Bank) to upgrade tax and customs procedures and information systems, including heightened security and mitigation plans for cyber security risks.

### Rationalizing government spending: public employment reform
- Implement the Public Employment Bill (approved March 2022) to create a single pay spine with eight job families, consolidating wage supplements (annuities, bonuses, incentives, others) within a single salary. Oversight shared between MIDEPLAN and autonomous institutions.
- Implementation deadline: Bill, including introduction of a single pay spine, to be implemented by end-March 2023 (structural benchmark), within 12 months since its approval.
- Public consultations: ongoing since July 2022; implementing regulation to be submitted for public consultation in January 2023; law enters into force in March 2023.
- Coverage and exclusions:
  - Applies to all public sector institutions except non-state public entities that operate in the public interest and state-owned companies and institutions that operate under competitive markets.
- Transitional arrangements and fiscal impact:
  - 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 for their occupation (Transitory Disposition XI).
  - Estimated savings from the reform (with IDB support): range between 0.4 and 0.6 percent of GDP during the first five years for the entire public sector, including savings of 0.3 to 0.5 percent of GDP for the central government.
- Additional features: 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 care for a family member.

### Enhancing social protection targeting and delivery through digitalization
- Fiscal commitment: Costa Rica devoted 1.9 percent of GDP in 2021 to fighting poverty and reducing inequality.
- Centralization and digitalization of payment system:
  - Centralization of cash transfer payments at MOF’s National Treasury (SUPRES) completed December 2021 (structural benchmark).
  - Agreements signed, regulations issued, payment software incorporated into the Digital Treasury system.
  - Implementation resumed after cyberattack; expected completion for IMAS programs by end-June 2023 (except those funded through their own revenues).
  - Expect all main institutions and programs providing cash benefits to be fully compliant with the new system by end-December 2023.
  - Estimated reduction in payment processing time from 3-5 days to 24 hours.
- Targeting and coverage improvements:
  - Strengthen SINIRUBE as main instrument to target social protection benefits and services (with World Bank support).
  - August 2022 study by Programa Estado de la Nación confirmed robustness of the SINIRUBE algorithm.
  - Major social assistance programs have adopted SINIRUBE; IMAS assisting remaining institutions including judiciary and higher education.
  - IMAS Directive 0122-2022: increase SINIRUBE capabilities for better socio-economic profiling.
  - IMAS to begin removing ineligible duplicate benefits identified by SINIRUBE outside municipalities starting in early 2023 (to support compliance with Directive 060-MTSS-MDHIS).
  - 2023: start a new bridge program to facilitate transition to employment and entrepreneurship.
  - IMAS (with WB technical support) designing a single window to:
    - serve as a one-stop-shop for potential beneficiaries,
    - consolidate information on existing benefits and eligibility for new benefits,
    - facilitate coordination between social protection institutions.
  - Government expects first stage of single window by end-2023.

### Public Financial Management (PFM) reforms
- Medium-Term Fiscal Framework (MTFF):
  - MOF published MTFF in April 2022 covering NFPS for 2022-2027 (structural benchmark), with IMF TA support.
  - MTFF includes analysis and reporting of fiscal risks, contingent liabilities, debt guarantees, explicit fiscal contingency reserve schemes, and integrates a medium-term public investment plan/framework.
  - MTFF updated in September 2022 as part of 2023 budget submission.
  - Plan to further strengthen MTFF by end-March 2023 by better aligning fiscal policy with long-term national plans and improving spending projections.
  - Plan to formalize a permanent MOF unit in charge of macro fiscal issues by end-February 2023 (in line with IMF TA recommendations).
- Public Investment Management Assessment (PIMA):
  - PIMA (including a new Climate Change Module) undertaken in November-December 2021 with IMF, WB, and IDB support.
  - Plan to strengthen public investment efficiency and make fiscal space for climate change-related and critical infrastructure needs (MEFP ¶40).
  - Bill submitted to extend SNIP procedures to broader set of NFPS entities; expected approval by Legislative Assembly by end-June 2023.
  - Plan to include climate impact via social cost of carbon in project appraisal by end-September 2023 (MEFP ¶40).
  - Publish clear and transparent project selection criteria including climate change criteria by end-December 2023 (MEFP ¶40).
  - Issue quarterly and half-year reports on physical and financial progress of externally funded projects.
  - Hacienda Digital adoption in 2025 to extend project monitoring to domestically funded projects.
  - Plan to develop a comprehensive asset register including stock of public assets and condition to inform investment planning.
- Gender budgeting:
  - Incorporate gender lens into budget preparation with IMF support.
  - Publish a gender budget statement as an annex to 2024 budgets for Ministry of Justice and IMAS by end-October 2023.
  - Intermediate steps:
    - Pilot to identify gender-related expenditures by end-December 2022.
    - Adjust budget call circulars for 2024 budget to identify gender-related spending in pilot ministries by end-April 2023.
    - Establish coordination between MOF, STAP and Comptroller’s Office so CGR adopts technical budgeting standards to identify gender-related spending and mandatorily applies it in decentralized sector.
  - Execution of gender-related spending will be monitored during 2024.
- Fiscal Council:
  - Working to fully operationalize the Fiscal Council with goal of publishing first public assessment of government’s fiscal strategy in 2023.
  - Support to develop communication tools and memorandum of collaboration with MOF to clarify separation of functions and information sharing.
- Other PFM institutional reforms:
  - Continue MOF and Comptroller’s Office cooperation across budget cycle to ensure compliance with fiscal rule.
  - Resume efforts to reduce budget fragmentation; consolidate public services within fewer public institutions as part of public sector reform.
  - Submitted legislation to consolidate responsibilities within MOPT, create a new Ministry of Housing, and a new Social Ministry.
  - Restructuring ministries to strengthen oversight of decentralized entities; eliminate Ministry of Governance and reallocate some directorates.
  - With IMF TA, extend Treasury Single Account (TSA) to decentralized and autonomous entities through draft legislation requiring phased transfer of cash held in commercial bank accounts to the TSA to reduce idle cash and central government borrowing costs.
  - Hacienda Digital para el Bicentenario to modernize and integrate PFM information systems for better alignment of expenditure policies.

### Modernizing public procurement
- Enforce use of electronic platform Sistema Integrado de Compras Públicas (SICOP) by all procuring entities to lower transaction costs and improve capacity.
- Public Procurement Law (No. 9986) approved May 2021:
  - Introduced regulatory and institutional framework for umbrella contracts, eliminated exceptions to public bidding, increased competition.
  - Law enters into force in December 2022 and requires bidders’ registration in the e-procurement system ‘Electronic Registry of Official Suppliers and Subcontractors of the Unified Digital System’, to be incorporated into SICOP.
  - After public consultation in August 2022, MOF continues to review regulation to implement Law 9986 in coordination with the President’s office; regulation to be published by end-November 2022.
  - Regulation will require bidders to submit accurate and current beneficial ownership information via affidavits as part of the bidding process, including full name and type and number of official identification document(s) for legal persons.
  - Beneficial ownership information will be held within MOF’s supplier registry for consultation by the Comptroller General of the Republic, Office of the Attorney General of the Republic or other judicial authority upon request.
  - Allows cross-checking with the Transparency and Final Beneficiary Registry administered by the BCCR to combat tax fraud and money laundering (MEFP ¶34).
- Expected outcomes:
  - Update, streamline, and modernize procurement processes, ensure greater efficiency, savings through bulk purchases, differentiate processes and thresholds for public works, goods and services, and reduce complexity in procurement.

*Source: 1criea2022002 - 11. We are developing a medium-term revenue strategy to move towards a more (PDF).*

### 17. We continue to foster transparency and adhere to best practices in the procurement

### 17. We continue to foster transparency and adhere to best practices in the procurement

### COVID-19 procurement transparency and audits
- The Comptroller’s Office developed a Fiscal Transparency Portal for COVID-19 with published information on public purchases and audit results on the use of emergency assistance.
- The Ministry of Labor and Social Security created a transparency portal on the Bono Proteger program that includes a list of beneficiaries, statistics, and reports.
- With IDB support, MIDEPLAN launched a 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.
- Published procurement data include information on awarded vendors, including their legal ownership (if tenders required it).
- The Comptroller’s Office continues specific audits on emergency cash transfers and publishes results in its Portal.

### SOE governance and financial reporting
- SOEs dominate key sectors: electricity, telecoms, transportation, banking and insurance services, and petroleum products.
- Some SOEs present data reporting weaknesses that constrain full balance-sheet assessment and may hide fiscal risks.
- Commitment to accelerate full adoption of International Financial Reporting Standards (IFRS) by SOEs.
- Publication status of 2020 financial statements according to IFRS (end-December 2021 structural benchmark):
  - ICE (Instituto Costarricense de Electricidad): fully compliant.
  - AyA (Instituto Costarricense de Acueductos y Alcantarillados): became compliant with a delay in June 2022.
  - CNP (Consejo Nacional de Producción): will need time to implement a new accounting system for FANAL (a very small company under its purview) to fully comply.
  - Almost all remaining SOEs already published their 2020 financial statements in line with IFRS.
- An updated 2021 aggregate report on SOE performance was published in February 2022.
- With OECD and WB support: commit to bring SOEs’ public procurement process fully consistent with SICOP by end-December 2022, limit use of exceptions for direct public procurement, and gradually eliminate regulations allowing withholding of confidential information.

### Electricity sector efficiency, tariff modernization, and competition
- High energy costs for consumers and the productive sector attributed to state energy companies.
- ICE implementing an efficiency strategy since 2021 as part of its strategic plan for 2019-23 (Strategy 4.0) including reducing operational costs, restructuring debt, and implementing IFRS.
- Cumulative tariff reductions in 2021 compared to December 2020:
  - Generation: 15.98 percent
  - Distribution: 12.73 percent
  - Transmission: 13.44 percent
- Government commitments and actions:
  - Advance efficiency strategy through further debt restructuring and cost reduction.
  - ICE to execute its Financial Sustainability Roadmap to reduce fixed costs and renegotiate debt conditions; reclassify operating leases as finance leases for financial statements and regulatory accounting used for tariff setting.
  - With WB support, ICE to assess cost structure across generation, transmission, distribution and launch roadmap with detailed actions to increase efficiency by end-March 2023.
  - ICE will not renew or will renegotiate at affordable terms private generator contracts as they expire.
  - Bill No. 22.561 (submitted June 2021) to authorize private energy generators, public companies, and cooperatives to sell surplus energy to the regional market expected to be approved by end-June 2023.
  - Bill No. 22.601 to eliminate the minimum national capital requirement of 35 percent for private companies to sell electricity to ICE expected to be approved by end-June 2023.
  - ARESEP to expand efforts to reduce electricity prices charged by other generators, applying new tariff methodologies and adopting new benchmark tariffs for generation, distribution, and transmission with IDB support.
  - Three companies (ICE, ESPH and COOPELESCA) started implementing the first part of the tariff modernization program in 2021; remaining five companies started implementation in 2022.
  - All eight companies expected to develop roadmaps for introduction of international reference tariffs by end-April 2023.
  - ARESEP will monitor distribution companies’ financial costs to ensure investment financing terms fit asset useful lifespans.
  - Implementing regulation for Law No. 10086 to simplify administrative procedures for private participation in renewable self-consumption approved in October 2021; regulation will be approved by end-December 2022 (MEFP ¶41).

### Comprehensive debt management reform
- Debt Policy for the Public Sector approved in 2019 (Executive Decree 41935-H) provides guidelines for sustainable public debt.
- Debt management agenda centers on three pillars: institutional reforms, medium-term strategy, and domestic market development.
- Institutional debt management reforms:
  - Plan to submit an amendment to law 8131 to centralize all debt-related functions and create a standalone Public Debt Management Office reporting directly to the Minister of Finance by end-June 2023 (proposed structural benchmark).
  - Assets and Liabilities Committee (Treasury, Public Credit Department (DCP), soon-to-be-established Macroeconomic Analysis Unit of MOF, and BCCR) to provide strategic guidance and inter-agency coordination.
  - Continue liaising with the Legislative Assembly for a general authorization for external borrowing consistent with annual budgetary and borrowing limits and debt management strategy.
- Medium-term debt strategy (MTDS):
  - Published updated MTDS covering 2022-27 in April 2022, meeting the relevant structural benchmark.
  - Report covered 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 for public debt payments.
- Domestic market development:
  - Focus 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; 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.
  - Submitted proposal to Legislative Assembly to promote and open Costa Rican public debt market to foreign participants expected to be approved by end-December 2022.
  - Consultations with international platforms to allow clearing and settlement of debt securities to international standards.
  - Continue active use of liability management operations to reduce rollover risks for debt maturing in the next 12-24 months and smooth impact of maturing benchmark bonds, in line with MTDS.
  - In December 2022, with support from BCCR and IDB, roll out a pilot market-making/primary dealer program with a small group of participants with well-defined rights and responsibilities.

### Fiscal data quality, coverage, and transparency improvements
- Commitment to improve timeliness, quality, and comprehensiveness of fiscal, financial and debt accounting for the public sector with IMF TA support.
- Despite hacking-induced delays, efforts resumed to adopt GFSM 2014 accrual accounting standards.
- Data compilation targets and timelines:
  - Finalize compilation of monthly revenue and expenditure (above-the-line) data excluding accrued interest for 2019-2022 for the Consolidated Central Government (CCG), including extrabudgetary units representing at least 80 percent of extrabudgetary units’ spending by end-March 2023.
  - Compile BCG quarterly debt stocks from Q1 2022 to Q3 2023 including loans and debt securities at nominal value (including accrued interest) according to GFSM 2014 by end-December 2023.
  - Progressively extend institutional coverage of GFS and PSDS to the General Government (GG) and its subsectors to allow compilation and publication of quarterly GG fiscal and debt data for 2022 and 2023 consistent with 2014 GFSM accrual standards by end-March 2024.
  - Expand institutional coverage to include nonfinancial public corporations’ GFS and PSDS above-the-line quarterly data by end-March 2025.
  - Initiated compilation, consolidation, and dissemination of 2022, 2023 and 2024 data on assets and liabilities for all subsectors of CCG, local governments, the social security fund, and nonfinancial public corporations, and developed reporting of fiscal risks (in MTFF context) including contingent liabilities, guarantees, concession contracts, and indebtedness of municipal governments and nonfinancial public corporations by end-March 2025.
- Improvements include comprehensive collection and reconciliation of financing (below-the-line) data, harmonization of methodology and data coverage among national accounts, government finance and public sector debt statistics, and coordinated public sector accounting improvements to guarantee stock-flow consistency and enable balance sheet analysis.
- Program coverage and definitions will be updated in line with progress and reflected in the attached TMU.

### Monetary policy stance and inflation targeting
- Monetary policy anchored by a firm commitment to low inflation within an inflation targeting framework under a flexible exchange rate.
- Countercyclical easing during COVID-19: policy rate reduced to a record low of 0.75 percent by June 2020.
- Tightening since December 2021 as inflation pressures rose; policy rate brought to 9 percent by October 2022.
- Minimum legal reserve requirement rate for deposits and obligations in national currency raised from 12 percent to 15 percent in July 2022.
- MPCC band breaches: outer band breached by 2.6 and 5.3 percentage points in June and September 2022, respectively.
- Inflation target and monitoring:
  - Target inflation: 3 percent with a tolerance band of ±1 percentage point.
  - Monetary policy will remain data dependent and forward looking; BCCR stands ready to continue gradual and orderly policy rate increases as needed.
  - Progress monitored through an MPCC around quarterly targets (Table 1) as described in the TMU.

### Exchange rate policy, reserves, and FX market reforms
- Flexible exchange rate regime; interventions only to avoid disorderly market conditions.
- BCCR faced higher FX demands from energy imports by the NFPS in H1 2022:
  - End-June NIR target missed by US$612.2 million.
  - End-September NIR target missed by US$48.6 million.
- Continued BCCR net purchases expected to restore NIR to the previously expected path by end-December.
- Commit to proactively purchase foreign currency as warranted to maintain adequate 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 will regularly review NIR and underlying data and reconcile with audited financial statements as needed at fiscal year-end.
- Operational reforms to deepen FX market and improve predictability and transparency:
  - Since April 2022, NFPS entities must give at least one month advance notice to the BCCR for FX requests.
  - Broader review of NFPS foreign exchange needs management; recommendations to BCCR Board by end-December 2022.
  - Considering separation of BCCR FX operations between:
    - Reserve accumulation/replenishment via preannounced schedule of daily FX auctions.
    - Intervention to address market dysfunction via Monex as needed.
  - Improve spot FX market functioning; consider introduction of market makers obligated to regularly quote prices based on minimum trading lots and a maximum bid/ask spread.
  - Revisit Monex operating parameters by end-December 2022 to re-extend trading hours.
  - Set minimum and maximum thresholds to order sizes by end-December 2022 to help define participant roles in Monex.
  - Promote implementation of the FX Global Code among main participants by end-December 2023.
  - Revise FX intermediaries’ net open FX position requirements in line with international best practices.
  - Develop a master agreement for negotiation of FX derivatives by end-April 2024 and introduce FX swaps for BCCR participation by end-June 2024.
- All reforms to be consistent with Article VIII commitments and the IMF’s Institutional View on Liberalization and Management of Capital Flows and to complement measures to reduce financial dollarization (MEFP ¶29).

*Source: 1criea2022002 - 17. We continue to foster transparency and adhere to best practices in the procurement*

### 26. We stand ready to further strengthen the BCCR’s independence, transparency, and

### 26. We stand ready to further strengthen the BCCR’s independence, transparency, and

### BCCR independence, transparency, and accountability
- 2019 amendments to the BCCR Law tightened dismissal rules for the BCCR Governor, delinked the Governor’s term from the political cycle, and removed the Minister of Finance’s voting rights in the BCCR Board, improving personal autonomy provisions.
- In line with the IMF’s 2020 Safeguards Assessment, draft amendments to the BCCR law were submitted to the MOF by end-August 2021 (meeting the relevant structural benchmark).
- Final amendments, once approved by the MOF and the President of the Republic, will be submitted to the Legislative Assembly by end-December 2022 (structural benchmark).
- The Executive Branch will take necessary steps to fill the current vacancy in the BCCR Board.
- A long-term roadmap will be developed to continue to strengthen the BCCR’s equity position.

### Financial sector reforms — progress and vulnerabilities
- Significant reforms implemented, building on IMF’s 2018 FSSR, OECD recommendations, and WB FSAP Development Module.
- Banking system entered the COVID-19 crisis with strong capital and liquidity buffers; stress test results published in the Financial Stability Report support this assessment.
- Key remaining vulnerabilities: high levels of unhedged FX borrowing and indebtedness in household and corporate sectors.

### Banking sector stability and post-COVID regulatory stance
- Pre-pandemic settings for regulatory treatment of restructured loans were restored as of January 1, 2022.
- Use of accumulated countercyclical provisions and softer regulatory capital thresholds that define banks’ “irregularity” extended until December 2022.
- Strengthened reporting and monitoring per the attached TMU; continued monitoring through the Financial Stability Committee’s (FSC) Monitoring and Coordination Group (MCG) comprising senior representatives of the BCCR, CONASSIF, the Superintendencies, and the MOF.
- Technical group supporting the MCG to meet frequently to follow up on systemic developments and financial risks.
- Continued updates and publication of bottom-up and top-down stress tests in the annual Financial Stability Report.
- BCCR roadmap to integrate climate considerations into monetary and financial policies, including: enhanced climate risk management capabilities, an integrated climate and economic model, and development of stress testing methodologies (MEFP ¶44).

### Reducing risks from financial dollarization
- Since 2018, BCCR allowed greater exchange rate flexibility (MEFP ¶24-25).
- FSC, SUGEF and CONASSIF measures to discourage dollarization include:
  - establishing a higher general provision requirement for loans to non-FX generators;
  - calculating liquidity coverage requirements by currency;
  - requiring additional capital requirements for foreign currency mortgages to unhedged borrowers, based on LTV thresholds;
  - requiring banks to assess sensitivity of debtors’ payment capacity to exchange rate changes.
- SUGEF and CONASSIF actions:
  - Revised definition of an unhedged borrower, effective January 1, 2023.
  - New regulation imposing additional capital requirements on foreign currency loans to unhedged borrowers: establishes gradual increase in the risk weight for credits to unhedged borrowers, starting on January 1, 2024, and ending on January 1, 2031.
  - Risk weight will apply gradually to both the loan balance by end-December 2023 and to marginal loans from the corresponding effective date.
  - SUGEF will begin to regularly publish data on unhedged FX borrowing starting in December 2022.

### Strengthening prudential regulatory and supervisory regime
- 2019 reforms to laws on consolidated banking supervision and securities market regulation (Law no. 9768) strengthened supervisors’ powers, including sanctioning powers.
- Implementing consolidated supervision:
  - May 2022: CONASSIF approved a regulation to strengthen governance of supervised financial entities, holding companies, and affiliates, to take effect January 1, 2023, with transition arrangements.
  - September 2022: CONASSIF issued regulations to implement consolidated supervision of financial groups, including guidelines to strengthen regulatory provisions and information sharing, and to update solvency and capital requirements for financial groups; phased implementation starting January 1, 2023.
- Phasing-in risk-based supervision and Basel III standards in a phased manner:
  - SUGEF improvements in liquidity risk monitoring; net stable funding ratio expected to come into effect from January 1, 2024.
  - Forward-looking assessment of losses and provisioning requirements: new regulation and guidelines for provisioning finalized in November 2021, to come into effect from January 1, 2024.
  - Revised banks’ capital definition, established conservation and systemic importance capital buffers, and definition of systemically important institutions; regulation issued in August 2021, to come into effect from January 1, 2025.
  - During the adjustment period, financial entities must assess operational and financial impacts and send results to SUGEF on a quarterly basis starting in the last quarter of 2022.
  - Continued strengthening toward fully risk-based supervision, including broadening risk assessment beyond specific business lines and bringing in specialized expertise.
- Strengthening supervisors’ legal powers and protection:
  - Intent to grant CONASSIF, SUGEF and other Superintendencies powers to: (i) dismiss members of Board and senior management for unsafe and unsound practices; (ii) impose additional capital requirements under Pillar II on individual banks; (iii) ease legal conditions for exercise of supervisory powers and establish a separate appeal procedure for most serious supervisory measures where annulment results only in monetary indemnification, not reversal.
  - Recalibrate sanctioning framework and strengthen legal protection for supervisors regarding coverage of legal costs and protection against good faith errors.
  - Road map on necessary steps to advance these reforms to be finalized by end-June 2023.
- Cyber risks:
  - With IMF TA support, draft regulations on governance and risk management of cyber risk are being prepared, covering information sharing, incident reporting, testing frameworks, third party risks, and response/recovery.
  - Plan to complete draft and initiate consultations with industry by end-February 2023; regulations expected to be approved by end-June 2023.

### Financial safety net, resolution, and deposit insurance
- February 2020: Legislative Assembly approved law on banking resolution and creation of a deposit guarantee fund (DGF) (law no. 9816).
- Implementing regulations effective since May 2021; quarterly payments into the DGF started in October 2021.
- With IMF TA support, further strengthening legal framework on bank resolution and deposit insurance: institutional arrangements for DGF and resolution authority, sufficient resolution powers, clear resolution triggers, and strengthened regime for resolution and recovery plans.
- Draft amendments to Law 9816 and other relevant laws being finalized in coordination with CONASSIF and BCCR; to be submitted for consultation with industry and stakeholders by end-April 2023.
- Final legal amendments, once approved by MOF and the President of the Republic, will be submitted to the Legislative Assembly by end-December 2023 (proposed structural benchmark).
- Crisis preparedness strengthened by continuous monitoring of macro-financial risks by the MCG (MEFP ¶28), updated early warnings system, updated contingency plan including communications protocol, and BCCR enhancement of Lender of Last Resort mechanism.

### Level playing field between public and private banks
- Executive Branch committed to addressing regulatory asymmetries to foster competition:
  - Proposal to Legislative Assembly to: (i) convert parafiscal contributions by state-owned banks into a single commensurate transfer to the CG budget, adjusting the fiscal rule spending accordingly; (ii) remove requirement on state-owned financial institutions to comply with public procurement requirements; (iii) gradually phase out requirement for private banks that have not opened agencies or branches in certain listed areas to transfer a part of their short-term deposits as a loan to state-owned banks (the peaje).
  - Identify alternative ways to channel resources to underserved sectors, limiting fiscal contingent liabilities.
  - Develop first legislative draft by end-October 2023.
  - Asymmetry from requirement for NFPS to do banking with state-owned banks to be corrected with approval of Single Treasury Account legislation (MEFP ¶15).
  - As deposit guarantee covering entire banking sector becomes fully effective, options to gradually phase out existing blanket guarantee for state-owned banks will be explored.
  - BCCR and MEIC launched a database comparing credit products across the financial system to enhance consumer information and foster competition.

### Financial inclusion and digitalization
- Pandemic increased use of electronic transactions and allocation of Bono Proteger, raising bancarization and financial inclusion.
- Structural constraints remain: limited banking competition and partial coverage of the credit registry.
- MEIC developed and started implementing a national strategy for financial education in coordination with BCCR, CONASSIF, and Superintendencies (aligned with IMF FSSR recommendations).
- Simplified requirements for opening a bank account; launched electronic payment system for public transport nationwide.
- Commit to improve design and scope of public credit registry, Centro de Información Crediticia (CIC):
  - Plan to build a modern credit registry with information from supervised financial entities and non-supervised credit providers by end-December 2022.
- CONASSIF and four Superintendencies finalized draft legislation for financial consumer protection; currently under review by BCCR and MEIC before submission to Legislative Assembly.
- April 2022: CONASSIF, BCCR and Superintendencies inaugurated a Financial Innovation Center (with IDB support) to advise fintech startups and inform ongoing fintech regulation.
- Aim to balance innovation promotion with financial stability protections.

### AML/CFT commitments and beneficial ownership transparency
- Continued strengthening of technical compliance with FATF standards on AML/CFT.
- May 2022: Submitted application to GAFILAT for re-rating of FATF recommendations 8, 17, 22, and 28; discussion at GAFILAT Plenary Meeting in December 2022.
- Six other recommendations to be re-evaluated due to changes in FATF standard.
- Progress update provided to GAFILAT Plenary in July 2022; an improved Enhanced Follow-Up Report expected in 2023.
- CONASSIF actions:
  - Approved regulations to make sanctioning framework more effective, proportionate and dissuasive; incorporate new regulated subjects; adopt new regulatory and legal framework related to beneficial ownership, including revised SUGEF Regulation 12-21 of September 2020.
  - Updated regulations in force as of January 1, 2022 to strengthen due diligence measures for politically exposed persons, financing of political parties, and receipt of cash especially in foreign currency.
  - January 2021: Approved SUGEF regulation 35-21 establishing Centro de Información Conozca a su Cliente (CICAC) as centralized repository of customer information; effective January 2022.
  - All regulated entities required to ask customer authorization to record information in CICAC as of July 2022.
  - DNFBPs: close to 5,000 legal entities and individuals registered in SUGEF; as of December 2022 they will be required to upload information to CICAC to register.
  - Developing technology to enable clients to share beneficial ownership information provided for centralized registry with CICAC.
  - Regulation allows SUGEF to “suspend” registration of entities/individuals that do not comply, preventing regulated intermediaries from providing services; as of June 2022, 1040 registered legal persons and natural persons have been suspended.
- BCCR created in 2019 a centralized Transparency and Beneficial Ownership Registry and started collecting shareholder and beneficial ownership information for all legal entities except trusts, third-party resource managers and non-profit organizations.
  - Registry accessible to MOF and Costa Rican Institute on Drugs.
  - As of October 2021, trusts have been included; intend to include the rest of entities by end-December 2023.
- CONASSIF and the Financial Intelligence Unit will continue dedicating resources to AML/CFT supervision and inter-agency collaboration, including required-frequency inspections.

### Structural reforms to boost productivity and inclusion
- Strategic objectives: (i) protect the most vulnerable and support inclusion, including promoting greater female labor force participation; (ii) boost productivity by removing barriers to formalization, investment, and job creation; (iii) promote a green recovery anchored by National Decarbonization Plan and goal of zero net emission economy by 2050.
- Formalization measures:
  - Since 2017, CCSS adopted plans to reduce social security contributions targeting populations with prevalent informality.
  - June 2022: CCSS Board formulated plan to adjust minimum contribution base for part-time workers; submitted for public consultation.
  - Structural benchmark not met by end-June as originally envisaged; CCSS approved final plan in September 2022.
  - Reduced minimum contribution base to be implemented in three phases: starting January 2023 for workers below the age of 35; January 2024 for workers below the age of 50; and January 2025 for all workers.
  - CCSS developing incentives for independent workers to contribute by allowing differentiation in contributions by age/years in the job market and for seasonal employment.
  - PIT reform considers allowing deductibility of CCSS contributions from PIT taxable income (MEFP ¶11).
  - Minimum wages reduced from 26 to 16 over last four years; plan to reduce further to 11 by end-December 2022, in line with OECD recommendations.
  - National strategy for transitioning to the formal economy to be implemented with ILO technical assistance.
- Education reforms:
  - Extensive review of school curricula by competencies; aim to finalize and introduce updated curricula by end-February 2024.
  - Offer training for teachers based on new competencies; develop preliminary proposal for a new performance-based evaluation model by early 2024 and finalize after formal consultations.
  - Ministry of Education developing new proposal to evaluate students’ performance to replace FARO.
  - Training courses offered to improve teaching performance in digital technologies during pandemic; ongoing efforts to reduce digital gap through infrastructure, teacher digital capacity, and access to equipment for teachers and students from low-income families.
  - February 2021: Bilingualism Education Policy introduced with Action Plan to improve proficiency in a second language, including rural areas, by 2040.
  - Entrepreneurship education: integrating business management courses in 17 schools.
  - Revising vocational curricula in context of Industry 4.0 to be implemented by end-December 2023 with IDB support.
  - Already offering 24 new study programs and aiming to implement 8 more programs.

_Italicized source: Content excerpt from the IMF chapter provided in the supplied PDF content._

### 2023. The INA (Instituto Nacional de Aprendizaje)’s Organic Law has been amended to provide

### 1criea2022002 - 2023. The INA (Instituto Nacional de Aprendizaje)’s Organic Law has been amended to provide

### Vocational training and higher education links to labor market
- INA’s Organic Law amended to provide greater autonomy and agility for administration and hiring, with employability as its key objective, in line with ILO recommendations.
- Continue linking public universities’ funding to labor market needs and enhancing connections to the business world through integration in the National Science and Technology Information System to promote innovation and allow firms to benefit from access to state-of-the art knowledge and skills, in line with recommendations from IDB and OECD.

### Investment climate and regulatory reforms
- Efforts to identify spending priorities and promote PPPs, with support from CABEI and IDB, to reduce physical and digital infrastructure gaps, consistent with fiscal consolidation plans under the program.
- Launched Program of Road Infrastructure and Promotion of PPP with IDB support and will provide PPP development training across central and local governments during 2022-2024.
- Ongoing effort to reduce electricity tariffs (MEFP ¶19).
- Launched National Telecommunications Plan 2022-2027 (November 2022) with IDB support, focusing on increasing competition among 5G technology operators (at least 3) by end-December 2023.
- Developing legislative reform updating Law 8220 to simplify administrative procedures with sanctions for non-compliance.
- Launched Le Dejamos Trabajar program with private sector to eliminate 163 obstacles for businesses by end-February 2023.
- Implementing Costa Rica Fluye commitments with 11 public institutions to enact 21 regulatory enhancements.
- Implemented a single-window system (VUI) for licenses and permits; VUI being implemented in 37 local governments.
- Simplification efforts to address 125 procedures across the public sector to start a business, integrate environmental permits, and centralize procedures at the national level to provide a single point of contact by end-September 2023, in line with OECD recommendations.
- Eliminated minimum fees to increase competition in 11 professional associations (September 2022).
- Expediting implementation of new bankruptcy law (Ley 9957) with approval of necessary regulation to simplify bankruptcy process and promote restructuring.
- Promoting innovation clusters to remove information barriers and facilitate integration of domestic firms in global value chains to foster FDI attraction.

### Inclusive growth and female labor force participation
- Acknowledges female labor force participation is considerably lower than for men despite women’s better education outcomes.
- Launched Gender Parity Initiative (IPG) in September 2020 with support from IDB, WEF, and AFD to reduce women’s care burden and promote participation in labor market and leadership.
- IPG action plan to be implemented over a minimum period of three years with measures from regulatory changes to awareness-raising involving public and private sectors.
- Appointed inspectors from the Ministry of Labor in each region to monitor and sanction gender discrimination, including pay gaps, in private companies.
- Expand coverage under Avanzamos Mujeres from around 11,000 to more than 20,000 women by end-December 2023, subject to availability of fiscal resources; program provides education and technical training.
- Advancing gender budgeting agenda to support implementation of IPG and other initiatives to reduce the gender economic gap (MEFP ¶15).
- Launching strategy to combat sexual harassment: emotional and legal support to victims, increased resources for first-response centers, early warning devices to prevent harassment in public transportation, and broad communication campaign. Pilot strategy launched in October 2022.

### Childcare policies
- 2018 fiscal reform expanded definition of public education to include early education centers to help reallocate funds to increase supply of public childcare services.
- In 2021, childcare services increased by 15,000 additional children (relative to 2017), focusing on children up to 5 years old and improving access for low-income households.
- Prior to further expanding coverage, plan to strengthen quality of existing childcare services by standardizing costing framework and basic certification.
- Working to implement a co-payment scheme for private childcare services based on family income (above the poverty line and below the sixth decile), building on current private-sector pilots in the free-trade zone.
- 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 care for a family member.

### Long-term care and national care system
- National Care Policy 2021-2031 launched in March 2021 to establish a long-term care system and reduce women’s family care requirements (Decree 42878-MP-MDHIS).
- SINCA (Sistema Nacional de Cuidados y Apoyos para personas adultas y personas adultas mayores en situación de dependencia) created in March 2022 to improve quality and access to long-term care.
- Implementation plan structured along five pillars: governance, data intelligence, strengthening of care supply and benefits, generation of conditions for closing gender gaps in labor markets, and quality assurance.
- System to strengthen coverage of day centers and long-term residences and establish home care and assistance services for dependent people.
- IMAS, INAMU and MTSS working with UN Women on mechanism to prioritize provision of care services in households where there is potential for women to enter (or remain in) formal employment, and to ensure money transfers to caregivers living in extreme poverty where prospect for paid employment is low.
- Plan to complete protocols for eligibility by end-March 2023, building on a pilot with UN Women support.
- Start implementing new Policy for all eligible women by end-December 2023.
- Progressing on three pilots of care services financed by the IDB to test feasibility and cost/efficiency.
- Implement single dependency scale and a co-payment scheme based on family income by end-December 2023.
- Developing pilot to connect care service providers with demand through a mobile application with IDB support.

### Education, entrepreneurship, and financial inclusion for women
- Strengthening education system and vocational training and deepening financial inclusion (MEFP ¶33) to support women’s economic empowerment.
- Plan to boost program FOMUJERES at regional level to finance women-owned businesses and support formalization; implementation planned to start in January 2023.
- Ongoing financial inclusion pilot programs financed by CAF to design financial products based on women’s specific needs.
- In 2022, completed incorporation of all regions into STEAM education strategy to foster women’s participation in these fields in collaboration with IDB.
- 56 new public institutions expected to be added in 2022 to the 160 public educational institutions already implementing the STEAM education strategy.
- Continue implementing national action plan for gender equality in scientific and technological fields to strengthen female labor force participation and productivity growth.

### Climate change strategy and institutional readiness
- Ambitious strategy centers on: (i) adapting to climate change with emphasis on crisis preparedness and climate-resilient infrastructure; (ii) reaching net-zero emissions by 2050 while ensuring a just transition in jobs and growth; (iii) greening the financial sector, monitoring climate risks and updating modeling and regulatory tools; (iv) mobilizing official and private financing to meet short- to long-term costs from climate change.
- Committed to implementing reform measures supported by the Resilience and Sustainability Facility (RSF).
- MINAE has overall responsibility for climate change issues; bill (23.213) submitted in June 2022 to integrate relevant decentralized bodies into MINAE expected to be approved by end-December 2022.
- MINAE produced National Adaptation Plan with MIDEPLAN support and National Decarbonization Plan with other ministries’ support.
- National Commission of Risk Prevention and Emergencies (CNE) coordinates disaster management framework.
- MINAE’s National Directorate of Climate Change oversees Carbon Neutrality Country Program (PPCN 2.0).
- Establish data-driven, highly inclusive process to update NDCs and long-term climate action plans including new National Development Plan for the environmental sector (launched in October 2022).
- SEPLASA coordinating with MIDEPLAN and environmental sector to sustain modelling and analysis capabilities developed over last six years.
- BCCR is part of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and established Group for Strategic Analysis of Climate Change (GAECC) to coordinate efforts to green monetary and financial sector (MEFP¶47).

### Adaptation efforts and disaster risk management
- Launched National Adaptation Plan (NAP) in April 2022 to set climate adaptation milestones for 2022-2026 consistent with National Policy on Adaptation.
- Strengthening National System for Disaster Risk Management with WB support and aligning with Institutional Strategic Plan 2018-2022 of National Commission for Risk Prevention and Emergency Care.
- Business continuity policies in all providers of public services by June 2023.
- Developed climate risk maps for extreme hydrometeorological events for 23 cantons; expect to cover all remaining cantons by end-June 2023.
- Only about 50 percent of Costa Rica’s land area is regulated by land-use/spatial plans; Regulatory Plans and Regional Development Plans do not take climate change into account.
- MIVAH, in collaboration with MINAE, to develop and publish guidelines for including climate change considerations in Regulatory Plans by end-February 2024 (proposed RSF reform measure).
- Plan to implement guidelines into new regulatory plans and gradually adjust existing ones; National Commission for Risk Prevention and Emergency Care to provide information to municipalities on climate-related risks.
- Introduced new insurance scheme in 2019 allowing agricultural producers to insure harvests against climate change risks and offering lower premia for producers implementing adaptation measures.
- NAP aims to introduce 75 percent of small and medium size farmers to crop insurance providers over the period 2022-2026.

### Climate-resilient infrastructure and public investment management
- Developed roadmap to enhance infrastructure resilience to climate change in September 2022 (structural benchmark) to guide technical planning and implementation, assess medium-term investment needs and associated costs, and explore private and public financing options.
- Identified priority actions to reduce infrastructure loss due to climate change, interruption of public goods provision, fiscal costs of rebuilding and retrofitting, and damage to transport and water sectors.
- Exploring green finance opportunities from official and private sources while seeking to improve public investment efficiency.
- Committed to strengthening institutional capacity to plan and manage green and resilient investment projects, building on PIMA recommendations and its climate change module, with IMF TA support (MEFP ¶15).
- 2020 Decree (N°42465- MOPT-MINAE-MIVAH) on incorporation of resilience measures in infrastructure issued.
- With WB support, updated methodological guidelines for preparation and appraisal of public investment projects to incorporate principles handling exposure and resilience to natural disasters.
- Plan to develop and publish guidelines to expand project appraisal to assess impact on climate change through the social cost of carbon by end-September 2023 (proposed RSF reform measure).
- Developing methodology to score and prioritize capital projects with IDB and a private company; will publish guidelines setting clear and transparent project selection criteria including climate change criteria for SNIP entities by end-December 2023 (proposed RSF reform measure).
- Committed to more efficient and proactive approach to capital maintenance; will develop guidelines to assess needs and allocate resources to routine and capital repairs.

*Source: 1criea2022002 - 2023. The INA (Instituto Nacional de Aprendizaje)’s Organic Law has been amended to provide*

### 41. We are strongly committed to promoting environmentally sustainable growth by

### 41. We are strongly committed to promoting environmentally sustainable growth by

### National Decarbonization Plan and overall targets
- Pledged to reduce greenhouse gas emissions to a net absolute maximum of 9.11 million tons of carbon dioxide equivalent (CO2e) by 2030 and achieve zero net emissions by 2050.
- Plan assessed to be consistent with limiting global warming to 1.5°C, in line with the Paris Agreement.
- Electricity matrix: almost 100 percent currently sourced from renewables.

### Electrification of transport
- Legislative Assembly approved extending tax incentives for electric vehicles to 2034.
- Developing a feebate scheme:
  - Sliding scale of fees for vehicles with above average emission rates and rebates for light-duty private passenger vehicles with below average emission rates.
  - Levied at purchase or import of new or used vehicles up to 5 years old.
  - Design aims to be revenue-neutral with safeguards to reduce risks of revenue loss.
  - IMF TA support to complete technical design.
  - Bill to introduce feebate scheme to be submitted to the Legislative Assembly by end-September 2023 (proposed RSF reform measure).
- Systematic cost-benefit analysis of tax exemptions will appraise and publish a review of existing tax incentives with a negative effect on the environment by end-February 2024 (proposed RSF reform measure).
- Public transport electrification:
  - Develop new promotional electric tariffs for charging centers for electric buses by end-June 2023, assuming a 15-year life span, and incorporate into current tariff schedules.
  - With IDB support, installed 40 fast charging centers nationwide and on track to reach 70 by end-December 2022.
  - Conducting review of operators’ concession contracts and transport routes to include incentives to unit (fleet) electrification.

### Renewable energy
- Approve implementing regulation of Law No. 10086 to simplify administrative procedures for private participation in renewable power generation for self-consumption by end-December 2022 (proposed RSF reform measure).
- Complementary efforts:
  - Costa Rican Institute of Electricity (ICE) to enact tariff reductions by reducing operational costs, restructuring debt, and implementing IFRS.
  - Autoridad Reguladora de Servicios Públicos (ARESEP) to reduce electricity prices charged by other generators beyond ICE using new tariff methodologies.
  - Measures to remove barriers to foreign participation in the energy sector through legislation under consideration (MEFP ¶19).
- Developing legal framework to allow private sector use of geothermal energy in industrial processes, agriculture, and tourism.
  - Currently only ICE allowed to use low-enthalpy geothermal energy.
  - Plan to submit bill to facilitate expanded use of low-enthalpy geothermal energy to Legislative Assembly by end-April 2023.

### Agriculture, forestry, and marine ecosystems
- Agriculture and forestry are key for carbon sequestration and zero net emission target.
- With GIZ support: provide technical assistance, promote agricultural research on low-carbon solutions, and develop financing instruments to support farmers adopting low-carbon technologies and practices.
- Scaling up NAMAs for coffee, rice, sugarcane, and bananas with support from IDB and AFD.
  - Assessment of costs and identification of financing options for scaling up to start with priority sectors by end-March 2023.
- Refine payment for ecosystems schemes to cover agriculture, livestock, and forestry with WB and Global Environmental Facility support; include job-creation initiatives (e.g., wood industry).
- Explore extending payment for environmental services model to marine sectors, starting with fisheries, with WB support.
- Committed to supporting the “blue” economy through sustainable use of coastal areas while ensuring conservation.
- Exceeded goal to protect 30 percent of marine territory under conservation schemes by end-December 2022.
  - Decree 43368-MINAE (December 2021) to expand protection of Coco Island National Park and Montes Submarinos Marine Area.
  - Part of regional strategy to establish a transboundary biosphere reserve (Cocos Island, Galapagos, Malpelo, Coiba) with application expected to be filed by end-March 2023.

### Environmental trade and branding
- Negotiating Agreement on Climate Change, Trade and Sustainability (ACCTS) with Fiji, Iceland, New Zealand, Norway, Switzerland to align trade policy with National Decarbonization Plan.
  - Work toward eliminating tariffs on environmental goods trade, barriers to environmental services trade, and environment-damaging subsidies and commitments.
- Publish sustainable agro-landscapes strategy by end-December 2022 to position agro products as sustainable and carbon neutral under brand "Essential Costa Rica".
- MINAE supporting Ministry of Foreign Trade in negotiations with trading partners.

### Strategy for transition mitigation (Territorial Economic Strategy)
- Territorial Economic Strategy for an Inclusive and Decarbonized Economy 2020-2050 (released March 2021) aims for gradual transition to an inclusive and decarbonized economy by 2050.
  - 12 development poles, six corridors, and 12,750 km2 of territorial management areas.
  - Policy measures span economic growth, social inclusion, human capital, gender, infrastructure, connectivity, and natural capital.
  - Among 50 priority actions, just transition actions include expanding early English education coverage and implementing training programs on the green and blue economy.
- Modeling with IDB and UN estimates National Decarbonization Plan economic benefits of $41 billion in net present value terms and a net positive effect on jobs by 2050.
- Additional analytical work:
  - Study technical profiles for new green and blue jobs by end-November 2022.
  - Identify transition pathways for different industries by end-March 2023.

### Integrating climate risks into fiscal planning
- Approved functional budget classification system in May 2022 aligned with 2014 IMF Government Finance Statistics Manual and international concepts of climate change and disaster risk expenditure.
- Developing methodology for tagging climate-related expenditure in budget and financial reporting with IDB and AFD support.
  - MOF to publish guidelines for climate budget tagging by end-February 2023 (proposed RSF reform measure).
  - Enhance capacities of ministries and agencies on green budget tagging and modify financial management information systems to operationalize classification.
- Published National Strategy for Financial Management of Disaster Risks in September 2022:
  - Quantifies financial losses and identifies possible ex ante instruments (budget provisions, National Emergency Fund, insurance) and ex post instruments (budget reallocations, new loans).
  - MOF and National Commission for Risk Prevention and Emergency Care to develop and publish an implementation plan to select an optimal combination of instruments by end-June 2023.
- Expand quantitative climate fiscal risk analysis in the Medium-Term Fiscal Framework to include transition risks from National Decarbonation Strategy by end-September 2023 (proposed RSF reform measure) with IMF support.

### Financial sector: governance, data, modeling, and regulation
- BCCR joined Network of Central Banks and Supervisors for Greening the Financial System (NGFS) in 2019.
- Established Group for Strategic Analysis of Climate Change (GAECC) within BCCR to address climate impacts and risks; GAECC coordinates with CONASSIF and Superintendencies.
- BCCR roadmap to integrate climate considerations into monetary, financial, and macro-prudential policies centered on:
  - Establishing reliable and comparable data and identifying systematic data gaps.
  - Strengthening modeling and analytical capacity for scenario analysis.
  - Promoting climate change risk management in the financial system.
  - Greening international reserves.
- Data and modeling:
  - With WB support, aim to identify indicators to measure and monitor climate-related risks.
  - BCCR compiled and published Material Flow Accounts for 2014-2019 and Environmental Protection Expenditure Accounts for private sector for 2018-2020.
  - BCCR to create a data repository covering at least 35 percent of the credit portfolio, including indicators of (i) main climate hazards (notably hydro-meteorological ones); (ii) degree of vulnerability to climate-related events at sectoral and geographical levels; (iii) exposure of banks' credit portfolios to vulnerable industries and regions by end-February 2023 (proposed RSF reform measure).
  - With IDB support, developed an integrated economic and environmental model for impact analysis; aims to be fully operational for climate scenario analysis by end-December 2024.
- Climate change risk management and stress testing:
  - BCCR assessing interlinkages between climate-related and macro-financial variables guided by NGFS “top-down” stress-testing methodologies.
  - Continue expanding data repository to map transmission channels of climate-related shocks and improve stress testing.
  - Incorporate climate effects on the banking sector (focused on physical risks) in “top-down” stress test by end-February 2024 (proposed RSF reform measure).
  - Aim to include preliminary information on new stress test methodology in Financial Stability Report in May 2024.
  - Seek to publish climate stress test results in future Financial Stability Reports and eventually incorporate climate risks into bottom-up stress testing as repository matures.
- Greening international reserves:
  - BCCR aims to pursue an environmentally friendly investment portfolio for international reserves using a “best in class strategy”.
  - Plans to publish final selection of indicators of the “greenness” of reserve holdings in its 2022 Annual Report by end-February 2023 (proposed RSF reform measure).
- Regulation of socioenvironmental risks:
  - CONASSIF to approve a regulation on management of socioenvironmental risks and climate change risks in the credit portfolio by end-September 2023 (proposed RSF reform measure).
  - Regulation to require banks to implement policies and processes to manage these risks, specify roles for Board and senior management, cover main risk areas (including physical and transition risks), and include disclosure requirements.
  - Strengthen internal training for supervisors and compliance processes.
  - As information and taxonomies improve, customize financial regulations to Costa Rican context and update capital, liquidity, market risk, operational risk, and other requirements for material climate-related risks.

### Development of green financing and ESG frameworks
- Law 10051 (October 2021) to Promote Financing and Investment for Sustainable Development approved to use Thematic Public Offering Securities for sustainable investment.
- CONASSIF updates (May 2022):
  - Supervised entities must incorporate sustainable or responsible components into investment policies.
  - Must incorporate ESG risk management into risk management frameworks.
  - Allowed to issue ESG bonds.
  - Recommended to include voluntary ESG disclosures in annual reports.
  - First two measures have transitional period ending December 2023.
- Working group (GAECC, CONASSIF, Superintendencies) with WB TA to develop a single green taxonomy for the financial sector.
- Exploring recognition as an ESG sovereign to catalyze private financing leveraging climate actions.
- Considering issuance of thematic sovereign bonds to foreign investors with key performance indicators related to forestry coverage, ecological integrity, and biodiversity.

### Risks and contingencies
- Largest program risks stem from external factors:
  - Further impacts of Russia’s war in Ukraine on commodity markets.
  - Greater-than-expected global downturn and/or further spillovers from advanced economy monetary policy.
  - Natural disasters exposure likely to increase over time.
- Potential consequences:
  - Adverse impacts on Costa Rica’s economy, slowdown in domestic activity, weaker-than-expected revenue performance, and challenges to fiscal consolidation and debt sustainability.
- Policy stance:
  - Government stands ready to promptly adjust policies in close consultation with IMF staff if risks materialize.
  - If domestic or external developments support stronger performance, ready to accelerate adjustment and reform to strengthen resilience.

*Source: IMF mission text provided in the content unit.*

### 47. Progress in the implementation of our policies, which are supported by the IMF, is

### 1criea2022002 - 47. Progress in the implementation of our policies, which are supported by the IMF, is

### Monitoring framework and instruments
- Progress is monitored through semi-annual reviews, performance criteria (PCs), indicative targets (ITs), structural benchmarks (SBs), and Reform Measures (RMs).
- Definitions and data requirements are provided in the attached Technical Memorandum of Understanding (TMU).
- Purchases under the EFF and RSF will be used for direct budget support during the program period.
- The BCCR and the MOF have finalized a new Memorandum of Understanding on responsibilities for servicing financial obligations to the IMF under the RSF, complementing the existing one under the EFF.

### Table 1 — Quantitative Performance Criteria (PC) and Indicative Targets (IT) (high-level items preserved)
- (Cumulative from the beginning of the year, in billions of colones, unless otherwise noted)
- I. Quantitative Performance Criteria
  - Floor on cash primary balance of the central government (-= borrowing): -34362 met144577met215287152305457609
  - Floor on net international reserves of the Central Bank (stock, in millions of U.S. dollars): 4,1232,7122,634not met3,0072,3011,689not met2,7913,2383,189not met3,8302,3143,7712,8602,815
- II. Continuous Performance Criteria
  - Ceiling on accumulation of new external arrears (in millions of U.S. dollars): 0 0met00met00Met00000
- III. Monetary Policy Consultation Clause (MPCC)
  - Year-on-year inflation in the consumer price index
    - Upper outer band limit (3 percent above center point): 6.0...6.0...6.0...6.06.06.06.06.0
    - Upper inner band limit (1.5 percent above center point): 4.5 ...inner4.5...outer4.5...outer4.54.54.54.54.5
    - End-of-period inflation center point (percent): 3.0 4.7band3.08.6band3.011.3band3.03.03.03.03.0
    - Lower inner band limit (1.5 percent below center point): 1.5...breach1.5...breach1.5...breach1.51.51.51.51.5
    - Lower outer band limit (3 percent below center point): 0.0...0.0...0.0...0.00.00.00.00.0
- IV. Quantitative Indicative Targets
  - Ceiling on debt stock of the central government: 28,74727,572met28,79128,108met28,85529,56629,71030,25430,59830,942
- V. Memorandum Items (selected lines as presented)
  - External program financing (in millions of U.S. dollars) 5/: 02709325401,4398401,60108908901,360
  - External project financing (in millions of U.S. dollars): 49 621219626418331361141212286
  - External commercial borrowing (in millions of U.S. dollars): 1,00000001,0561,00001,5001,5001,500
  - Domestic FX-denominated debt issuance (in millions of U.S. dollars): 03846345638841,1811,0980220220220
  - Amortization of official external debt by the central government (in millions of U.S. dollars): 204984 791571251916495158256
  - Interest payments of official external debt by the central government (in millions of U.S. dollars): 190145248198423379567180450734966
  - Domestic FX-denominated debt service (in millions of U.S. dollars): 4804347828011,2691,3171,3941234419121,014
- Footnotes (preserved wording)
  - 1/ Definitions as specified in the Technical Memorandum of Understanding (TMU).
  - 2/ The Standard Continuous Performance Criteria will also apply: (i) Not to impose new or modify existing restrictions on the making of payments and transfers for current international transactions; (ii) Not to introduce new or intensify existing multiple currency practices; (iii) Not to conclude bilateral payments agreement that are inconsistent with the IMF’s Articles of Agreement (Article III); and (iv) Not to impose new or intensify existing import restrictions for balance of payments reasons.
  - 3/ The Monetary policy consultation clause bands consist of two types of thresholds. The inner band triggers a staff consultation and the outer band triggers a Board consultation as detailed in the TMU.
  - 4/ See the TMU for how to measure year-on-year inflation.
  - 5/ Excluding IMF financing.

### Table 2 — Structural Benchmarks (selected entries and statuses)
- Efficiency of government spending
  - Legislative Assembly to approve Public Employment Bill. Target Date: End-May 2021. Status: Not Met. Comment: Approved on March 7, 2022.
  - Implementation of Public Employment Bill, including introduction of a single pay spine. Target Date: End-March 2023. Status: Ongoing
- Revenue mobilization
  - The Tax Commissioner to approve a new Tax Compliance Improvement Plan, in line with IMF staff recommendations. Target Date: End-December 2021. Status: Met
- Fiscal governance and transparency
  - Publication of financial statement under IFRS standards for fiscal year 2020 for three SOEs (ICE, AyA, CNP). Target Date: End-December 2021. Status: Not met. Comment: Pending for a small firm under CNP.
  - Cabinet to approve and publish a Medium-Term Fiscal Framework for the entire Non-Financial Public Sector for 2023-2026. Target Date: End-April 2022. Status: Met
  - Cabinet to approve and publish a Medium-Term Debt Strategy (MTDS) for 2023-2026. Target Date: End-April 2022. Status: Met
  - Government to submit law amendments to the Legislative Assembly to centralize all debt-related functions ... within a standalone Public Debt Management Office. Target Date: End-June 2023. Status: Proposed SB
- Social safety nets
  - MOF’s National Treasury to centralize and digitalize the payment system for all the cash transfer social assistance programs, in coordination with social assistance units. Target Date: End-December 2021. Status: Met
- Monetary and financial sector reforms
  - The BCCR to submit to the Ministry of Finance draft amendments to the BCCR Law, prepared in consultation with IMF staff, to strengthen the central bank’s operational autonomy and governance framework. Target Date: End-August 2021. Status: Met
  - The government to submit amendments to the BCCR Law to the Legislative Assembly, prepared in consultation with IMF staff, to strengthen the central bank’s operational autonomy and governance framework. Target Date: End-December 2022. Status: Ongoing
  - Government to submit amendments to the bank resolution and deposit insurance law and related legislation ... to strengthen the crisis management framework. Target Date: End-December 2023. Status: Proposed new SB
- Macro-structural reforms
  - CCSS to formulate and approve a plan to adjust the minimum contribution base for part-time workers. Target Date: End-June 2022. Status: Not met. Comment: Approved on September 1, 2022.
  - Authorities to develop a roadmap to enhance infrastructure resilience to climate change, including cost assessment and financing options. Target Date: End-September 2022. Status: Met

### Table 3 — Proposed Reform Measures (RMs) under the RSF Arrangement (selected)
- I. Integrating Climate Risks into Fiscal Planning
  - RM1. Ministry of Finance to develop and publish guidelines for climate budget tagging. Indicative Date: End-February 2023. Expected Corresponding Review under the EFF Arrangement: Fourth EFF Review
  - RM5. Ministry of Finance to expand the quantitative climate fiscal risk analysis in the Medium-Term Fiscal Framework to include climate transition risks. Indicative Date: End-September 2023. Expected Corresponding Review: Fifth EFF Review
- II. Strengthening Public Investment and Infrastructure Resilience
  - RM6. MIDEPLAN to develop and publish guidelines to expand the project appraisal process to assess the impact of the project on climate change through the social cost of carbon. Indicative Date: End-September 2023. Expected Corresponding Review: Fifth EFF Review
  - RM9. MIDEPLAN to publish guidelines on project selection criteria including a range of climate change criteria for SNIP entities. Indicative Date: End-December 2023. Expected Corresponding Review: Sixth EFF Review
  - RM10. MIVAH, in collaboration with MINAE, to develop and publish guidelines for including climate change analysis in Regulatory Plans. Indicative Date: End-February 2024. Expected Corresponding Review: Sixth EFF Review
- III. Supporting Decarbonization
  - RM2. Government to approve implementing regulation to simplify the administrative procedures for private participation in power generation from renewable sources for self-consumption. Indicative Date: End-December 2022. Expected Corresponding Review: Fourth EFF Review
  - RM7. Government to submit to the Legislative Assembly a bill to introduce feebate scheme to strengthen incentives for low-pollution private vehicles. Indicative Date: End-September 2023. Expected Corresponding Review: Fifth EFF Review
  - RM11. Government to appraise and publish a review of existing tax incentives with a negative effect on the environment to support decarbonization efforts. Indicative Date: End-February 2024. Expected Corresponding Review: Sixth EFF Review
- IV. Greening Reserves and Strengthening Financial Sector Resilience
  - RM3. BCCR to create a repository with data on climate hazards; industrial and geographical vulnerability to climate events; banks’ lending exposure to vulnerable industries and regions. Indicative Date: End-February 2023. Expected Corresponding Review: Fourth EFF Review
  - RM4. BCCR to publish indicators of the “greenness” of its reserve holdings in its 2022 Annual Report. Indicative Date: End-February 2023. Expected Corresponding Review: Fourth EFF Review
  - RM8. CONASSIF to approve regulation on management of socioenvironmental risks and climate change risks in the credit portfolio. Indicative Date: End-September 2023. Expected Corresponding Review: Fifth EFF Review
  - RM12. BCCR to incorporate climate effects on the banking sector in its top-down stress testing, based on aggregated data and capturing those new risks on credit risk parameters. Indicative Date: End-February, 2024. Expected Corresponding Review: Sixth EFF Review

### TMU — Key definitions, adjustors, and program rates
- Purpose: The TMU sets out the framework for monitoring performance under the EFF arrangement, specifies performance criteria and indicative targets (including adjustors), and lists monitoring procedures and reporting requirements.
- Quantitative PCs and ITs listed in Table 1:
  - a) quantitative performance criterion on central government primary balance (floor);
  - b) quantitative performance criterion on net official international reserves (floor);
  - c) 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).
- Standard continuous Fund performance criteria (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 (September 13, 2022) — exact values:
  - Colones to the U.S. dollar 635.725
  - U.S. dollar to the SDR 1.3068
  - U.S. dollar to the Yen 0.0070
  - U.S. dollar to the Euro 1.0179
  - U.S. dollar to the Canadian dollar 0.7620
  - U.S. dollar to the Chinese RMB 0.1443
  - U.S. dollar to the British Pound 1.1730
  - Gold price per troy ounce (U.S. Dollar) 1,703
- Valuation rules:
  - All foreign currency-related assets, liabilities, and flows will be evaluated at “program exchange rates” except for items related to fiscal operations which will be measured at current exchange rates.
  - Monetary gold will be valued at US$1,703 per troy ounce (price prevailing on September 13, 2022).
- Scope of central government for monitoring:
  - 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 from 2021 by Law 9524.
  - The Central Bank of Costa Rica (BCCR), state-owned enterprises and other public sector agencies are excluded from the definition of central government.
  - A list of 51 entities required to be consolidated under CG by Law 9524 is specified in the TMU.
- Performance criterion on central government cash primary balance
  - Overall balance defined as budgetary revenue minus total expenditure.
  - Cash primary balance defined as overall balance excluding net interest payment; revenue on cash basis; expenses on accruals except interest.
  - Proceeds from privatization or commercialization of public assets to residents or non-residents will not be recorded as part of central government revenues.
  - The performance criterion will have one adjustor for 2022 and 2023: 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 the health system, transfers for targeted support to families, workers, and firms heavily affected by the pandemic, or social assistance programs to the most vulnerable groups).
  - The adjustor is capped at CRC 95 billion for 2022 and 2023 (about 0.2 percent of GDP) cumulatively.
- Performance criterion on Net Official International Reserves (Program NIR)
  - Program NIR measured as the U.S. dollar value of the difference between:
    - a) Gross international reserves of the BCCR (includes monetary gold; foreign exchange balances; reserve position at the IMF and SDR holdings), with specific exclusions listed.
    - b) Gross reserve-related liabilities of the BCCR (includes 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; stock of IMF credit outstanding; nominal value of all short-term derivative positions implying a sale of foreign currency or other reserve assets), with specific exclusions listed.
  - At end-2021, the Program NIR, evaluated at market exchange rates, stood at US$2,884 million.
  - Targets for the Program NIR are set for cumulative flows from the end of the previous year and cumulative flows are calculated using program exchange rates and gold price specified in paragraph 4.

*Source: 1criea2022002 - 47. Progress in the implementation of our policies, which are supported by the IMF, is (PDF).*

### 9.      If (i) the amount of foreign program financing by the central government and the BCCR net

### 1criea2022002 - 9. If (i) the amount of foreign program financing by the central government and the BCCR net

### Adjustors to the Net International Reserves (NIR) Floor
- Components that trigger upward/downward adjustments to the program NIR floor (as set out in Table 1 of the MEFP):
  - (i) amount of foreign program financing by the central government and the BCCR net of IMF purchases (GRA and RST resources) and all debt service;
  - (ii) amount of external commercial borrowing (including international sovereign bonds and syndicated loans) by the central government net of debt service;
  - (iii) amount of project loans and grants disbursed to the central government net of debt service;
  - (iv) amount of foreign exchange-denominated domestic debt issued by the central government net of debt service;
  - (v) proceeds from commercialization of public assets to non-residents (defined as cash receipts from the sale or lease of publicly held assets, including but not limited to publicly held land, public holdings of infrastructure or commercial real estate, and public or quasi-public enterprises).
- Application: These adjustors will apply to the NIR floor for end-July 2021 and thereafter.
- Additional adjustor related to official external debt service:
  - 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 differs from program assumptions (per Table 1 of the MEFP), the NIR floor will be adjusted downward/upward by the cumulative differences on the test date.
  - Definition: Official external debt refers to external debt owed to multilateral and official bilateral creditors, as defined in the 2013 External Debt Statistics: Guide for Compilers and Users.
  - Application: These adjustors will apply to the NIR floor for end-July 2021 and thereafter.

### Continuous Performance Criterion on New External Payment Arrears
- A continuous performance criterion (PC) prohibits the accumulation of new external payments arrears on external debt contracted or guaranteed by the nonfinancial public sector and the BCCR.
- Definitions and scope:
  - Nonfinancial public sector is defined following the 1986 Government Finance Statistics Manual and the 2008 System of National Accounts; it includes the central government (as defined in paragraph 4) and nonfinancial public enterprises (boards, enterprises and agencies in which the government holds a controlling stake).
  - External payments arrears consist of 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 per contractual terms, subject to any applicable grace period.
  - Overdue debt and debt-service obligations that are in dispute by the authorities with respect to amount and/or validity will not be considered external payments arrears for program monitoring.
  - The PC excludes arrears on external financial obligations of the government subject to rescheduling.
  - Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to arrears under this PC.

### Monetary Policy Consultation Clause (MPCC)
- Inflation measurement:
  - Year-on-year inflation is measured by the headline Consumers Price Index (CPI) published by the National Institute of Statistics and Census (INEC), calculated for each test date as:
    - {CPI*(t) – CPI*(t-12)} / CPI*(t-12)*100
    - where:
      - t = the month within which the test date is included
      - CPI(t) = CPI index (all items) for month t
      - CPI(t-k) = CPI index (all items) as of k months before t
      - CPI*(t) = { CPI(t-2) + CPI(t-1) + CPI(t) } / 3
      - CPI*(t-12) = { CPI(t-14) + CPI(t-13) + CPI(t-12) } / 3
- Consultation triggers and consequences:
  - 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:
    - Authorities will complete a consultation with the IMF Executive Board, focusing on: (i) the stance of monetary policy and whether the Fund-supported program remains on track; (ii) reasons for deviations taking into account compensating factors; and (iii) proposed remedial actions, as necessary.
    - When this 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 reasons for the deviation and the proposed policy response.

### Indicative Target on Debt Stock of the Central Government
- Debt definition:
  - "Debt" follows the Guidelines on Public Debt Conditionality in IMF Arrangements, Decision No. 15688-(14/107): a current (not contingent) liability created under a contractual arrangement through provision of value (assets or services) that requires future payments in assets or services to discharge principal and/or interest.
  - Primary forms include loans, debt securities, bonds, commercial loans, buyers’ credits and off-budget project loans.
- Conversions:
  - All foreign currency denominated debt will be converted into colones using the program exchange rates set out in Table 1.
  - All domestic debt denominated in inflation indexed units (TUDES) will be converted into colones using the program rate set out in Table 1.
- Adjustor for COVID-19 emergency spending:
  - The performance criterion on central government debt stock will have one adjustor for 2022 and 2023.
  - 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 (e.g., transfers to the health system, transfers for targeted support to families, workers, and firms heavily affected by the pandemic, or social assistance programs to the most vulnerable groups).
  - Such additional expenditure should be clearly identified and reflected in an appropriate document (e.g., supplementary budget, government resolution, a circular of the Ministry of Finance (MOF)).
  - The adjustor is capped at CRC 95 billion.

### Data Reporting Requirements and Timelines
- General provision:
  - Costa Rica shall provide the Fund, through reports at intervals or dates requested by the Fund, with information requested in connection with progress on the MEFP and Letters of Intent.
  - Program monitoring data will be provided by the MOF, IMAS, FODESAF, BCCR, and SUGEF.
  - Fiscal performance: data in the formats shown in Tables 2, 3, and 4.
  - External sector performance: data in the formats shown in Tables 5 and 6.
  - Priority social spending: data in the format shown in Table 7.
  - Financial sector performance: data as described in paragraph 20.
- Specific timelines:
  - Fiscal targets (Tables 2, 3, and 4):
    - Data on the cash primary balance of central government: monthly, no later than three weeks after the end of the month to which the cash balance pertains.
    - Data relating to total stock of debt of the central government: monthly, no later than three weeks after the end of the month, with breakdowns listed in Table 4.
  - External targets (Table 5) and monetary consultation band:
    - Furnished within no more than three weeks after the end of each month.
    - Exception: data on official reserve assets (Table 6) furnished within one week after the end of each week.
  - Priority social spending (program spending only, excluding wages/salaries and administrative costs; see Table 7):
    - Provided on a quarterly basis, no later than four weeks after the end of the quarter.
  - Financial sector data (paragraph 20):
    - Financial soundness indicators of banks and cooperatives, bank by bank, group (public and private), and system level: monthly, no later than four weeks after the end of each month.
    - Anonymized bank-by-bank asset quality indicators (disaggregated by asset classification and provisioning by currency and type of credit, currency and economic sector): monthly, no later than four weeks after the end of each month. Such individual-bank data will be treated as strictly confidential and not published except in aggregate form.

### Monitoring Templates and Tables (as described)
- Tables specified for program monitoring (formats indicated in the source for internal use):
  - Table 2: Central Government Operations (In billions of colones) — line items include Total Expenditure, No Interest Expense Total, Current expenses, Salaries, Wages and salaries, Social Security Contributions, Purchase of Goods and Services, Interest Expenditure (internal and external), Transfers (Private Sector, Public Sector, External), Capital Expenditure, Primary Balance, Overall Balance, Total Financing, Net Domestic Financing, Net Foreign Financing, Privatization, etc.
  - Table 3: Central Government Financing (In billions of colones) — line items include Net Domestic Financing, Net BCCR Financing, Banking System Financing, Central Government Financing (amortization, change in securities), Other domestic financing, Net Foreign Financing (Disbursements, Amortization), etc.
  - Table 4: Central Government Debt (In billions of colones) — debt stock broken down by Domestic (Bonds: Tasa basica, Zero coupon colones, Zero coupon dolares, Fixed coupon colones, Fixed coupon dolares, Floating coupon colones, Floating coupon dolares, Inflation-linked bond (TUDES), Other liabilities), External (Bilateral, Bonds, Multilateral), Unidentified financing, debt by maturities, total borrowing requirement, sources of funds, use of government deposits, etc.
  - Table 5: Foreign Exchange Cashflows of the Central Bank and the Government (In millions of U.S. dollars) — inflows (official sector disbursement, program loans, IMF, World Bank, IDB, CABEI, ADF, CAF, project loans and grants, commercial loans, syndicated loans, sovereign bond incl Eurobonds, domestic FX debt issuance, other inflows, BCCR interest receipts, change in public account balances including proceeds from public asset sale), outflows (external debt service, amortization excl. to IMF, interest payment incl. to IMF, domestic FX debt service residents/non-residents, net capital transfers), Net FX intervention, Other net flows, Net International Reserves (at market and program exchange rates), Gross International Reserves, etc.
  - Table 6: Gross Official Reserve Position (In millions of U.S. dollars).
  - Table 7: Priority Social Spending (In billions of Colons) — includes programs such as Non-contributory pensions and healthcare (RNC), Conditional cash transfer Crecemos, Conditional cash transfer Avancemos, Poverty reduction and income support (Basic needs, Family allowance, Emergencies, Fishing subsidies), Childcare programs, School programs (school lunch, transportation, social scholarship), Housing subsidies (improvement, grants), Food security and nutrition programs (Prestación alimentaria), Active labor market programs (PRONAE, PRONAMYPE, Productive ideas, Training aid, Training voucher program), Other targeted programs (subsidies for elderly persons, persons with disabilities, violence female victims, teenage mothers), Capital transfers to social assistance programs, and TOTAL.
  - Notes in Table 7:
    - 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 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.

### Attachment III — BCCR Consultation on Missed Inflation Target Under the MPCC
- Observations:
  - In June and September 2022, inflation stood at 10.1 and 10.4 percent, respectively.
  - These readings represent breaches of the upper outer band limit of the MPCC by 2.6 and 5.3 percentage points (p.p.), respectively.
- Inflation trajectory and drivers:
  - Inflation increase began in the second half of 2021 and intensified in 2022, especially since Q2, reaching 10.4 percent in September, compared to 3.3 percent in December 2021.
  - Since February 2022, inflation was above the BCCR target and with a growing trend; since May 2022, inflation has been above the upper outer band limit established in the MPCC.
  - Drivers:
    - External shocks: persistently stronger-than-expected external inflation pressures exacerbated by the war in Ukraine and new COVID-19 confinement measures in some regions, leading to large increases in international food and oil derivative prices.
    - Transmission to domestic inflation: as a small, open economy highly integrated in trade and financial transactions, Costa Rica experienced worsening imported inflation transferred to local prices, especially food and fuels.
      - Food annual growth in September: 20.3 percent.
      - Fuels annual growth in September: 31.3 percent.
      - Contribution to annual inflation in September: food explained 42.4 percent and fuels explained 15.9 percent of the annual rate for that month.
  - Domestic factors: although inflation has primarily been driven by a supply shock (outside the control of monetary policy), internal factors also amplified local price increases, including:
    - a) The base effect associated with the low inflation in the first nine months of 2021 (average of ...). 

*Source: Excerpt from the Memorandum of Economic and Financial Policies and related attachments in the document provided.*

### 1.3 percent),  still a consequence of the effects of the pandemic.

### 1criea2022002 - 1.3 percent),  still a consequence of the effects of the pandemic.

### Inflation dynamics
- Inflationary expectations increased: median expectations were 8.0 percent at 12 months and 5.0 percent at 24 months in the September survey, exceeding January 2022 values by 4.4 and 1.4 p.p., respectively.
- Depreciation of the colón during the first semester of the current year, partially due to greater demand for foreign currency to meet the oil bill and the requirements of pension funds.
- Rebound of domestic demand as disinflationary forces dissipate since 2019 (accentuated in 2020 due to the pandemic).

### Policy response (BCCR)
- Monetary Policy Rate history and adjustments:
  - From mid-2020 through most of 2021, Monetary Policy Rate stood at 0.75 percent (historical minimum).
  - Beginning December 2021, BCCR initiated a gradual increase totaling eight adjustments amounting to 825 basis points, reaching a 9 percent rate in October.
- Other measures to reduce excess liquidity:
  - Reserve requirement for local currency increased in July 2022 from 12 percent to 15 percent.
  - Active participation in the debt market through placement of medium-term bonds.
- Policy stance:
  - BCCR committed to inflation control and a forward-looking, data-dependent monetary policy consistent with the inflation targeting framework and the long-term inflation goal of 3 percent ± 1 p.p.

### Inflation projections and risks
- Peak and short-term projection:
  - Inflation is expected to have reached its year-on-year maximum in August at 12.1 percent.
  - BCCR models project inflation would slow to 9.7 percent at the fourth quarter of 2022, conditional on an active monetary policy.
- Medium-term outlook:
  - As external shocks dissipate, FX pressures moderate, inflation expectations continue convergence toward the BCCR target (started in September), and the transmission mechanism completes, deceleration is expected during 2023 with a gradual return towards the BCCR’s target by late 2024.
  - Inflation will likely remain above the upper limit of the outer band agreed in the MPCC in December 2022 and possibly June 2023; BCCR will continue consultations with the IMF Executive Board as warranted.
- Policy flexibility:
  - BCCR will adjust its policy stance as new information becomes available and forecasts are updated.
- Risk factors (conditional to projections):
  - Upward risks: inertia in inflation expectations (despite recent downward correction); higher prices of raw materials in international markets; new COVID-19 lockdowns limiting trade and increasing transportation costs; upward pressures on the exchange rate from faster-than-expected increases in external interest rates encouraging capital outflows and demand for foreign currency by residents.
  - Downside risks: slow growth in main trading partners; international food and oil prices lower than expected in the base scenario.

### Climate change implications for Costa Rica
- Socioeconomic context:
  - Costa Rica doubled its income per capita over the last two decades while building resilience through institutions, outward-oriented growth, and human capital investments.
  - Fiscal vulnerabilities emerged as spending increased while revenues stayed flat, leaving limited fiscal space for public investment in the short run.
- Exposure and historical impacts:
  - Costa Rica ranks 61 out of 182 countries in the 2022 ND-GAIN Index.
  - Approximately 6.8 percent of total area is exposed to three or more adverse natural events.
  - Around 80 percent of the population reside in areas at high risk of multiple hazards.
  - In 1998-2018, infrastructure damage from rains and droughts averaged 0.7 percent of GDP.
  - In a high-risk scenario, damage could rise to 1.6 to 2.5 percent per year over the medium term.
- Sectoral vulnerabilities and consequences:
  - Tourism affected by coastal flooding from rising seas and storms.
  - Agriculture vulnerable to floods, droughts, rising temperatures, and desertification; key crops such as coffee beans and bananas will be negatively affected.
  - Changing rainfall patterns can affect hydroelectric powerplants, which account for most of the energy produced in Costa Rica, with fiscal and financial implications and effects on long-term growth.

### Policies and strategies on climate and adaptation
- Achievements and institutional measures:
  - Reversal of deforestation: forest cover increased from 26 percent in 1983 to 59 percent today.
  - National parks and protected areas comprise 26 percent of land area.
  - Share of renewables in the energy sector among the largest in the world; wind technologies significantly contributed to electricity generation and reduced oil use.
  - Emissions in 2020 amounted to 11.5 megatons.
  - Emissions composition: transport 43 percent, agriculture 21 percent, industrial processes and production 9.6 percent.
- National plans and instruments:
  - National Adaptation Plan launched in April with milestones for 2022-2026, aligned with the National Risk Management policy (2016-2030); aims to improve resilience in infrastructure, tourism, and water resources management and incorporate climate considerations into public investment decisions.
  - Insurance scheme for agriculture to insure harvests against climate risks.
  - Increasing forest biomass to mitigate impacts from tropical storms such as landslides.
  - Disaster financing strategy recently launched (Enacted by Executive Decree No. 43663-H, La Gaceta No 182, San Jose, Monday, September 26th, 2022).
  - National Decarbonization Plan (NDP) (Executive Decree no. 41581, February 2019) outlines paths to reach net-zero emissions by 2050 with sectoral goals and measures for transport, agriculture, and energy.
- Expected benefits and trade-offs:
  - Initial estimates suggest the NDP could generate a net economic benefit in the range of US$50 billion from energy savings, reduced congestion, reduced accidents, improved air and water quality, increased productivity, and ecosystem service benefits for tourism, water, and soil health.
  - Cumulative investment (private and public) needed to reach NDP objectives is estimated in the range of US$30 billion until 2050 (World Bank TA associated with Fiscal Management and Decarbonization DPL (2021)).
  - Decarbonization will require large investments, produce economy-wide adjustments, and may create winners and losers, necessitating mitigation measures such as investments in human capital, skills, and tailored social protection responses.
  - Opportunities from global leadership in decarbonization include positioning as a low carbon exporter and destination for sustainable investment; Costa Rica is implementing the Greening the Financial System (NGFS) initiative and has attracted sustainable FDIs.

### World Bank engagement
- World Bank technical assistance referenced: Fiscal Management and Decarbonization DPL (2021).

*Source: IMF staff extract from the Costa Rica report and World Bank assessment letter (content as provided).*

### 7.      The World Bank has been actively supporting a broad range of policies and initiatives

### 7.      The World Bank has been actively supporting a broad range of policies and initiatives

### World Bank engagement: scope and instruments
- The World Bank supports Costa Rica’s decarbonization and climate adaptation strategy through lending, technical assistance, and knowledge instruments and expects to continue this strategic engagement in the medium term.
- Activities include climate adaptation, disaster risk management (DRM), lending operations, and a fiscal and decarbonization technical assistance series.

### Climate adaptation and disaster risk financing
- Costa Rica received the first Catastrophe Deferred Draw Down Option loan (CAT DDO) from the World Bank in 2008 (Costa Rica CAT DDO (P111926, approved in August 2008)).
- Technical engagement areas include: National Adaptation Plans, disaster financing strategy, assessment of contingent liabilities associated with natural disasters.
- Ongoing/preparation lending operations:
  - Climate Change Resilience Recovery and Territorial Development (P178049) — supports resilient infrastructure across the territory.
  - Second Costa Rica CAT DDO (P179861) — recognizes recent improvements in disaster risk management and complements Costa Rica disaster financing strategy.
- Related technical assistance projects referenced: Central America Disaster Risk Financing Technical Assistance (P172169), Sustainable urban & regional development: unlocking post-COVID transformational opportunities in Costa Rica (P175084).

### Decarbonization Strategy and related operations
- Fiscal and Decarbonization Management Development Financing series (2020-2023 – P171912, P174786, P177029) provided an umbrella for policy dialogue and technical assistance on decarbonization.
- Third pillar supports reforms for a greener, low-carbon post-COVID recovery, including:
  - Information infrastructure for monitoring, reporting, verifying, and registering GHG emissions to inform policy and investment decisions and enable carbon-market mechanisms.
  - Initiatives to motivate greater investments in, and faster deployment of, green and low-carbon technologies and practices (including inclusion of climate considerations in the assessment of financial sector risks, policies to facilitate electric mobility, and climate friendly practices in agriculture).
  - Strengthening governance and transparency of institutions in the energy sector to enhance efficiency and help level the playing field for investments in renewable energy.
- World Bank participation in a joint climate-Public Expenditure and Financial Accountability (PEFA) and support for inclusion of climate considerations in public investment management and appraisal methodologies.
- Costa Rica met conditions to access the first tranche (US$16 million) of the World Bank’s Forest Carbon Partnership Facility (FCPF).
- Emission Reductions Payment Agreement (ERPA -P160368) with the FCPF unlocks up to US$60 million across three scheduled payments, for reducing a total of 12 million tons of carbon emissions through to 2025, in line with the country’s NDC commitment.
- Knowledge products referenced: Options for a Blue, Green, and Climate Smart recovery in Costa Rica (P177951), Green Resilient and Inclusive Landscapes in Central America (P176670), Partnership for Market Readiness (P158795), Supporting a sound energy transition for an efficient Central America (P169052).

### Economic outlook (selected indicators and developments)
- 2021: GDP real growth of 7.8 percent (4.1 percent contraction in 2020).
- BCCR projects GDP real growth of 4.3 percent for 2022 and a slowdown in 2023.
- August 2022: monthly index of economic activity expanded 3.7 percent, y-o-y; 12-month rolling average was 7.2 percent.
- Unemployment: peak of 24.4 percent; 12 percent in September 2022; pre-pandemic level 12.2; past average 9.9 percent (from 2010 until 2019).
- Inflation developments:
  - 2021 year-end inflation: 3.3 percent.
  - June 2022 inflation: 10.1 percent.
  - Annual inflation peaked at 12.13 percent in August; diminished to 10.37 percent in September; reached 8.99 percent in October.

### Fiscal policy performance and targets
- EFF program’s first pillar: equitable fiscal reforms to ensure debt sustainability while protecting the most vulnerable; included a fiscal rule limiting expenditure growth in accordance with the debt level.
- 2021:
  - Primary fiscal deficit: 0.3 percent of GDP (3.4 percent in 2020), below the EFF target of 1.7 percent.
  - Overall deficit: 5 percent (8 percent in 2020).
- First semester of 2022:
  - Primary fiscal balance: 1.3 percent of GDP.
  - Financial deficit: 1.0 percent of GDP (lowest of the last twelve years).
- Preliminary September 2022:
  - Primary balance: 2.2 percent of GDP.
  - Financial deficit: 1.7 percent of GDP.
  - Total income: 12.2 percent of GDP, 0.9 percent more than the same period last year.
  - Tax revenue: 10.3 percent of GDP (the highest of the last seventeen years).
- Third quarter of 2022: debt to GDP ratio was 63.1 percent.
- 2023 budget aims to achieve a primary balance of 1.3 percent of GDP.
- Structural measures under consideration: removal of regulatory differences between private and public banks; submission for Parliament discussion the sale of the state bank Banco de Costa Rica.

### Monetary policy actions and FX/reserve developments
- BCCR maintained monetary policy rate at 0.75 percent from June 2020 until mid-December 2021.
- Subsequent rate increases (December onward) include:
  - December and January: consecutive increases of 50 basis points each.
  - March: increased by 75 b.p.
  - April and June: two consecutive increments of 150 b.p. each.
  - July: increased by 200 b.p.
  - September: increased by 100 b.p.
  - Oct 26: increased by 50 b.p.
- Aggregate adjustments since December 2021: eight adjustments summing up 825 b.p., resulting in a monetary policy interest rate of 9 percent.
- Inflation expectations:
  - 12-month inflation expectation average in August: 9.9 percent (9.5 percent median).
  - 12-month expectation in October: 7.5 percent (7.5 percent median).
  - 24-month average in August: 8.5 (7 percent median).
  - 24-month in October: 6.1 (5.4 percent median).
- FX and reserves:
  - By end-June reserves decreased below the NIR floor in the program.
  - BCCR reduced the breach of the end-September indicative target to US$48.6 million (driven by valuation effects).
  - BCCR asked for a US$1.1 billion credit line from the Latin American Reserves Fund in August.
  - BCCR has been rebuilding reserves through systematic FX purchases and engaged with Fund TA to reorganize FX operations and deepen the FX market.

### Structural reforms and governance
- Public employment law (a structural benchmark) approved in March 2022; aims to modernize public administration, contain the wage bill (public wages account for almost one third of central government spending), create a single pay scale, eliminate salary components such as bonuses and annuities; enters into force in March 2023.
- Other structural fiscal reforms: public procurement reform, modernization of tax and customs administration, public financial management reforms.
- April 2022: cabinet approved and published a Medium-Term Fiscal Framework for the Non-Financial Public Sector for 2023-2026 and a Medium-Term Debt Strategy for the same period.
- Gender budgeting: pilot project expected to be completed by the end of December 2022; 2024 budget will include a statement identifying gender-related spending for selected entities.
- Medium-term revenue strategy being designed to increase progressivity and be more growth friendly; includes development of a feebate scheme to accelerate transition towards low-emission vehicles.
- Centralized digital information on recipients of social assistance is being used to assess cash-transfer and in-kind programs for eliminating ineffective programs and improving targeting.
- BCCR working with Fund legal experts on amendments to its Organic Law to clarify the Central Bank’s objective, improve governance, strengthen institutional, functional, personal, and financial and budgeting autonomy, and enhance transparency and accountability; bill to be submitted to the Legislative Assembly by the end of December 2022.

### Resilience and Sustainability Facility (RSF) and climate agenda
- Costa Rica aims for zero net emissions by 2050 under the National Decarbonization Plan and has pledged reductions more ambitious than the Paris Agreement.
- BCCR established the Group for Strategic Analysis of Climate Change (GAECC) to establish comparable data, strengthen scenario-analysis capacity, promote climate-change risk management in the financial system, and work on greening international reserves.
- The RSF comprises four reform priorities:
  - (i) integrating climate risks into fiscal planning,
  - (ii) strengthening public investment and infrastructure resilience,
  - (iii) supporting decarbonization,
  - (iv) greening reserves and strengthening financial sector resilience.
- The RSF is intended to unlock critical resources to tackle longer-term structural challenges, support issuance of securities focused on sustainability, and help Costa Rica be recognized as an ESG-indexed sovereign.
- Costa Rica is considering issuance of bonds to international investors with key performance indicators related to forestry coverage, ecological integrity, and biodiversity.
- The authorities plan to continue coordinated work with the World Bank and other IFIs to build on the RSF’s catalyzing effect.

*Statement by Mr. Guerra and Ms. Lankester Campos on Costa Rica, November 14, 2022*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1criea2022002.pdf_