## 1criea2023003 ## Source details **Canonical URL:** [1criea2023003](https://www.imf.org/-/media/files/publications/cr/2023/english/1criea2023003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1criea2023003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1criea2023003.pdf.json) --- ### Executive summary and program performance - IMF financing and arrangements: - 554.1 million (about US$ 725 million or 150 percent of quota in the IMF at the time of approval). - RSF disbursements contingent on conclusion of relevant EFF reviews and implementation of scheduled reform measures. - Program performance highlights: - Program performance under both the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF) remains strong. - All performance criteria and indicative targets met for the fourth review of the EFF. - Inflation exceeded the outer band of the Monetary Policy Consultation Clause in December 2022, triggering a Board consultation; inflation returned to the central bank’s tolerance band in April. - Single wage spine produced for one-quarter of executive branch positions (prior action met). - All reform measures scheduled under the RSF arrangement were completed for this review. - Staff support and financing decisions: - Staff supports completion of the fourth EFF review and the first RSF review. - Staff supports disbursements amounting to SDR 206.23 million (EFF) and SDR 184.70 million (RSF) based on progress and strong macroeconomic performance. ### Recent developments and macroeconomic conditions - Growth and labor market (real GDP, annual percent change; unemployment percent): - Real GDP: 2.4 (2019), -4.3 (2020), 7.8 (2021), 4.3 (2022), 3.0 (2023 projected). - Growth in Q1 2023: 4.0 percent (y-o-y). - Unemployment: 12.4 (2019), 20.0 (2020), 13.7 (2021), 11.7 (2022), 10.7 (2023). - Informal employment: 42 percent of total employment. - Inflation and wages: - Headline inflation: 2.1 (2019), 0.7 (2020), 1.7 (2021), 8.3 (2022), 1.9 (2023 projected). - Headline inflation peaked at 12.1 percent in August (2022) and fell to 2.4 percent (y-o-y) in April. - Composite indicator of core inflation: 3.4 percent (April). - Month-on-month inflation negative since February; real wage growth negative for most of the past year. - External sector and reserves: - Current account balance (percent of GDP): -1.3 (2019), -1.0 (2020), -3.3 (2021), -4.0 (2022), -3.4 (2023 projected). - Gross international reserves (millions of U.S. dollars): 8,937 (2019), 7,232 (2020), 6,921 (2021), 8,724 (2022), 10,541 (2023 projected). - Reserves as percent of ARA metric: 132.5 (2019), 108.4 (2020), 96.7 (2021), 100.9 (2022), 110.5 (2023 projected). - End-April 2023: gross international reserves US$11.1 billion (116.8 percent of the IMF’s Reserve Adequacy metric). - Real effective exchange rate: appreciated 13 percent during 2022 and another 5.5 percent as of end-March 2023. - EMBIG spreads: fell 151 bps in H2 2022 and a further 16 bps by end-April 2023. - Private sector credit growth: 5.5 percent y-o-y in March (adjusted for exchange rate movements). - Fiscal stance and debt: - Central government primary balance (percent of GDP): -2.6 (2019), -3.7 (2020), -0.3 (2021), 2.1 (2022), 1.5 (2023 projected). - Central government overall balance (percent of GDP): -6.7 (2019), -8.4 (2020), -5.1 (2021), -2.8 (2022), -3.4 (2023 projected). - Central government debt (percent of GDP): 64.5 (2019), 66.9 (2020), 68.0 (2021), 63.8 (2022), 62.4 (2023 projected). - Fiscal targets met by large margins in 2022 and Q1 2023. - Social indicators: - Poverty rate: 23 percent (national average); up to 34 percent in the rural Brunca region. - GDP per capita (US$): 12,691 (2019), 12,164 (2020), 12,473 (2021), 13,075 (2022), 16,250 (2023 projected). - Weak informal sector employment growth, especially for lower-skilled, young, and female workers. ### Outlook and risks - Projections (selected): - Real GDP growth: 3.0 (2023), 3.2 (2024), 3.2 (2025), 3.3 (2026), 3.2 (2027), 3.2 (2028). - Consumer prices (period average): 1.9 (2023), 3.0 (2024–2028 each year). - Current account deficit: projected to decline to 3.4 percent of GDP in 2023 and to around 2 percent of GDP over the medium term. - Downside risks: - Weaker-than-expected external demand, tighter global financial conditions, commodity price volatility, exposure to natural disasters, labor market recovery risks due to informality. - Upside potential: - Ongoing reform program could create more fiscal space to bolster investment and job creation. ### Safeguarding monetary and financial stability — policy discussions and recommendations - Monetary policy: - BCCR increased policy rate from 0.75 percent (December 2021) to 9 percent (October 2022). - BCCR lowered policy rate by 150 bps following disinflation; ex ante real policy rate remained above neutral. - Recommendation: Continue data-dependent, forward-looking approach; scope for further monetary easing in 2023 conditional on risks to the inflation outlook. - Exchange rate and reserves management: - BCCR committed to market-determined exchange rate; interventions focused on reserves adequacy and disorderly market conditions. - Measures to deepen FX market: reorganize FX operations, extend Monex trading hours, develop FX derivatives, review banks’ net open position limits. - Reserve accumulation supported by systematic FX purchases, issuance of a US$1.5 billion Eurobond, and multilateral funding inflows. - Financial sector resilience and supervision: - Financial system metrics (March): capital adequacy ratio 18 percent; NPL ratio 2 percent; provisioning adequate; dollarization of loans 32 percent. - Over 80 percent of loans at variable rates—higher rates weakening some borrowers’ repayment capacity. - Supervisory and regulatory actions: - Roadmap to address Basel Core Principles recommendations. - Regulations to mandate assessment of socioenvironmental and climate change risks in banks’ credit portfolios. - Tighter definition of an unhedged FX borrower; reduced discretion in assessing currency mismatches. - Additional capital requirements on FX loans to unhedged borrowers starting January 2024; regular publication of unhedged FX borrowing data initiated. - Amendments to bank resolution and deposit insurance legal framework expected to be submitted to the national supervisory council by end-September 2023. - Plan to modernize and broaden credit registry coverage by end-July 2023. - Draft cyber risk regulation expected to be approved by end-November 2023. ### Strengthening fiscal institutions, tax reforms, and debt management - Fiscal outturn and outlook: - 2022 primary balance 1.4 percent of GDP above target; tax revenues rose by 0.4 percent of GDP between 2021 and 2022. - Primary spending fell by 1.6 percent of GDP in 2022 due to wage freezes, lower transfers, and underexecution of capital spending. - Authorities on track to exceed 2023 primary surplus target of 1.3 percent of GDP. - Public Employment Bill (PEB) implementation: - Implementing regulation entered into force March 2023. - Single wage spine produced for one-quarter of executive branch positions (prior action). - Proposed structural benchmark: new wage scheme to cover at least 90 percent of executive branch positions by end-September; payments under the new wage scheme to begin by end-November 2023. - Expected fiscal savings: 0.4–0.6 percent of GDP for entire public sector in first five years; 0.3–0.5 percent of GDP for central government. - Tax policy reforms (May bills submitted): - Move to tax self-employed, pensioners, and employees under the same progressive schedule. - Equalize tax treatment of capital income and gains; tax passive income earned abroad; simplify non-resident taxation; eliminate progressive rate structure within CIT; rationalize VAT exemptions; increase progressivity of vehicle property tax. - Estimated tax policy reform yields for 2025 (Percent of GDP): - Total tax reform yield: 0.17 - Taxing self-employed under a dual schedule: -0.13 - Schedule recalibration (keeping the current exemption threshold): 0.07 - Eliminating the reduced progressive schedule within the CIT: 0.14 - Equating the tax rate on all capital income and gains: 0.01 - Eliminating the reduced VAT rate on airfare purchases: 0.05 - Eliminating the reduced VAT rate on wood: 0.00 - Eliminating the VAT exemption on medical equipment: 0.03 - Improving progressivity of the property tax on vehicles: 0.00 - Several measures are indicated as >0 where no estimates available. - Reforms would yield around 0.2 percent of GDP in additional revenues. - Tax compliance, PFM, and debt management: - Cyber attacks in 2022 caused backlog and delays; updated compliance plan approved December. - Legislation to broaden MTFF adoption, improve Treasury Single Account liquidity management, and increase transparency through digitalization submitted. - Debt trajectory: debt lowered to 64 percent of GDP at end-2022 and expected to reach 56 percent of GDP by 2028 under baseline, but sensitive to exchange rate and other risks. - FX-denominated debt: 25 percent of GDP at end-2022; estimated FX-denominated gross financing needs almost 4 percent of GDP for 2023. - Legislature approved issuance of up to US$5 billion in Eurobonds; primary dealer pilot program underway. - June 2023 structural benchmark met to centralize debt-related functions into a debt management office. ### Climate policy, RSF implementation, and green finance - RSF contributions and reform measures: - RSF arrangement supporting Costa Rica’s climate agenda; authorities completed RMs 1-4 for this review. - Implemented RSF RMs include: climate budget tagging guidelines (RM1); regulations facilitating private-sector participation in renewable self-consumption (RM2); BCCR data repository on climate hazards covering 35 percent of banking credit portfolio (RM3); BCCR published indicators of “greenness” of reserve holdings (RM4). - RM5 proposed revision: Ministry of Finance to expand quantitative climate transition fiscal risks analysis (timing revised to incorporate into March 2024 MTFF). - Other RMs in progress: RM6, RM7, RM8, RM9, RM10, RM11, RM12 with deadlines spanning end-September 2023 to end-February 2024. - Official climate-related financing expectations for 2023-2024: - US$1.2 billion expected from official sources. - Specific expected investments: - US$370 million pledged by a World Bank adaptation and mitigation project (excludes Disaster Risk Management Policy Loan with Catastrophe Drawdown Option signed March 2023). - IDB, French Development Agency, and Korean Infrastructure Funding Facility expected to invest US$400 million. - IDB has US$100 million in ongoing projects. - Central American Bank for Economic Integration expected to lend US$350 million for climate-resilient infrastructure. - Green financing instruments and sovereign positioning: - Authorities exploring ESG or sustainability-linked Eurobonds; sovereign green credentials partially priced in existing bonds. - Development of a harmonized green taxonomy with support from Green Climate Fund and UNEP. - Planned removal of tax exemptions with negative environmental impacts to incentivize private green investment. - Expected promotion of thematic bonds and ESG disclosure frameworks. ### Social protection, labor market, and inclusion policies - Social registry and program targeting: - Enhancing digital registry of social benefits recipients; single social assistance window planned (proposed SB for end-February 2024). - Legislation submitted to consolidate social programs under IMAS. - WB, UN support for migrant assistance. - Childcare, long-term care, and gender measures: - Childcare coverage expansion target: reach about 64,700 children by end-2023 (a four percent increase relative to pre-pandemic levels). - Roadmap to support women entrepreneurs to be launched by end-October 2023. - SINCA created March 2022; regulation to be issued by end-July 2023. - Target for long-term care cash transfers and support: cash for care to 3,000 households effective May 2023; aim to cover 4,000 vulnerable caregivers by end-December 2026. - Labor market incentives and formalization: - Social Security Fund reducing minimum contribution base for part-time workers in phased manner; low-income self-employed can voluntarily contribute for 6 months before mandatory contributions. - 132 obstacles identified by firms eliminated by end-March 2023; decrees and draft law to reduce mandatory professional fees submitted. ### Program financing, IMF access, and external buffers (selected figures) - Program financing table (selected lines, exact figures preserved): - Financing need: 3,152 1,291 1,965 - Reserve accumulation (excl. RSF): 1,803 1,324 418 - Underlying BOP need 1/: 1,349 -341 1,547 - Official multilateral financing: 2,673 1,291 1,965 - IMF: 552 550 275 - EFF: 552 550 275 - Other multilateral creditors: 2,121 741 1,690 - World Bank: 307 109 669 - Inter-American Development Bank: 385 516 416 - Central American Bank for Economic Integration: 329 115 604 - Latin American Reserve Fund: 1,100 0 0 - Unidentified financing: 479 0 0 - RSF disbursement: 0 49 324 6 - Total change in official reserves (incl. RSF): 1,803 1,817 664 - Memorandum items — Gross international reserves (incl. RSF): 8,610 10,541 11,205 - In percent of the ARA metric (incl. RSF): 101 111 110 - In percent of the ARA metric (excl. RSF) 2/: 101 105 103 - IMF access and phasing (EFF and RSF): - Total EFF access: 1,237.49 SDR (335 percent of quota); Quota: 369.40 SDR. - Total RSF access: 554.10 SDR (150.00 percent of quota); Quota: 369.40 SDR. - EFF disbursements by review include multiple tranches of 206.34 SDR, 103.11 SDR, and 206.23 SDR as listed in the program schedule. ### Staff appraisal and policy recommendations (summary) - Monetary policy and reserves: - Support BCCR’s data-dependent, forward-looking approach; scope for further easing in 2023 conditional on inflation risks. - BCCR’s steps to strengthen reserves and allow market-determined exchange rate welcomed. - Financial sector supervision: - Continue proactive supervision to ensure provisioning adequacy; implement planned legal amendments to resolution and deposit insurance frameworks. - Fiscal policy and debt sustainability: - Authorities met 2022 fiscal targets by large margin and are on track to exceed 2023 targets; proposed fiscal rule changes preserve debt-reducing role. - Tax reforms to enhance progressivity and environmental objectives supported. - Social protection and inclusiveness: - Continue improving targeting, coverage, timeliness, and efficiency of social programs; promote formalization and female labor force participation. - Climate integration: - Support modification of RM5 to integrate climate transition risks in fiscal planning; continue efforts to attract climate financing and operationalize RSF measures. *Source: IMF staff report for Costa Rica, 1criea2023003 (staff report text and annexes as provided).* ### 554.1 million (about US$ 725 million or 150 percent of quota in the IMF at the time of approval ### COSTA RICA: FOURTH REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, FIRST REVIEW UNDER THE RESILIENCE AND SUSTAINABILITY ARRANGEMENT, REQUEST FOR MODIFICATION OF REFORM MEASURE UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY, AND MONETARY POLICY CONSULTATION ### Executive summary and program performance - IMF financing and arrangements: - 554.1 million (about US$ 725 million or 150 percent of quota in the IMF at the time of approval). - Duration coincides with the period remaining under the EFF; RSF disbursements contingent on conclusion of relevant EFF reviews and implementation of scheduled reform measures. - Program performance: - Program performance under both the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF) remains strong. - All performance criteria and indicative targets have been met for the fourth review of the EFF. - Inflation exceeded the outer band of the Monetary Policy Consultation Clause in December 2022, triggering a Board consultation; inflation returned to the central bank’s tolerance band in April. - Implementation of most structural reforms is on track. The single wage spine has been put in place for one quarter of executive branch positions, meeting the prior action for this review. - Submission of amendments to the central bank law was delayed; a subset of amendments has been submitted to the legislature and a separate law proposal to provide constitutional autonomy to the central bank is being prepared. - All reform measures scheduled under the RSF arrangement were completed. - Policy focus and consensus: - Overall policy stance should remain focused on durably bringing inflation back to target and keeping public debt on a firm downward path. - Review concentrated on accelerating structural reforms, improving social protection, enhancing equity and efficiency of taxes, and strengthening the fiscal rule. ### Recent developments and macroeconomic conditions - Growth and labor market: - Real GDP: 2.4 (2019), -4.3 (2020), 7.8 (2021), 4.3 (2022), 3.0 (2023 projected). - Growth in Q1 2023: 4.0 percent (y-o-y). - Unemployment: 12.4 (2019), 20.0 (2020), 13.7 (2021), 11.7 (2022), 10.7 (2023). - Informal employment: 42 percent of total employment. - Inflation and wages: - Headline inflation: 2.1 (2019), 0.7 (2020), 1.7 (2021), 8.3 (2022), 1.9 (2023 projected). - Headline inflation peaked at 12.1 percent in August (2022) and fell to 2.4 percent (y-o-y) in April. - Composite indicator of core inflation: 3.4 percent (April). - Month-on-month inflation has been negative since February; real wage growth has been negative for most of the past year. - External sector and reserves: - Current account balance: -1.3 (2019), -1.0 (2020), -3.3 (2021), -4.0 (2022), -3.4 (2023 projected). - Gross international reserves (millions of U.S. dollars): 8,937 (2019), 7,232 (2020), 6,921 (2021), 8,724 (2022), 10,541 (2023 projected). - Reserves as percent of ARA metric: 132.5 (2019), 108.4 (2020), 96.7 (2021), 100.9 (2022), 110.5 (2023 projected). - End-April 2023: gross international reserves were US$11.1 billion (116.8 percent of the IMF’s Reserve Adequacy metric), up from US$6.2 billion as of end-June. - Real effective exchange rate: appreciated 13 percent during 2022 and another 5.5 percent as of end-March 2023. - EMBIG spreads fell 151 bps in H2 2022 and a further 16 bps by end-April 2023. - Private sector credit growth: 5.5 percent y-o-y in March (adjusted for exchange rate movements), up from 2.5 percent at end-2021. - Fiscal stance and debt: - Central government primary balance: -2.6 (2019), -3.7 (2020), -0.3 (2021), 2.1 (2022), 1.5 (2023 projected). - Central government overall balance: -6.7 (2019), -8.4 (2020), -5.1 (2021), -2.8 (2022), -3.4 (2023 projected). - Central government debt: 64.5 (2019), 66.9 (2020), 68.0 (2021), 63.8 (2022), 62.4 (2023 projected). - Fiscal targets were met by large margins, further strengthening debt sustainability. - Social indicators: - Poverty rate: 23 percent (national average); up to 34 percent in the rural Brunca region. - GDP per capita (US$): 12,691 (2019), 12,164 (2020), 12,473 (2021), 13,075 (2022), 16,250 (2023 projected). - Informal sector employment growth has been weak, especially for lower-skilled, young, and female workers. ### Outlook and risks - Projections: - Real GDP growth: 3.0 (2023), 3.2 (2024), 3.2 (2025), 3.3 (2026), 3.2 (2027), 3.2 (2028). - Consumer prices (period average): 1.9 (2023), 3.0 (2024), 3.0 (2025), 3.0 (2026), 3.0 (2027), 3.0 (2028). - Current account deficit projected to decline to 3.4 percent of GDP in 2023 and to around 2 percent of GDP over the medium term. - Downside risks: - Weaker-than-expected external demand, tighter global financial conditions, and commodity price volatility. - Exposure to natural disasters. - Risks to labor market recovery, given high informal employment and uneven recovery of real incomes. - Upside potential: - Ongoing reform program could create more fiscal space to bolster investment and job creation. ### Safeguarding monetary and financial stability (Program discussions and policy recommendations) - Monetary policy and inflation: - BCCR increased policy rate from 0.75 percent (December 2021) to 9 percent (October 2022). - BCCR lowered policy rate by 150 bps following disinflation, while the ex ante real policy rate remained above the neutral level. - Recommendation: Continue data-dependent, forward-looking approach; scope for further monetary easing in 2023 conditional on risks to the inflation outlook. - Exchange rate and reserves management: - BCCR committed to allowing the exchange rate to be market-determined; interventions focused on reserves adequacy and disorderly market conditions. - Actions to deepen FX market: reorganize FX operations, extend Monex trading hours, develop FX derivatives, review banks’ net open position limits. - Systematic FX purchases, issuance of a US$1.5 billion Eurobond, and multilateral funding inflows have boosted reserves. - Financial sector resilience and supervision: - Financial system metrics (March): capital adequacy ratio 18 percent; NPL ratio 2 percent; provisioning adequate; dollarization of loans 32 percent. - With over 80 percent of loans at variable rates, higher interest rates are weakening some borrowers’ repayment capacity. - Supervisory actions and reforms: - Roadmap to address Basel Core Principles assessment recommendations. - Regulations to mandate assessment of socioenvironmental and climate change risks in banks’ credit portfolios. - Tighter definition of an unhedged FX borrower; reduced discretion in assessing currency mismatches. - Additional capital requirements on FX loans to unhedged borrowers starting January 2024. - Regular publication of data on unhedged FX borrowing initiated. - Bank resolution and deposit insurance legal framework to be amended; proposed amendments expected to be submitted to the national supervisory council for approval by end-September 2023. - Plan to modernize and broaden the coverage of the credit registry by end-July 2023. - Draft cyber risk regulation expected to be approved by end-November 2023. ### Strengthening fiscal institutions, social protection, and structural reforms - Fiscal consolidation and reforms: - Fiscal consolidation has continued to overperform government targets. - Proposed tax reforms (recently submitted legislation) aim to make the system more progressive, equitable, efficient, and environmentally friendly. - Steady improvement in public debt management noted. - Implementation of the Public Employment Bill is taking longer than expected, but recent progress (single wage spine for one quarter of executive branch positions) is a crucial milestone toward full implementation. - Social policy and labor market measures: - Improvements to targeting and efficiency of social programs are underway to help address relatively high poverty rates. - New incentives to formalize employment, support female labor force participation and entrepreneurship, and improve the business climate are highlighted as key steps toward a more dynamic and equitable economy. ### Climate policy and the RSF - RSF contributions: - The RSF arrangement is supporting Costa Rica’s ambitious climate change agenda. - Authorities completed all RSF reform measures for this review. - Climate integration in policies: - Steps taken to incorporate climate considerations into fiscal planning and policy, infrastructure investments, financial sector supervision, and the investment of the country’s international reserves. - Authorities intensifying efforts to attract climate financing from official and private sector sources. *Source: IMF staff report for Costa Rica, June 9, 2023.* ### 12. While a comprehensive reform proposal has not been submitted, the authorities are ### 1criea2023003 - 12. While a comprehensive reform proposal has not been submitted, the authorities are ### Central bank autonomy, governance, and safeguards - Authorities have submitted a limited subset of amendments to the central bank law to the Legislative Assembly and intend to submit a separate law proposal during the August-October legislative session to provide constitutional autonomy to the central bank. - Following the legislative process, authorities should consider further measures to align BCCR’s governance reforms with the recommendations of the 2020 Safeguards Assessment; these measures are to be discussed in the context of the next program review. ### Strengthening fiscal institutions and preserving fiscal sustainability - Fiscal outturns: - The 2022 primary balance was 1.4 percent of GDP above the target. - Tax revenues rose by 0.4 percent of GDP between 2021 and 2022. - Primary spending fell by 1.6 percent of GDP due to wage freezes, lower transfers to public entities, and the underexecution of capital spending. - 2023 outlook and policy stance: - Authorities are on track to exceed their 2023 primary surplus target of 1.3 percent of GDP. - The approved budget has frozen current primary spending in nominal terms, and the government aims to maintain priority social spending as a share of GDP constant, offset by lower spending on other transfers and on goods and services. - An unwinding of cyclical revenues and a one-off payment to settle a debt to the social security fund (postponed from 2022 to 2023) will reduce the headline primary balance, but continued structural gains through tax yields and tight spending control are expected to continue the underlying fiscal consolidation trend. - The March indicative target on the primary balance was met by a large margin. - Fiscal rule amendments: - Proposed refinements to the 2020 nominal expenditure rule would exclude financially sound public institutions operating as market producers or without government control while maintaining broad coverage of spending types and spending growth formulas. - Public Employment Bill (PEB) implementation: - Implementing regulation entered into force in March 2023. - The single wage spine was produced for one-quarter of executive branch positions (a prior action for this review). - Guidelines for data collection, job factor valuation, and wage spine design were issued for institutions outside the Ministry of Planning’s purview. - Proposed new structural benchmark (SB): the new wage scheme will cover at least 90 percent of executive branch positions by end-September. - Payments under the new wage scheme for all employees covered by the PEB will begin in line with transitional provisions by end-November 2023. ### Tax policy reforms and revenue measures - May bills submitted to the Legislative Assembly aim to improve equity and efficiency of the tax system, including: - Moving to an income tax system that taxes the income of the self-employed, pensioners, and employees under the same, more progressive, schedule. - Equalizing the tax treatment of capital income and gains. - Taxing passive income earned abroad. - Simplifying taxation of non-residents. - Eliminating the progressive rate structure for the corporate income tax. - Rationalizing VAT exemptions. - Increasing progressivity of the property tax on vehicles. - Estimated tax policy reform yields for 2025 (Percent of GDP): - Total tax reform yield: 0.17 - Income tax measures listed individually: - Taxing self-employed under a dual schedule: -0.13 - Schedule recalibration (keeping the current exemption threshold): 0.07 - Eliminating the reduced progressive schedule within the CIT: 0.14 - Equating the tax rate on all capital income and gains: 0.01 - Taxing dividends distributed by firms in Free zones: >0 (no data available to estimate yields) - Taxing passive income earned abroad by residents: >0 (no data available to estimate yields) - VAT and other indirect taxes: - Eliminating the reduced VAT rate on airfare purchases: 0.05 - Eliminating the reduced VAT rate on wood: 0.00 - Eliminating the exemption on car rentals: >0 (no data available) - Eliminating the VAT exemption on medical equipment: 0.03 - Property taxes: - Improving the progressivity of the property tax on vehicles: 0.00 - The authorities have also updated the special regime for small businesses to align it with the general regime. - The reforms would yield around 0.2 percent of GDP in additional revenues. ### Tax compliance, PFM reforms, and debt management - Tax compliance: - Cyber attacks in 2022 produced a backlog of unprocessed forms and delayed some risk assessment plans. - An updated plan to improve compliance was approved in December, developing tools for revenue risk assessment (notably transfer pricing and cross-border payments). - Updates to the tax code were submitted in May to improve enforcement and compliance; new regulations will expedite customs procedures, combat fraud, and impose fines on non-compliant taxpayers. - PFM reforms: - Legislation submitted in September 2022 to broaden adoption of the National Public Investment Management System by autonomous institutions. - Legislation proposed to improve liquidity management of the Treasury Single Account and increase transparency and traceability of public funds through digitalization. - A macrofiscal unit is being formalized within the Ministry of Finance and the Fiscal Council is being operationalized to support institutionalization of the Medium-Term Fiscal Framework (MTFF) and fiscal rule reforms. - Public debt and market development: - Debt developments: - Debt lowered to 64 percent of GDP at end-2022 and further this year so far. - Continued downward path expected to 56 percent of GDP by 2028, although debt levels and financing needs remain sensitive to the exchange rate and other risks. - FX-denominated debt was 25 percent of GDP at end-2022 and estimated FX-denominated gross financing needs are almost 4 percent of GDP for 2023. - Market and legal measures: - Legislature approved issuance of up to US$5 billion in Eurobonds. - Legislation being drafted to give the executive more discretion over external borrowing. - A primary dealer pilot program is underway. - New law passed to reduce obstacles for foreign investors to participate in domestic debt markets; legal revisions approved in December 2022 remove double taxation on interest and repatriation, clarify the term internal public debt, and add provisions to the Securities Market Regulatory Law on compensation, liquidation and custody of securities. - Legislation submitted to centralize debt-related functions into a debt management office (a June 2023 SB) and a strategic framework to govern sovereign assets and liabilities is being developed. ### Climate change resilience and decarbonization - 2022 climate impacts and priorities: - 2022 was one of the rainiest years on record, triggering flooding that affected 300,000 people and required emergency repairs. - Identified needs: better execution of maintenance projects, incorporation of climate resilience considerations into public investment decisions, and increased fiscal resources for emergencies. - Costa Rica’s emissions profile and transition: - Electricity is generated almost exclusively from renewables. - Transport and storage account for over half of greenhouse gas emissions but make up only around 5 percent of GDP and employment. - Decarbonization expected to generate modest employment gains, while agriculture, forestry, and fishing will face negative impact. - Policy emphasis on increasing labor mobility, investing in new skills (e.g., lower carbon and climate-resilient agricultural methods, maintaining electric vehicles), adapting educational programs especially for women and coastal area workers, and improving the social safety net to protect vulnerable workers (¶ 28). - Progress on RSF Reform Measures (implemented and in progress): - Implemented: - RM1: Climate budget tagging guidelines published; information systems being developed for operationalization. - RM2: Regulations issued to facilitate private-sector participation in renewable energy for self-consumption. - RM3: BCCR established a data repository on climate hazards and vulnerabilities covering 35 percent of the banking system’s credit portfolio. - RM4: BCCR published indicators of the “greenness” of its reserve holdings in its 2022 Annual Report. - In progress / planned: - RM5 (proposed revision): Ministry of Finance to publish a quantitative climate transition fiscal risks analysis; revised timing includes a focused document and incorporation into the March 2024 MTFF. - RM6: MIDEPLAN to publish guidelines to expand project appraisal to assess climate impact through the social cost of carbon. - RM7: Legislation being prepared to introduce feebates for lower emissions in transport. - RM8: CONASSIF to approve regulation on management of socio-environmental and climate change risks in the credit portfolio. - RM9, RM10, RM11, RM12: Guidelines, appraisals, and BCCR top-down stress testing integration of climate effects are being advanced. - Private climate financing and instruments: - Measures under EFF and RSF to create enabling environment for private climate financing include fiscal consolidation, public investment reforms, promotion of thematic bonds, regulations requiring supervised entities to incorporate sustainability and ESG risks, allowance for ESG bond issuance, and promotion of ESG disclosure. - A harmonized green taxonomy is to be developed with support from the Green Climate Fund and UNEP. - Planned removal of tax exemptions with negative environmental impacts (e.g., in agriculture and transport) to incentivize private sector green investment. - Efforts to improve project selection and fiscal risk management to incentivize Public-Private Partnerships for climate projects. - Official climate-related financing expectations for 2023-2024: - US$1.2 billion in climate-related financing is expected from official sources. - Specific pledges and expected investments: - US$370 million pledged by a World Bank adaptation and mitigation project (this amount excludes a Disaster Risk Management Policy Loan with a Catastrophe Drawdown Option signed in March 2023). - IDB, French Development Agency, and Korean Infrastructure Funding Facility expected to invest US$400 million in ecosystem conservation, electrification of transport, renewable energy expansion, and improved gender equality in climate transition. - IDB has US$100 million in ongoing projects in water and sanitation, renewable energy production, and transportation. - Central American Bank for Economic Integration expected to lend US$350 million to rebuild and climate-resilient infrastructure. - Sovereign bond positioning: - Costa Rica’s green credentials are partially priced into existing bonds; bonds without specific tags already attract ESG-focused investors. - Authorities plan to build greater recognition as an ESG sovereign, possibly through ESG or sustainability-linked bonds. ### Advancing dynamic and inclusive growth; social protection - Social registry and benefits: - Authorities are enhancing their digital registry of social benefits recipients to improve targeting, coverage and efficiency of social programs. - A single window will be launched to consolidate social programs, improve targeting, and prioritize responses according to urgency (proposed new SB for end-February 2024). - Legislation submitted to consolidate social programs under the social benefits institute, IMAS. - The UN is supporting the government in providing assistance to the considerable flow of in-transit migrants. *Source: IMF staff report text as provided.* ### 29. Improved childcare and long-term services are needed to support female labor force ### 29. Improved childcare and long-term services are needed to support female labor force participation ### Childcare, long-term care, and gender budgeting - Minimum quality standards for childcare are being established while coverage is being expanded to reach about 64,7 00 children by end-2023 (a four percent increase relative to pre-pandemic levels). - Steps are being taken to expand households’ eligibility for long-term care. - A roadmap to provide guidance and financial support for women entrepreneurs will be launched by end-October 2023. - As part of the gender budgeting strategy, a pilot exercise was completed in December 2022 and the 2024 budget statement will identify gender-related spending. ### Labor market incentives and business climate reforms - Social Security Fund actions: - Begun to reduce the minimum contribution base for part-time workers in a phased manner (to reduce risks of contributions shortfalls). - Low-income self-employed workers can voluntarily contribute to the health and pension scheme for 6 months (after which contributions become mandatory). - Participation of seasonal workers in the social security system has been incentivized by eliminating the employee contribution of targeted groups such as coffee harvest workers. - Business climate measures: - 132 obstacles identified by firms as preventing them from carrying out their businesses (such as excessive paperwork and regulations) were eliminated by end-March 2023. - Decrees issued and a draft law recently submitted to the Legislative Assembly to reduce the cost of specialized professional advice, through the elimination of mandatory minimum fees of 10 professional associations. ### Program modalities, conditionality, and structural reforms - All PCs and ITs and all Reform Measures for this review were met, and important progress is being made on structural reforms. - Targets on the primary balance, government debt, and NIR were met with large margins. - The MPCC outer band was exceeded in December but the authorities took corrective actions and inflation is now falling rapidly. - Amendments to the BCCR Law were not submitted to the Legislative Assembly by December, but the authorities have subsequently submitted a subset of these amendments and are preparing legislation to provide the BCCR with constitutional autonomy. - The March 2023 SB on implementation of the Public Employment Bill was not met but the authorities have made progress and a new SB has been established to ensure completion of these changes by November. - The June 2023 SB to centralize debt management functions was met. - The four reform measures under the RSF arrangement targeted for this review have been completed. - Proposed for March 2024: ITs and two new structural benchmarks to establish a single social assistance window and to ensure continued implementation of the Public Employment Bill. - A modification of RM5 is proposed, which integrates climate transition risks in fiscal planning. ### Program financing and external buffers (selected figures from program financing table) - Financing need: 3,152 1,291 1,965 - Reserve accumulation (excl. RSF): 1,803 1,324 418 - Underlying BOP need 1/: 1,349 -341 1,547 - Official multilateral financing: 2,673 1,291 1,965 - IMF: 552 550 275 - EFF: 552 550 275 - Other multilateral creditors: 2,121 741 1,690 - World Bank: 307 109 669 - Inter-American Development Bank: 385 516 416 - CAF Development Bank for Latin America: 0 0 0 - Central American Bank for Economic Integration: 329 115 604 - Latin American Reserve Fund: 1,100 0 0 - Unidentified financing: 479 0 0 - RSF disbursement: 0 49 324 6 - Total change in official reserves (incl. RSF): 1,803 1,817 664 - Memorandum items: - Capital market access: 0 2,500 1,000 - Gross international reserves (incl. RSF): 8,610 10,541 11,205 - In percent of the ARA metric (incl. RSF): 101 111 110 - In percent of the ARA metric (excl. RSF) 2/: 101 105 103 - Costa Rica’s outstanding Fund credit peaking at 2.8 percent of GDP or 7.5 percent of exports in 2024. ### Staff appraisal and policy recommendations - Monetary policy and reserves: - The BCCR’s data-dependent, forward-looking approach, supported by clear and transparent communications, has helped bring inflation back down to target. - The decline in inflation provides scope for further monetary easing in 2023 but policy should remain attentive to the evolving distribution of risks to the inflation outlook. - The BCCR has taken appropriate steps to strengthen its reserves position while allowing the exchange rate to be determined by market conditions. - Authorities are taking steps to further strengthen the BCCR’s autonomy, governance, and operational framework; staff supports preparations to provide constitutional autonomy. - Financial sector supervision: - Financial supervisors continue to closely monitor risks to the financial sector. - Supervisors should continue to pro-actively ensure that provisioning is adequate and that any asset quality concerns do not develop into systemic threats. - Planned legal amendments to the bank resolution and deposit insurance framework will help strengthen the financial safety net. - Fiscal policy and debt sustainability: - The authorities met their 2022 fiscal targets by a large margin and are on track to exceed 2023 targets, further strengthening debt sustainability. - Proposed changes to the fiscal rule redefine institutional coverage while preserving fiscal discipline. - Tax reforms will help make the system more progressive, equitable, efficient, and environmentally-friendly, and debt management is being steadily strengthened. - The SB on the Public Employment Bill was not met but the authorities are moving ahead to fully implement the reform by November. - Social protection and inclusiveness: - Improvements are underway to the targeting, coverage, timeliness, and efficiency of social programs. - Incentives are being offered to formalize employment, support female labor force participation and entrepreneurship, and improve the business climate. - Climate integration: - First steps are being taken to incorporate climate considerations into fiscal planning and policy, infrastructure investment, financial sector supervision, and the investment of the country’s international reserves. - The authorities are intensifying efforts to attract further climate financing from official and private sector sources; staff supports modification of RM5 to integrate climate transition risks in fiscal planning. - Program support: - Staff supports the authorities’ request for completion of the fourth EFF review and the first review under the RSF arrangement. - Based on the strong macroeconomic performance, important progress on structural reforms, completion of Board consultation under the MPCC, and completion of RMs 1-4, staff support disbursements amounting to SDR 206.23 million and SDR *Source: IMF staff estimates.* ### 184.70 million. ### 1criea2023003 - 184.70 million. ### Real sector developments - Real GDP (annual percent change) - 2019: 2.4 - 2020: -4.3 - 2021: 7.8 - 2022: 3.3 - 2023 (CR/22/345): 2.9 - Projections: 2024: 3.0; 2025: 3.2; 2026: 3.2; 2027: 3.3; 2028: 3.2 - Domestic demand (annual percent change) - 2019: 0.2 - 2020: -4.8 - 2021: 7.8 - 2022: 3.1 - 2023 (CR/22/345): 1.1 - Projections: 2024: 2.2; 2025: 2.4; 2026: 2.7; 2027: 3.0; 2028: 3.1 - Components (annual percent change) - Private consumption 2023 (CR/22/345): 3.0; projections through 2028: 2.8, 2.7, 2.8, 3.0, 2.9 - Public consumption 2023 (CR/22/345): 1.9; projections through 2028: 1.3, 1.2, 1.6, 1.5, 1.7, 1.6, 1.9 - Gross fixed capital formation 2021: 11.0; 2022: 3.7; 2023 (CR/22/345): 0.8; projections: 2024: 4.2; 2025: 5.3; 2026: 2.4; 2027: 4.2; 2028: 2.9 - Prices - GDP deflator 2023 (CR/22/345): 4.4; projections 2024–2028: 2.0, 3.2, 3.1, 3.0, 3.1, 3.0 - Consumer prices (period average) 2023 (CR/22/345): 6.4; projections 2024–2028: 1.9, 3.0, 3.0, 3.0, 3.0 - Consumer prices (end of period) 2023 (CR/22/345): 4.8; projections 2024–2028: 2.1, 3.0, 3.0, 3.0, 3.0 - GDP per capita (US$) - 2019: 12,691 - 2020: 12,164 - 2021: 12,473 - 2022: 13,159 - 2023 (CR/22/345): 13,075 - Projections: 2024: 13,868; 2025: 16,250; 2026: 17,016; 2027: 17,779; 2028: 18,560 ### External sector and reserves - Current account balance (in percent of GDP) - 2019: -1.3 - 2020: -1.0 - 2021: -3.3 - 2022: -4.6 - 2023 (CR/22/345): -4.0 - Projections 2024–2028: -4.3, -3.4, -2.7, -2.4, -2.1, -1.9, -1.8 (table shows through 2028) - Trade balance (percent of GDP) - 2019: -6.0 - 2020: -2.7 - 2021: -4.4 - 2022: -7.3 - 2023 (CR/22/345): -5.6 - Projections: 2024–2028: -7.4, -5.7, -5.7, -5.9, -6.0, -6.0, -6.2 - Services balance (percent of GDP) - 2019: 9.8 - 2020: 6.4 - 2021: 6.7 - 2022: 8.4 - 2023 (CR/22/345): 9.2 - Projections: 2024–2028: 7.6, 8.5, 8.7, 8.8, 9.1, 9.2 - Gross international reserves (millions of U.S. dollars) - 2019: 8,937 - 2020: 7,232 - 2021: 6,921 - 2022: 8,241 - 2023 (CR/22/345): 8,724 - Projections: 2024: 8,695; 2025: 10,541; 2026: 11,205; 2027: 11,527; 2028: 12,258; 2029: 12,830; 2030: 13,518 - Gross international reserves (as percent of ARA metric) - 2019: 132.5 - 2020: 108.4 - 2021: 96.7 - 2022: 98.9 - 2023 (CR/22/345): 100.9 - Projections include values at or above 100 for several years and 107.7 for 2028 - Gross international reserves (months of next year's imports) - 2019: 6.1 - 2020: 3.9 - 2021: 3.2 - 2022: 3.4 - 2023 (CR/22/345): 3.5 - Projections through 2028: 3.4, 4.0, 3.9, 3.8, 3.8, 3.8, 4.1 - External debt (percent of GDP) - 2019: 47.8 - 2020: 49.6 - 2021: 50.0 - 2022: 54.6 - 2023 (CR/22/345): 52.4 - Projections show values around 55.5–49.1 across 2024–2028 ### Fiscal sector — central government (levels and percent of GDP) - Central government revenue (in billions of colones; percent of GDP) - Revenue (billions of colones) - 2019: 5,676 - 2020: 5,077 - 2021: 6,326 - 2022: 6,908 - 2023 (CR/22/345): 7,341 - Projections: 2024: 7,229; 2025: 7,320; 2026: 7,766; 2027: 8,268; 2028: 8,788; 2029: 9,324; 2030: 9,888 - Revenue (percent of GDP) - 2019: 15.0 - 2020: 13.9 - 2021: 15.8 - 2022: 15.7 - 2023 (CR/22/345): 16.6 - Projections: around 15.3–15.7 percent of GDP in near-term projections - Tax revenue (billions of colones) - 2019: 4,940 - 2020: 4,385 - 2021: 5,566 - 2022: 6,006 - 2023 (CR/22/345): 6,312 - Projections to 2030: up to 8,876 - Tax revenue (percent of GDP) 2019: 13.1; 2023 (CR/22/345): 13.7; projections near 14.0 - Expenditure (billions of colones; percent of GDP) - Expenditure (billions of colones) - 2019: 8,223 - 2020: 8,147 - 2021: 8,377 - 2022: 8,806 - 2023 (CR/22/345): 8,598 - Projections: 2024: 9,141; 2025: 8,903; 2026: 9,165; 2027: 9,550; 2028: 9,984; 2029: 10,430; 2030: 10,935 - Expenditure (percent of GDP) - 2019: 21.7 - 2020: 22.3 - 2021: 20.9 - 2022: 20.0 - 2023 (CR/22/345): 19.4 - Projections: 19.3–17.2 across 2024–2030 - Central government primary balance (percent of GDP) - 2019: -2.6 - 2020: -3.7 - 2021: -0.3 - 2022: 1.1 - 2023 (CR/22/345): 2.1 - Projections: 2024–2030: 1.3, 1.5, 1.9, 2.0, 2.0, 2.1, 2.1 - Central government overall balance (percent of GDP) - 2019: -6.7 - 2020: -8.4 - 2021: -5.1 - 2022: -4.3 - 2023 (CR/22/345): -2.8 - Projections: 2024: -4.0; 2025: -3.4; 2026: -2.8; 2027: -2.4; 2028: -2.1; 2029: -1.9; 2030: -1.7 - Central government debt (percent of GDP) - 2019: 64.5 - 2020: 66.9 - 2021: 68.0 - 2022: 67.2 - 2023 (CR/22/345): 63.8 - Projections: 2024–2030 vary in mid-60s to mid-50s; 2030 projection: 55.9 ### Public financing and debt composition - Total financing (central government, billions of colones) - 2019: 2,494 - 2020: 3,388 - 2021: 2,158 - 2022: 1,897 - 2023 (CR/22/345): 1,207 - Projections: 2024: 1,912; 2025: 1,583; 2026: 1,399; 2027: 1,282; 2028: 1,196; 2029: 1,106; 2030: 1,046 - Central government debt stock (in billions of colones) - 2019: 24,420 - 2020: 24,420 - 2021: 27,272 - 2022: 29,566 - 2023 (CR/22/345): 28,224 - Projections: 2024: 31,338; 2025: 28,985; 2026: 30,391; 2027: 31,799; 2028: 33,129; 2029: 34,327; 2030: 35,466 - Debt split (percent of GDP) - External debt share: 2019: 12.6; 2020: 16.2; 2021: 16.9; 2022: 18.3; 2023 (CR/22/345): 16.3 - Domestic debt share: 2019: 52.0; 2020: 50.8; 2021: 51.1; 2022: 48.9; 2023 (CR/22/345): 47.5 ### Monetary and financial sector indicators - Monetary base (annual percent change) - 2019: 7.1 - 2020: 8.3 - 2021: 7.9 - 2022: 7.3 - 2023 (CR/22/345): 8.1 - Projections: 2024–2028: 7.2, 7.9, 7.8, 7.7, 7.7, 7.8 - Broad money (annual percent change) - 2019: 44.8 - 2020: 54.8 - 2021: 54.1 - 2022: 48.9 - 2023 (CR/22/345): 47.9 - Projections: 2024–2028: 48.5, 47.9, 47.3, 47.2, 47.2, 47.2 - Credit to the private sector (percent change) - 2019: -2.3 - 2020: 3.4 - 2021: 3.7 - 2022: 6.2 - 2023 (CR/22/345): 3.3 - Projections: 2024–2028: 5.0, 3.8, 6.0, 6.1, 6.1, 6.2 - Financial soundness (selected indicators, Dec/Mar) - Risk-adjusted capital ratio (Dec) - 2021: 16.8; 2022: 16.7; 2023: 17.5 - Nonperforming loans to total loans (Dec/Mar) - 2021 Dec: 2.0; 2022 Dec: 2.1; 2023 Dec: 2.4; 2023 Mar: 2.5 - Liquid assets to total short-term liabilities (Dec) - 2021: 102.7; 2022: 98.6; 2023: 96.8; 2023 Mar: 96.8 ### Balance of payments and financing needs - Balance of payments (current account, U.S.$ millions) - 2019: -826 - 2020: -639 - 2021: -2,136 - 2022: -3,166 - 2023 (CR/22/345): -2,706 - Projections 2024–2028: -3,151; -2,951; -2,406; -2,256; -2,156; -2,065; -2,056 - Financial account (U.S.$ millions) - 2019: -1,268 - 2020: -1,172 - 2021: -1,622 - 2022: -3,145 - 2023 (CR/22/345): -2,207 - Projections: -3,129; -2,928; -2,381; -2,228; -2,126; -2,031; -2,019 - Foreign direct investment, net (U.S.$ millions) - 2019: -2,695 - 2020: -1,644 - 2021: -3,110 - 2022: -3,526 - 2023 (CR/22/345): -2,941 - Projections: 2024–2028: -3,599; -2,895; -2,925; -3,110; -3,277; -3,403; -3,527 - Gross external financing needs (U.S.$ millions) - 2019: -8,143 - 2020: -10,001 - 2021: -10,391 - 2022: -11,853 - 2023 (CR/22/345): -16,220 - Projections: 2024–2028: -14,125; -14,168; -14,408; -14,833; -15,223 - Gross external financing sources (U.S.$ millions) - 2019: 7,648 - 2020: 8,621 - 2021: 9,236 - 2022: 10,280 - 2023 (CR/22/345): 14,498 - Projections: 2024–2028: 12,160; 12,672; 13,808; 14,355; 15,112 - Memorandum: Gross multilateral support (U.S.$ millions) - 2019: 495 - 2020: 1,380 - 2021: 1,154 - 2022: 1,573 - 2023 (CR/22/345): 1,783 - Projection 2024: 2,211; 2025: 1,682; 2026: 670; 2027: 640; 2028: 366 ### IMF support, access, and phasing - Extended Fund Facility (EFF) — Access and phasing (Millions of SDR; percent of quota) - March 1, 2021: 206.34 SDR (55.86 percent of quota) — Board approval of the Extended Arrangement under the Extended Fund Facility - October 15, 2021: 103.11 SDR (27.91 percent of quota) — First review and continuous and end-July 2021 performance criteria - March 15, 2022: 103.11 SDR (27.91 percent of quota) — Second review and continuous and end-December 2021 performance criteria - October 15, 2022: 206.23 SDR (55.83 percent of quota) — Third review and continuous and end-June 2022 performance criteria - March 15, 2023: 206.23 SDR (55.83 percent of quota) — Fourth review and continuous and end-December 2022 performance criteria - October 15, 2023: 206.23 SDR (55.83 percent of quota) — Fifth review and continuous and end-June 2023 performance criteria - March 15, 2024: 206.23 SDR (55.83 percent of quota) — Sixth review and continuous and end-December 2023 performance criteria - Total EFF access: 1,237.49 SDR (335 percent of quota) - Quota: 369.40 SDR - Resilience and Sustainability Facility (RSF) — Access and phasing (Millions of SDR; percent of quota) - Multiple disbursements listed on March 15, 2023 and October 15, 2023 and March 15, 2024: each 46.17 SDR (12.50 percent of quota) tied to reform measure implementation reviews - Total RSF access: 554.10 SDR (150.00 percent of quota) - Quota: 369.40 SDR - Indicators of Fund credit (selected items) - Fund obligations based on existing credit (principal, millions of SDR) - 2023: 46.21 - 2024: 84.71 - 2025: 138.55 - 2026 onward show scheduled principal through 2030 and beyond per table - Outstanding IMF credit based on existing and prospective drawings (millions of SDRs) - 2023: 1,723.9 - 2024: 1,930.1 - 2025: 1,791.6 - 2026: 1,740.0 - 2027: 1,619.7 - Projections decline over time toward zero by mid-2040s in table - Net use of IMF credit (millions of SDRs) 2023: 1,723.9; projected gradual declines with specific annual net reductions shown in table *Sources: Central Bank of Costa Rica; Ministry of Finance; Superintendency of Banks (SUGEF); and IMF staff estimates.* ### Annex I. Capacity Development Integration: Updated Country ### Annex I. Capacity Development Integration: Updated Country Strategy Note ### Context - The COVID-19 pandemic exacerbated pre-existing fiscal and social challenges in Costa Rica despite the authorities’ timely response. - Following a disbursement under the Rapid Financing Instrument in 2020, the Executive Board on March 1, 2021 approved a three-year arrangement under the Extended Fund Facility (EFF). - Program pillars anchored reform priorities: (i) implementing equitable fiscal reforms to ensure debt sustainability, while protecting the poor and most vulnerable; (ii) maintaining monetary and financial stability, while continuing to strengthen the central bank’s autonomy and governance and addressing structural financial vulnerabilities; and (iii) advancing structural reforms to support inclusion, while boosting labor productivity, under the government’s strong commitment to fighting climate change. - Under the new administration, which took office in May 2022, capacity development (CD) has continued and will continue to play a key role in advancing EFF and RSF priorities; the RSF arrangement was approved by the Executive Board on November 14, 2022. ### Engagement Strategy - Historical traction: Costa Rica has received extensive CD with a generally good implementation record; examples include updating the base year of national accounts and publication of tax expenditure reports. - Integration with Fund work: - CD delivery is closely integrated with surveillance priorities from Article IV Consultations, the 2018 Financial Sector Stability Review (FSSR), and recent Basel Core Principles assessment from the WB FSAP Development Module. - Country team coordinates sequencing of CD across reform streams, consulting authorities and providers, including CAPTAC-DR. The Fund’s resident representative office plays a key role. - Collaboration with other partners: - Strong collaboration, notably with the WB on climate change adaptation, business climate, and FSAP follow-up; the IDB on public employment reform, climate change mitigation, FinTech, and road infrastructure PPP development; the OECD on SOE reporting standards; and the UN on gender and education. - Regular joint meetings/missions and donor debriefs to ensure policy consistency and synergies. ### CD Priorities (overview) - Main objectives align with EFF and RSF: consolidate achievements and progress on macro-critical reforms. - Priority areas: - Implement fiscal reforms to boost private investment and support inclusive and green growth while ensuring debt sustainability. - Strengthen autonomy and governance of the Central Bank of Costa Rica (BCCR), and enhance supervisory and crisis management frameworks to maintain monetary and financial stability. - Enhance fiscal institutions, revenue administration, public financial management, social safety net, and data/reporting capacity. ### Implementing Fiscal Reforms: Key CD Workstreams and Achievements - Public Employment Reform - Corrective actions and revised timeline drew heavily on TA provided in February 2023. - Revenue administration and tax policy (FAD/CAPTAC-DR) - Support through Tax Compliance Improvement Plans (SB), a Customs Law, and Hacienda Digital project implementation. - FAD assistance on a dual personal income tax design and feebates to support emissions reduction. - Public Financial Management (FAD/CAPTAC-DR; WB; IDB) - Support for a comprehensive Medium-Term Fiscal Framework (MTFF) covering the entire NFPS (SB) and improvement of Treasury cash management. - Action plan on gender budgeting; centralization and digitalization of payment system for cash transfer social assistance programs (SB) to aid targeting accuracy (WB complement). - 2022 PIMA to improve public investment efficiency and climate resilience (SB); PIMA implementation supported RSF measures. - FAD fiscal rule TA to improve rule operation while preserving its debt-reducing role; FAD TA facilitates incorporation of climate-related transition risks in fiscal planning; IDB complements on risks to fuel revenues from transport decarbonization. - Debt management (MCM, in coordination with WB) - Deepen domestic debt market; enhance debt management with MTDS updates (SB) and unify debt functions within the same agency (SB). - Government Finance Statistics (STA/CAPTAC-DR/ICD) - Support to improve quality and timeliness of fiscal reporting, expand coverage beyond central government, and transition from GFSM 1986 to GFSM 2014. - Macroeconomic frameworks (ICD) - Enhance analytical and forecasting capacity of the MoF via a comprehensive macro-fiscal framework and customized training. ### Fiscal Reform Objectives, Achievements, and Future Outcomes (selected items from integration matrix) - Tax Policy - Objectives: Improve tax policy under efficiency, fairness, progressivity, and sufficiency. - TA: FAD options for income tax reform; environmental feebate scheme; tax expenditures analysis and measurement. - Achieved: Publication of tax expenditure reports as part of the budget process. - Future outcomes: Introduce income tax reform to strengthen progressivity and support climate change; reduce profit shifting; evaluation of tax exemptions and incentives. - Revenue Administration - TA: FAD TADAT, Revenue Administration Gap Assessment, CIP; CAPTAC-DR risk-based post-clearance audits; WB upgraded tax and customs procedures. - Achieved: TADAT assessment completed; New Custom Portal aligned with WTO TF Agreement; Submission of a bill containing a new Custom Law. - Future outcomes: Develop and implement Tax CIPs; Update estimates of VAT and CIT compliance gaps; Implement Hacienda Digital project. - Public Financial Management - TA: FAD (payment system improvements, PIMA, MTFF, GB, transition risks); CAPTAC-DR (Treasury/fiscal risk, reporting); WB (social safety net targeting, payment systems); IDB (public investment management, climate-related tagging). - Achieved: First MTFF report for CG and NFPS published; Methodology for fiscal risk reporting formulated; General assessment of TSA operation and coverage completed; Centralize and digitalize payment system for cash transfer social assistance programs; Fiscal rule bill amended; Create and staff a macro-fiscal unit. - Future outcomes: Additional fiscal rule modifications supplemented by MTFF; Establish an independent fiscal council; Expand TSA coverage; Implement PIMA recommendations; Develop GB; Establish a social assistance single window; Business continuity policies in place. - Debt Management - TA: MCM assistance with institutional reforms and MTDS update; IDB market development; WB ABP and legal reforms to attract non-resident investors. - Achieved: Publication of guidelines for public institutions debt management; Debt Committee established; Pilot market-making / primary dealer program; Structure operational responsibilities of the Public Credit Directorate and National Treasury. - Future outcomes: Deepen domestic debt market and improve price formation and auction mechanism; Update MTDS to include contingent liabilities. ### Maintaining Monetary and Financial Stability: Key CD Workstreams and Achievements - Central Bank Operations (LEG/MCM/CAPTAC-DR) - Objectives: Strengthen BCCR operational autonomy and governance; strengthen BCCR functions as risk monitor, lender of last resort (LOLR), and inflation targeter. - TA/Actions: - LEG supported draft amendments to the BCCR Law prepared in August 2021 (SB) and revised in December 2022 for submission to the Legislative Assembly (SB) to further strengthen operational autonomy and governance as per the 2020 Safeguards Assessment (SA). - CAPTAC-DR designed a LOLR facility; MCM/CAPTAC-DR supporting FX market deepening. - Achieved: Regulation on emergency liquidity assistance facility approved by the BCCR Board in July 2018; ongoing legal reforms to further strengthen BCCR mandate, autonomy, decision-making, transparency, and accountability. - Future outcomes: Deepen FX market; increase daily variation in net open FX position limits; introduce BCCR FX swaps; develop interbank markets to increase liquidity; promote legal reform to allow greater NFPS FX activity with FX intermediaries. - Financial Crisis Management (LEG/MCM) - TA: LEG/MCM support to align bank resolution and deposit insurance legal framework with international practices based on gap analysis. - Future outcomes: Adequate institutional arrangements for deposit insurance fund and resolution authority; safeguards for resolution; clear resolution triggers (SB). - Financial Supervision and Regulation (CAPTAC-DR/MCM) - TA: Ongoing CD to strengthen supervision and regulation, including enhanced consolidated supervision and gradual adoption of Basel III; engagement on climate change issues; support for FinTech regulation, cybersecurity, and derivatives market development. - Achieved/Expected: Greater exchange rate flexibility and prudential policies implemented to discourage dollarization; improved liquidity risk monitoring. - Macroeconomic Frameworks (ICD) - TA: ICD to enhance BCCR analytical, forecasting, and policy analysis capacity through development of macroeconomic frameworks, semi-structural gap and DSGE models, and tailored training to align forecasting and policy analysis with best international practices. ### Key Cross-cutting Achievements and Ongoing Actions (selected) - Published outputs and institutional steps: - Publication of tax expenditure reports in budget process. - TADAT assessment completed. - New Custom Portal aligned with WTO TF Agreement; submission of new Custom Law bill. - First MTFF report for CG and NFPS published. - Centralization/digitalization of payment system for cash transfer social assistance programs (SB). - Regulation on emergency liquidity assistance facility approved by the BCCR Board in July 2018. - Public procurement law approved; transparency portal created. - Publication of guidelines for public institutions debt management; Debt Committee established; pilot market-making / primary dealer program initiated. - Public Employment Bill passed; Implementing Regulation published and law took effect; single wage spine produced for one-quarter of executive branch positions. - 51 public institutions consolidated under CG for GFS reporting. - Planned/future institutional reforms and capacity outcomes: - Introduce income tax reform and feebates; implement Hacienda Digital; expand TSA coverage; establish independent fiscal council; implement PIMA recommendations; update MTDS to include contingent liabilities; deepen domestic debt market; fully implement single wage spine; fully adopt 2014 GFSM accrual accounting standards for NFPS data. _Annex I. Capacity Development Integration: Updated Country Strategy Note (Costa Rica) — IMF country strategy note and CD integration matrices._ ### introduction of ### introduction of ### Financial sector reforms and supervision - Introduced liquidity coverage ratio (LCR) and the expected introduction of a net stable funding ratio (NSFR). - Further discouraged financial dollarization by: - revised the definition of “unhedged borrowers”; - issued regulation imposing additional capital requirements on unhedged FX borrowing; and - published data on unhedged FX borrowing. - Implement recommendations from the Basel Core Principles detailed assessment report, based on road map to be prepared by August 2023. - Introduced regulations for consolidated supervision of financial groups. - Credit-risk regulation revamped. - Strengthened supervisory stress test models/tools of credit, market, liquidity and contagion risks. - A NSFR to take effect from 2024. - Financial Stability Committee established to coordinate MAP policy. - Strengthen macro-financial stress testing tools, including on climate risks. - Enhance FinTech and cybersecurity regulation. - Strengthen banking resolution and deposit insurance legal framework; legal amendments drafted for submission to CONASSIF; submit the revised law on bank resolution and Deposit Guarantee Fund for Legislative Assembly’s approval. - Crisis management protocols in place; roadmap developed to close the gaps identified in the legal framework. ### Macroprudential policy framework and systemic risk analysis - Strengthen the resilience of the financial sector through enhancing macroprudential (MAP) frameworks and systemic risk monitoring. - MCM: FSSR follow-up. - Develop a NSFR. - Financial Stability Committee established to coordinate MAP policy. - Strengthen macro-financial stress testing tools, including on climate risks. ### Capacity development and statistics - CAPTAC-DR: regional training and country dialogue on integrating climate change considerations into financial policies; enhancing FinTech and cybersecurity regulation. - Real sector statistics: strengthen compilation and dissemination of macroeconomic and financial statistics for decision making according to internationally accepted statistical standards. - CAPTAC-DR: compile a quarterly supply and use table (SUT) and improve monthly economic activity indicator (IMAE), annual accounts, and non-financial asset balance sheets. - GDP rebased to 2017; rebased GDP published by industry and expenditure approach, in line with the 2008 SNA. - Main 2008 SNA recommendations implemented. - Develop financial accounts, balance sheets, revaluation and other volume changes in asset accounts, and quarterly SUT for all sectors to meet national data and ISWGNA minimum requirements. - Update CPI weights with year 2025 as the reference year. - Development of High-frequency Indicators. - Macroeconomic frameworks: ICD to assist and train staff on model-based forecasting and policy analysis, including semi-structural and structural models; help develop further the BCCR model-based frameworks. - Align the BCCR forecasting and policy analysis system with best international practices. ### IMF capacity development missions (selected, 2019–end-April 2023) - Revenue administration and tax policy: numerous CAPTAC-DR and FAD missions (examples include Strengthening taxpayers’ registry CAPTAC-DR February 2019, September 2022; Strengthening risk management CAPTAC-DR May, November 2019, February 2020, June 2022, November 2022, April 2023). - Public financial management: Treasury management and fiscal risks CAPTAC-DR April 2019, January, March, April 2021; Accounting – IPSAS & consolidation CAPTAC-DR/FAD July, November 2020, August 2021, October 2021, May 2022. - Debt management: Updating medium-term debt management strategy (MTDS), and institutional reform and deepening debt markets MCM November 2021, March-April 2022; Sovereign Assets and Liability Management MCM November 2022. - Macroeconomic forecasting and policy: Model-based economic frameworks (BCCR) ICD December 2022, January 2023. - Financial supervision and regulation: Credit risk regulation strengthening CAPTAC-DR January, April, May 2019, July-August 2020; Supervisory liquidity stress test CAPTAC-DR December 2019, September-December 2020; Cybersecurity Regulation Training, review regulation MCM/CAPTAC-DR July 2022, March 2023. - Real sector statistics: Preparation of quarterly SUT and sectoral accounts for rebasing national accounts to 2017 CAPTAC-DR July 2019, August 2020; High Frequency Economic Activity Indicators CAPTAC-DR December 2022. ### Collaboration with World Bank and Inter-American Development Bank - Close collaboration with the WB and IDB under the EFF arrangement leveraging comparative expertise and institutional knowledge on social spending, human resource management, debt management, and spending controls. - WB support: emissions monitoring, promoting investment in green technologies, reducing emissions in transport, promoting conservation and decarbonization in agriculture, forestry, and fishing. - IDB support: strengthening management and monitoring of climate action, conservation of ecosystems that capture greenhouse gases, electrification of transport, promotion of gender equality and decarbonization. - RSF reforms coordinated with WB and IDB; parallel and complementary conditionality across institutions (examples): - Public investment management: IDB-supported reform to align projects submitted to the SNIP with the National Decarbonization Plan and WB-supported changes to the Public Investment Law complement RSF RMs 6, 9, and 10. - Transport decarbonization: WB-supported reforms to promote electrification of buses and reduce taxes on electric vehicles and IDB-supported establishment of fares for electric buses complement RSF RM7. - Fiscal planning: RSF RM11 reenforces a WB prior action to remove tax exemptions; an IDB policy condition on climate and biodiversity markers complements RSF RM1. ### Letter of Intent (highlights) - Date: San José, June 8, 2023. - Program context: Extended Arrangement under the Extended Fund Facility (EFF) and Resilience and Sustainability Facility (RSF). - Program performance: - Met the end-December fiscal targets for the fourth review by a comfortable margin. - Proactively purchased FX from the market in the second half of 2022 and met the end-December target. - Inflation outer target band under the program’s Monetary Policy Consultation Clause (MPCC) was breached in December 2022, triggering a Board consultation as part of this review cycle. - Continued compliance with the continuous performance criteria. - Legislative actions and reforms: - Submitted a subset of previously foreseen changes to the BCCR law in June; working on a proposal to award constitutional autonomy to the BCCR to be submitted during the next ordinary legislative session period in August-October. - Could not meet the end-March 2023 structural benchmark on implementation of the public employment bill (PEB) but achieved the prior action needed for this review and committed to an additional structural benchmark. - Submitted a bill to unify debt management (an end-June 2023 structural benchmark). - RSF implementation: Implemented four RSF reform measures (RMs) linked to this review: climate budget tagging, private participation in power generation, a data repository, and indicators of the greenness of international reserves. - Financing requests: - Request completion of the Fourth Review of the Extended Arrangement under the EFF and the purchase of SDR 206.23 million. - Request the purchase of SDR 184.70 million in view of completion of RSF RMs. - Request modification of the RM to incorporate climate transition risks in fiscal planning. - Macroeconomic targets and commitments: - Primary surplus of at least 1.3 percent of GDP by end-2023. - Debt-to-GDP ratio of 50 percent of GDP by end-2035. - Commitment to additional progressive income and expenditure measures to further decline debt and secure macroeconomic stability. - Monetary policy: BCCR will continue its data-dependent and forward-looking approach to bring inflation back within the BCCR’s tolerance band, in line with inflation targeting and a flexible exchange rate regime. - Transparency: Authorized publication of the letter and its attachments as well as the associated staff report. *Source: 1criea2023003 - introduction of* ### 1. The government of Costa Rica remains fully committed to the economic reform ### 1. The government of Costa Rica remains fully committed to the economic reform ### Commitments and program architecture - Extended arrangement under the EFF approved by the IMF Executive Board on March 1, 2021, and ratified by the Legislative Assembly on July 19, 2021. - RSF approved by the IMF Executive Board on November 14, 2022; authorities submitted the relevant bill to the Legislative Assembly and will strive for ratification as soon as possible during the extraordinary sessions. - Memorandum outlines progress toward objectives of the Fund-supported program, policy plans to advance objectives, and progress and policy commitments under the RSF arrangement. - Tables 1, 2, and 3 summarize performance to date, planned updates to quantitative targets, progress on structural benchmarks and new structural conditionality under the EFF, and progress on reform measures supported by the RSF arrangement. ### Macroeconomic developments and outlook - Post-pandemic rebound: real GDP grew by 7.8 percent in 2021. - Growth slowed to 4.3 percent in 2022 amid global headwinds; moderation driven particularly by a moderation in domestic demand despite solid export growth. - Forecast: real GDP growth expected to moderate to 3.3 percent in 2023; medium-term growth expected to remain broadly in line with potential of just over 3 percent. - Inflation: peaked in August and declined to 2.4 percent y-o-y in April, within the BCCR’s 2-4 percent tolerance band. - External sector: current account deficit expected to narrow from 4.0 percent of GDP in 2022 to 3.3 percent of GDP in 2023. - Sovereign spread has continued to narrow, further supported by sovereign credit rating upgrades earlier this year. - Principal downside risks: further supply disruptions and commodity price volatility, further tightening of financial conditions, weaker-than-expected global demand, and possible natural disasters. ### Program performance through end-December 2022 and end-March 2023 - End-December 2022 QPC on the central government primary balance and IT for the debt stock were met by comfortable margins. - End-March fiscal ITs were met by a good margin. - End-December QPC and end-March IT on net international reserves were met by comfortable margins. - Monetary Policy Consultation Clause (MPCC) outer band—set in early 2022—was breached by 2.4 percentage points in December; attached letter from the BCCR explains the deviation. - Continuous PCs observed: non-accumulation of new external arrears; non-imposition/intensification of restrictions on payments and transfers for current international transactions; 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 status: - Did not submit amendments to the BCCR Law to the Legislative Assembly as foreseen by end-December 2022; in June submitted a subset of previously foreseen amendments. - Working on proposal to award constitutional autonomy to the BCCR to be submitted during the next ordinary legislative session period in August-October. - Did not meet the public employment bill structural benchmark owing to complexities implementing the wage spine; progress made but benchmark unmet (¶13). - Submitted a bill to unify debt management (an end-June 2023 structural benchmark). ### Fiscal policy: stance and objectives - Main priorities: meet critical social and health needs, support recovery, and secure debt sustainability. - Historical context: fiscal balance deteriorated sharply over the previous decade due to a permanent increase in current spending after the global financial crisis; comprehensive fiscal reform bill approved in December 2018. - Targets and expectations: - On track to exceed primary balance target of 1.3 percent of GDP by end-2023. - Aim to achieve a surplus of 1.85 percent of GDP by end-2024. - Expect to reach a debt-to-GDP ratio of 50 percent by 2035. - Additional progressive income and expenditure measures will foster more inclusive and sustainable growth and deliver a faster decline in debt. ### Fiscal rule and tax reform features - Fiscal rule: - Introduced in 2018 reform tying down nominal spending growth and included tight restraints on public sector remunerations. - Enabled reallocation of earmarked revenues and legally mandated spending (except Constitutional mandates) if debt exceeds 50 percent of GDP. - Change to implementing regulation in June 2022: spending ceilings for execution will be based exclusively on the previous year’s original budget rather than previous year’s execution. - Considering further options to improve the fiscal rule (¶15). - Tax reform highlights: - VAT replaced the General Sales Tax. - Income taxation strengthened via: (i) globalization and phased-harmonization of capital income and gains tax at a 15 percent rate; (ii) phasing-in of new rules for corporate income taxation (CIT); (iii) increase in PIT progressivity with additional brackets of 20 and 25 percent for employment income. ### 2022 fiscal outturn and measures implemented - Primary balance outcomes: - End-September primary balance: CRC 1,003 billion vs. program target CRC 215 billion. - End-December primary balance: CRC 927 billion vs. program target CRC 287 billion. - Revenue measures in 2022: - Despite a cyberattack in late April 2022, revenue performance remained strong for corporate income, VAT, and import-related taxes due to contingency plans. - Scheduled rate increases of VAT on construction-related services and tourism and the capital income tax continued to generate yields. - Delayed scheduled inflation adjustment to the fuel tax for six months until December 2022 to mitigate commodity price shock. - Used one-off revenues from transferring surpluses accumulated by decentralized entities to accelerate debt reduction. - Spending measures in 2022: - Fiscal rule envisages tighter spending constraints for 2022-2025 to accelerate debt reduction; total spending grew by 1.4 percent in 2022. - Primary spending fell in nominal terms and by 1.6 percent of GDP in 2022. - Wage constraints: freeze in base salaries, annuities, and new hiring; elimination of vacancies; annual nominal reductions of temporary wage components by 8.5 percent until September 2022; freezes in pensions of public sector retirees and current transfers 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 the constraints abrogated in September 2022, but MOF circular issued in November 2021 continues to ensure tight spending controls in line with the budget and fiscal rule. - Delays and reprioritization of capital projects and unused guarantee fund resources led to under execution of capital spending. - Provided an additional 0.2 percent of GDP compared to the budget for cash transfers for poverty reduction and support for childcare. - Considered temporary scheme to limit gasoline price increases; would be amended to ensure duration not exceed 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 if revived. ### 2023 fiscal stance, measures, and revenue projections - Primary balance to end-March 2023: CRC 467 billion vs. IT of CRC 152 billion. - On track to achieve a primary surplus above CRC 609 billion (or about 1.3 percent of GDP) by end-December 2023. - Revenue measures for 2023 and beyond: - Enforcement of thin capitalization rules expected to generate 0.1 percent of GDP. - January 2023 measure to tax imports of certain goods with VAT throughout production stages expected to yield 0.06 percent of GDP. - Phase-out of reduced VAT rates to tourism sector and construction services remains on schedule. - Legal framework adopted in September 2022 to periodically appraise tax expenditures and remove those not serving intended purpose; expected to broaden the tax base and mobilize at least 0.07 percent of GDP by removing lenient VAT treatment of airfares, medical equipment, and wood, and tax exemptions on car rentals (legislation submitted in May). - Submitted in May 2023 a tax bill to reform the PIT: unify taxation of employed, pensioners, and self-employed under a single recalibrated schedule; fully harmonize PIT rate on capital income and gains; broaden the tax base by including dividends distributed by firms in free zones to Costa Rican residents and capital income earned abroad by Costa Rican residents; remove progressive schedule within the CIT while retaining updated regime for SMEs; simplify taxation of non-residents. Bill expected to be approved by end-January 2024. Estimated annual yield of the bill’s reforms is approximately 0.1 percent of GDP. - Committed to improving progressivity of vehicle property tax via a bill submitted in May. - Will introduce a revenue neutral scheme of feebates to incentivize replacement of high-polluting private vehicles and further decarbonization plans by end-September 2023 (MEFP ¶42). - Overall net yields on the revenue side estimated at about 0.2 percent of GDP on an annual net basis from 2025 onwards. - Spending measures for 2023: - 2023 budget envisages total spending growth of 3 percent in 2023 (consistent with fiscal rule limit of 2.6 percent after accounting for emergency spending). - Given budgeted increases in interest bill, this implies zero growth in budgeted primary current spending. - 2023 budget increases social spending by more than CRC 30 billion (4 percent) compared to initial 2022 budget, including new pensions for elderly people in poverty. - Intend to maintain social spending as a share of GDP relative to 2022 by reallocating resources underexecuted through subsequent budgets to cash transfer and childcare programs with identified funding gaps. - As per 2018 fiscal reform, effectively reallocating spending away from legally mandated uses (except Constitutional mandates) when debt-to-GDP ratio is above 50 percent. - Committed to staying current on payment obligations and not accumulating any spending arrears. - Approval in November 2022 of external loans by multilateral partners and planned multi-year Eurobond issuance, combined with improved market conditions and debt management, will help contain interest expenditure. ### Program flexibility and contingency arrangements - Program builds in flexibility to deal with unforeseen shocks; improvements in tax and customs administration support revenue yields. - If revenues underperform: will propose temporary tax measures and reprioritize non-critical spending to keep primary target within reach. - COVID-19 adjustor: program targets allow for an adjustor to accommodate increased COVID-19 emergency spending up to 0.2 percent of GDP in 2023 for health services, targeted household and business support, or enhanced social assistance. - Committed to saving any revenue over-performance or windfalls in 2023 and outer years to accelerate debt reduction plans. *Source: 1criea2023003 - 1. The government of Costa Rica remains fully committed to the economic reform* ### 10. We will further advance our fiscal consolidation efforts in 2024 and over the medium ### 10. We will further advance our fiscal consolidation efforts in 2024 and over the medium ### Fiscal consolidation objectives and near-term targets - Target to reduce debt to below 60 percent of GDP as soon as possible while making space for critical infrastructure and social needs. - Targeting a primary balance of at least 1.85 percent of GDP in 2024, consistent with conditions set by the Legislative Assembly for further Eurobond issuance. - Spending will comply with the fiscal rule and continue to decline as a share of GDP. - Additional measures will be underpinned by a planned income tax reform and additional efforts to rationalize tax expenditure (MEFP ¶11). - Implementation of the public-sector employment reform (MEFP ¶13) will further support commitment to keeping nominal spending growth low. - In line with the fiscal rule and the Public Employment Bill (PEB), the freeze in the basic wage will be extended beyond 2025. - Expected upsides to tackling current debt and financing challenges faster than expected under the program include: - Efficiency gains through consolidation of ministries and other institutions as part of broader public sector reform. - A planned asset sale program. - Greater revenue mobilization from modernization of the tax and customs administration (MEFP ¶12) and PFM reforms (MEFP ¶15). ### Structural fiscal and tax policy reforms (medium-term revenue strategy) - Developing a medium-term revenue strategy to move towards a more progressive and growth-friendly tax system supporting equitable growth. - The strategy includes: - Reforming the PIT: tax wages, self-employed profits, and pensions through a single recalibrated progressive tax schedule (MEFP ¶8). - Broadening the base by taxing dividends distributed by firms in Free Zones and taxing passive capital income earned abroad by Costa Rican residents. - Rationalizing and simplifying income taxation of non-residents. - Further broadening the tax base by removing services taxed with reduced VAT rates and conducting systematic cost-benefit analysis of tax exemptions to remove outdated or ineffective exemptions, including those with negative environmental impact with IMF TA. - Removing the progressive tax schedule within the corporate income tax (CIT), amending the definition of permanent establishment, and broadening the tax base. - Revising current incentives under the Free Zones to move in line with the new international taxation architecture (Pillar 2) with World Bank support. - Supporting the environmental agenda by introducing and periodically recalibrating feebates to support the transition to low emission vehicles and safeguarding revenues consistent with IMF advice. ### Revenue administration strengthening and enforcement measures - Tax Compliance Improvement Plan (approved December 2021, updated December-2022) with IMF TA aims to strengthen compliance via automated cross-matching and revamped audit programs focused on VAT on services and erosion of CIT bases. - Rollout delays due to hacking of tax and customs administration systems; resumed implementation of compliance risk mitigation strategies in August 2022 with quarterly monitoring. - From September-2022 to April-2023, risk assessments of VAT and large corporate taxpayers allowed recouping approximately US$ 14.6 million in owed taxes, including interest and penalties. - International taxation risk assessments scheduled for end-June 2023. - Developed guideline (ficha) to undertake risk assessments of large net-wealth taxpayers by end-May 2023. - Modernizing tax code through a bill submitted in May to institute fiduciary responsibility, simplified enforcement procedures, updates on penalties, coercive collection and precautionary administrative measures. - Strengthening taxpayers’ registry integrity with IMF TA; scheduling monthly taxpayer registry cleansing processes during May-November 2023. - Use administrative and third-party information to enhance compliance, including automatic exchange of information on financial accounts (CRS), Country-by-Country (CbC) reports, and corporation shareholders and beneficial owners’ registers when warranted. - Exploiting electronic invoice data samples to detect unusual activity and improve enforcement capabilities. - Updated noncompliance estimations for VAT and CIT in May 2023 with IMF TA. - Customs reforms: - New Customs Law approved May 2022 with IMF TA to promote trade facilitation and improve revenue collection; implementing regulation to be approved and published in June 2023. - Directorate of Customs preparing organizational change to be formalized via executive decree by August 2023. - Modernizing points of entry at borders with Panama and Nicaragua. - CAPTAC-DR support to develop analytical tools to improve risk-based assessments and reduce under declaration of imported goods. - Use of non-intrusive scanners with risk-selection criteria at Moin Port. - MOF’s digital transformation plan, Hacienda Digital (WB supported), will upgrade tax and customs procedures and information systems and replace the National Integrated Risk Management Systems. - Aggressive strategy to minimize cyber risks: communication strategy, training programs for MOF staff, updated security measures. ### Public employment reform and fiscal savings from wage spine - Commitment to rationalize and improve efficiency and quality of government spending through full implementation of public employment reform. - Public Employment Bill (PEB): - Approved March 2022; implementation underway in phases. - MIDEPLAN created a Public Employment Unit and, with DGSC and IDB support, finalized methodology to create a single wage spine with all seven job families, consolidating other wage supplements. - Oversight shared between MIDEPLAN and autonomous institutions (Judiciary, Legislative Branch, Supreme Electoral Tribunal, public universities, municipalities, CCSS) following criteria and ceilings approved by the Bill. - Bill, including single pay spine, to be implemented by end-November 2023 (missed end-March 2023 structural benchmark). - Public consultation in January 2023 and a follow-up National Dialogue in March 2023 to facilitate implementation and address technicalities. - Amendments to specific articles in the PEB to be submitted to the Legislative Assembly in June 2023 to close loopholes (e.g., carve-outs by declaring positions exclusive). - Implementation steps and timelines (with IMF and IDB support): - MIDEPLAN issued methodological guidelines in May 2023 for job data collection and single wage spine formulation. - For institutions under MIDEPLAN’s purview, MIDEPLAN produced a single wage spine covering at least one-quarter of executive branch job positions in June 2023 (a prior action for completing this review). - Assign points to teachers by end-June 2023 and take steps to include them in the single wage spine. - Incorporate 90 percent of executive branch job positions in the single wage spine by end-September 2023 (proposed structural benchmark) by publishing the directive setting global salaries for new workers and applying transitional provisions. - Begin administering payments for all employees covered by the law in line with transitional provisions by November 2023. - Run a simulation on a representative sample of jobs by December 2023 and adjust the single wage spine if necessary. - Expected fiscal savings from the reform (IDB-supported estimates): - Savings for the entire public sector expected to range between 0.4 and 0.6 percent of GDP during the first five years. - Savings for the central government expected to range between 0.3 and 0.5 percent of GDP. - Operational and fairness features: - Salaries above the spine will be frozen until the single pay scheme reaches them; gradual transition for salaries below the reference wage (Transitory Disposition XI). - New rules for recruitment, selection, professional development, performance evaluation (including top-ranked officials). - New employee benefits: one-month parental leave, two-month extension of maternity leave (for special cases), sick leave to care for a family member. ### Social protection targeting, delivery, and digitalization - Commitment to enhance targeting accuracy and delivery of social protection programs via digitalization and institutional improvements. - Bill 23.436 (presented October 2022) to integrate functions within IMAS; expected to be available for plenary discussion by December 2023 to consolidate social protection system and provide flexibility in social spending. - Centralization and digitalization of payment systems: - Payment system for cash transfer social assistance programs centralized and digitalized in December 2021 at MOF’s National Treasury (SUPRES) (structural benchmark). - Agreements signed, regulations issued, payment software incorporated into Digital Treasury. - Despite cyberattack delays, resumed implementation in IMAS Avancemos Program; remaining programs financed by national budget to be included by end-June 2023. - Support adoption by remaining institutions; 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, improving service delivery, fiscal operations efficiency, and financial inclusion (especially women) through digital payment tools. - Targeting and coverage improvements via SINIRUBE: - Strengthening role of SINIRUBE as main instrument to target social protection benefits and services and harmonize inter-institutional coordination. - Programa Estado de la Nación study confirmed robustness of SINIRUBE algorithm. - Major social assistance programs have already adopted SINIRUBE; office administering it has plans to support adoption by remaining institutions, including judiciary and higher education. - Encouraging municipalities to adopt SINIRUBE. - Increasing use of SINIRUBE information per IMAS Directive 0122-2022 to improve socio-economic profiles for benefit allocation. - SINIRUBE to incorporate the baremo tool to quantify intensity of needs for prioritization. - IMAS progressing to remove ineligible duplicate benefits identified by SINIRUBE outside municipalities. - Bill 23.436 to facilitate removal of duplicate benefits paid by multiple agencies. - Social Assistance Single Window (“ventanilla única”): - WB technical support to design and develop a single window consolidating social programs and moving from first-come-first-serve to urgency-based prioritization. - Online form launched to change contact details; back-office systems being strengthened. - IMAS to launch single window for social programs under its authority (except specified exclusions) by end-February 2024 (proposed SB). - Single window will automate request-to-appointment process, allow public updates of personal/contact information, integrate with SINIRUBE, and provide: - One-stop-shop access to information on social programs. - Consolidated information on benefits and programs individuals/families receive. - Information on potential eligibility for new benefits to beneficiaries and social workers. - Facilitation of legal document preparation for beneficiaries (e.g., certificates for appeals). - Improved coordination among public institutions managing benefits and programs. - Early 2024: inventory of programs from other institutions that could be linked to the single window. *Source: Excerpt from the IMF chapter on Costa Rica fiscal and social reforms (content unit: 1criea2023003).* ### 15. We are taking further actions to improve public financial management (PFM) and the ### 15. We are taking further actions to improve public financial management (PFM) and the functioning of our fiscal rule. ### Fiscal Rule Improvements - Developing amendments to clarify the rule’s regulatory perimeter and allow for a more flexible reallocation of resources within the existing spending ceilings while maintaining the rule’s essential role in containing spending and reducing debt. - First legislative proposal submitted in September 2022 (bill 23.330); amendments discussed through motions at the legislative committee level in March 2023. - Modified proposal submitted in April 2023 with expected approval in July 2023. - Modified proposal preserves broad coverage of spending categories (e.g., capital when debt is above 60 percent, interest, and court rulings). - Modified proposal excludes institutions that operate as market producers or without government control to prevent ad hoc requests for exclusion. - The MOF will by end-October 2023 produce an assessment of legal changes needed to empower the STAP to make the expenditure limit applicable to the overall central government (including extrabudgetary entities) on aggregate instead of to individual entities. - Further changes to the rule will be limited to holistic periodic reviews. ### Medium-Term Fiscal Framework (MTFF) - MOF published in April 2022 a Medium-Term Fiscal Framework covering the NFPS including the period 2022-2027, meeting the relevant structural benchmark. - Revised MTFF improves budget credibility and presents a coherent fiscal strategy in line with the fiscal rule; includes analysis and reporting of fiscal risks with contingent liabilities, debt guarantees, and explicit fiscal contingency reserve schemes; integrates a medium-term public investment plan/framework. - MTFF updated in September 2022 (submission of the 2023 budget) and in March 2023 to ensure continuity in macroeconomic shock analysis and further debt management analysis. - Plan to further strengthen the September 2023 MTFF by better aligning fiscal policy with long-term national plans and explicitly stating the goal to reduce debt to 50 percent of GDP by 2035. - MTFF will include climate transition risks to enhance fiscal risk analysis (¶44). ### Public Investment Management Assessment (PIMA) and project appraisal - MOF and MIDEPLAN undertook the IMF PIMA, including a new Climate Change Module, in November-December 2021, with support from the WB and IDB. - Defined a plan to strengthen public investment efficiency and make fiscal space for climate change-related and other critical infrastructure needs (MEFP ¶41). - Submitted bill No. 22.470 to extend SNIP procedures to all decentralized entities, Legislative Branch, Judicial Branch, Supreme Electoral Tribunal, dependencies and auxiliary entities, autonomous and semiautonomous state-owned enterprises and municipalities; bill advancing with expected approval by end-June 2023. - Plan to include climate impact in project appraisal through the social cost of carbon by end-September 2023 (MEFP ¶41). - Started training planning unit staff in other public sector institutions to apply the appraisal process. - Will publish by end-December 2023 a set of clear and transparent project selection criteria including climate change criteria (MEFP ¶41). - Already issue quarterly and half-year reports on physical and financial progress of externally funded projects; plan to extend monitoring to domestically funded projects. - Plan to develop a comprehensive asset register including stock of public assets and their condition to inform investment planning, selection, and maintenance. ### Gender budgeting - Introducing gender budgeting to operationalize the gender equality policy agenda with IMF capacity development support. - Gradually incorporating a gender lens into budget preparation to publish a gender budget statement as an annex to 2024 budgets for: Ministry of Justice, Ministry of Education, Ministry of Agriculture and Livestock, the Judicial Branch, National Institute of Learning, Rural Development Institute, National Institute of Cooperative Development, and IMAS by end-October 2023. - Intermediate steps completed or in progress: - Pilot exercise to identify gender-related expenditures (completed by end-December 2022). - Adjusted budget call circulars for the 2024 budget to identify gender-related spending in pilot ministries (completed by end-April 2023). - Established coordination among MOF, STAP and the Comptroller’s Office so the CGR considers adoption of technical budgeting standards to identify gender-related spending and mandatorily applies it in the decentralized sector. - Execution of gender-related spending in line with the budget statement will be monitored during 2024. ### Fiscal Council - Resourcing and fully operationalizing the Fiscal Council to enable publication of its first public assessment of the government’s fiscal strategy, fiscal rule compliance, debt sustainability, and macro-fiscal projections included in the March 2024 MTFF. - Will support the Fiscal Council in developing communication tools and a memorandum of collaboration with the MOF to clarify separation of functions and information sharing. ### Macro-fiscal Unit - In line with IMF TA recommendations, will formalize a unit at the MOF permanently in charge of macro-fiscal issues by end-December 2023. ### Other key PFM institutional reforms - MOF and the Comptroller’s Office will continue coordination throughout the budget cycle to ensure compliance with the fiscal rule. - Resumed efforts to reduce budget fragmentation following consolidation under the CG budget from 2021 as required by Law 9524 of April 2018. - Plan to consolidate public services within fewer public institutions as part of public sector reform: submitted legislation to consolidate responsibilities within the Ministry of Public Works and Transportation (MOPT), a new Ministry of Housing, and a new Social Ministry. - Restructuring several ministries to strengthen oversight of decentralized entities and eliminating the Ministry of Governance, reallocating some directorates under other public institutions. - Continue improving public sector liquidity management by extending the Treasury Single Account (TSA) to the entire public sector, including decentralized and autonomous entities. - Submitted revised bill No. 22.661 in September 2022 with expected approval by end-December 2023 to require phased transfer of all cash held by decentralized and autonomous entities in commercial bank accounts to the TSA to reduce idle cash and central government borrowing costs. - Additional efficiencies expected from Hacienda Digital (MOF’s digital transformation plan), supported by the WB, to modernize and integrate PFM information systems. ### Public procurement modernization - Enforced use by all procuring entities of the electronic platform Sistema Integrado de Compras Públicas (SICOP) to lower transaction costs and improve capacity and expertise. - Public Procurement Law No. 9986 approved in May 2021 introduced a regulatory and institutional framework for umbrella contracts, eliminated past exceptions, increased competition; entered into force in December 2022. - Regulation published in November 2022 requires bidders’ registration in the ‘Electronic Registry of Official Suppliers and Subcontractors of the Unified Digital System’ incorporated into SICOP. - Regulation requires competing bidders to submit accurate and current beneficial ownership information through affidavits as part of bidding (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 CGR, Office of the Attorney General, or other judicial authority upon request; authorities can cross-check with the Transparency and Final Beneficiary Registry administered by the BCCR (MEFP¶35). - Public Procurement Law updates aim to increase efficiency savings through bulk purchases, differentiate processes and thresholds by public works, goods, and services, and reduce complexity. ### Transparency and oversight of COVID-related spending - Comptroller’s Office developed a Fiscal Transparency Portal for COVID-19 with published information on public purchases and audit results on emergency assistance. - Ministry of Labor and Social Security created a transparency portal on the Bono Proteger program with 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. - Portal publishes awarded vendors and their legal ownership (if tenders required it). - Comptroller’s Office continues audits on emergency cash transfers and publishes them in its Portal. ### SOE governance and financial reporting - Committed to accelerating full adoption of International Financial Reporting Standards (IFRS) by SOEs to improve transparency and reveal potential fiscal risks. - Publication status for 2020 financial statements per IFRS (end-December 2021 structural benchmark): - ICE fully compliant. - AyA became compliant with a delay in June 2022. - CNP continues to work on implementing a new accounting system for FANAL, a very small company under its purview. - Remaining SOEs published their 2020 financial statements per IFRS. - Updated 2021 aggregate report on SOE performance published in February 2022. - With OECD and WB support, SOEs’ public procurement processes are being aligned with SICOP, limiting exceptions and confidential information withholding. ### Electricity sector efficiency and tariff modernization - ICE implementing an efficiency strategy since 2021 to reduce electricity prices through operational cost reductions, debt restructuring, and IFRS implementation. - ICE’s cumulative average price reductions in 2022 compared to December 2020: - 8.8 percent in generation, - 8.0 percent in distribution, - 10.7 percent in transmission. - Government committed to advancing efficiency strategy through further debt restructuring and cost reduction to achieve lower competitive tariffs. - ICE executing a Financial Sustainability Roadmap to reduce fixed costs and renegotiate debt conditions; reclassification of operating leases as finance leases concluded in March 2023 and expected to be reflected in tariffs as of 2024. - ICE will assess cost structure in each electricity supply segment and launch a roadmap with detailed actions to increase efficiency by end-December 2023. - Renewing/renegotiating private generator contracts as they expire to leverage installed capacity and achieve tariff benefits. - Bill No. 22.561 (submitted June 2021) authorizes private energy generators, public companies, and cooperatives to sell surplus energy to the regional market; expected approval by end-July 2023. - ARESEP to expand efforts analyzing tariff competitiveness and adopt a new efficient tariffs benchmark with IDB support. - Three companies (ICE, ESPH and COOPELESCA) started tariff modernization pilot in 2021; remaining five companies started implementation in 2022; ARESEP to work with distribution companies to develop roadmaps for tariff modernization during 2023. - Implementing regulation for Law No. 10086 to simplify administrative procedures for private participation in renewable self-consumption approved in October 2021; officially established in February 2023 (MEFP¶42). - ICE and Costa Rican Chamber of Distributed Generation to simplify interconnection procedures via an internal protocol. - Bill No. 23.414 submitted in October 2022 to promote new technologies and business schemes for public electricity service, optimize infrastructure, promote commercialization of electricity, and integrate public policy for electricity and fuels to accelerate decarbonization. ### Comprehensive debt management reform - Debt Policy for the Public Sector approved in 2019 (Executive Decree 41935-H) establishes guidelines for sustainable public debt. - Eurobond issuance: - Legislative Assembly authorized Ministry of Finance in November 2022 to issue up to US$ 5 billion in Eurobonds. - First issuance since 2019 secured US$ 1.5 billion in March 2023. - Authorization allows up to another US$ 1.5 billion in the second half of 2023, up to US$ 1 billion in 2024, and up to US$ 1 billion in 2025, subject to prudent fiscal targets being met to accelerate debt reduction. - In August 2023, will pursue a constitutional reform to grant the executive greater flexibility in international borrowing. - Institutional debt management reforms: - Submitted amendment to law 8131 to centralize all debt-related functions and establish a standalone Public Debt Management Office reporting directly to the Minister of Finance in May 2023 (an end-June 2023 structural benchmark). - Assets and Liabilities Committee (Treasury, DCP, macro-fiscal unit of MOF, BCCR) will continue providing strategic guidance and inter-agency coordination. - Medium-term debt strategy (MTDS): - Updated MTDS covering 2022-27 published in April 2022, meeting the relevant structural benchmark; report covered contingent liabilities and guarantees to SOEs. - Will publish and adhere to Annual Borrowing Plans and Quarterly Issuance calendars in line with the MTDS and strengthen accounting and budget execution for public debt payments. - Domestic market development: - With WB support, focusing issuance on standard fixed-rate bullet bonds of select maturities; open bond windows and bilateral bond sales being phased out. - Reform auction mechanism for Treasury to become a price-taker and 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. - Legislative Assembly approved in December 2022 a law to promote and open the Costa Rican public debt market to foreign participants by easing regulatory barriers and harmonizing tax treatment. - In consultations with international platforms to allow clearing and settlement of debt securities in accordance with international standards. - Continue active use of liability management operations to reduce rollover risks and smooth impact of maturing benchmark bonds, in line with MTDS. - In December 2022, with IDB support, rolled out a pilot market-making / primary dealer program with a small group of participants with well-defined rights and responsibilities. *1criea2023003 - 15.* ### 21. We stand ready to adopt a sovereign asset and liability management (SALM) at an ### 1criea2023003 - 21. We stand ready to adopt a sovereign asset and liability management (SALM) at an ### Sovereign Asset and Liability Management (SALM) - Agreement to adopt a sovereign asset and liability management (SALM) at an operational level to effectively analyze and manage overall risk exposures. - Commitment to publish the recent Technical Assistance report on SALM to facilitate broader discussion among stakeholders. - Plan to develop a roadmap to implement key recommendations from the report, including: - Broadening data collection on all sovereign assets and liabilities. - Establishing a risk-analyzing framework. ### Fiscal Reporting, Data Quality, and Public Sector Accounting - Commitment to improve timeliness, quality, and comprehensiveness of fiscal, financial and debt accounting for the public sector, with IMF TA support. - Resumed efforts to adopt the GFSM 2014 accrual accounting standards for fiscal and debt information after delays from hacking attacks. - Completed and published 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 90 percent of extrabudgetary units’ spending by end-March 2023. - Intention to compile BCG quarterly debt stocks from the first quarter of 2022 to the third quarter of 2023, including loans and debt securities at nominal value (including accrued interest) according to the GFSM 2014 framework, by end-December 2023. - Progressive extension of institutional coverage of GFS and PSDS to the general government (GG) and its subsectors, targeting: - Compilation and publication of quarterly GG fiscal and debt data for 2022 and 2023 consistent with 2014 GFSM accrual accounting standards by end-March 2024. - Expansion 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 the nonfinancial public corporations. - Development of reporting of fiscal risks (in the context of the MTFF) to include contingent liabilities, guarantees, concession contracts, and the 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 enhanced analysis. - Program coverage and definitions will be updated in line with progress and reflected in the attached TMU. ### Monetary Policy Framework and Recent Actions - Monetary policy anchored in an inflation targeting framework with commitment to low inflation and a flexible exchange rate, consistent with the BCCR’s mandate. - Policy rate history and actions: - Reduced policy rate to a record low of 0.75 percent by June 2020 in response to COVID-19. - Began raising the policy rate in December 2021 as inflation pressures rose. - Accelerated tightening brought the policy rate to 9 percent by October 2022. - Lowered the policy rate by 0.5 percent in March and 1.0 percent in April (year not specified in source). - Minimum legal reserve requirement rate for deposits and obligations in national currency raised from 12 percent to the maximum level of 15 percent in July 2022. - Noted developments: - Decline in global fuel prices and monetary tightening led to steady decline in inflation and inflation expectations since last September. - The outer MPCC band was breached by 2.4 percentage points in December 2022; factors explained in attached letter (Attachment III). - Forward guidance: - Monetary policy will remain data dependent and forward-looking to meet inflation target of 3 percent, with a tolerance band of ±1 percentage point. - Continued monitoring through a MPCC around quarterly targets (Table 1) as described in the attached TMU. - While disinflation could provide scope for further policy rate cuts in 2023, high uncertainty and external risks warrant a cautious approach. ### Exchange Rate Policy, International Reserves, and FX Market Reforms - Exchange rate regime and reserves: - Costa Rica operates a flexible exchange rate regime, intervening only to avoid disorderly market conditions. - Higher FX demands in first half of 2022 caused misses of NIR targets by US$612.2 million (end-June) and US$48.6 million (end-September). - BCCR exceeded end-December 2022 and end-March 2023 NIR targets by US$576 million and US$1511 million, respectively. - Intention to maintain reserves in line with the IMF’s Assessing Reserve Adequacy (ARA) metric and above the net international reserves floor set under the program (Table 1). - The Internal Audit Office of the BCCR will regularly review the NIR and underlying data, and reconcile with audited financial statements as of the end of the fiscal year as needed. - FX market deepening reforms and operational changes: - Since April 2022, NFPS entities must give at least one month advance notice to the BCCR for FX requests to improve visibility on large orders. - BCCR staff recommendations under consideration include reviewing management of foreign exchange needs of the NFPS, potentially requiring FX purchases by NFPS to be pre-announced and gradually eliminating central bank purchases for the NFPS, delegating to state-owned banks as an intermediate step. - Considering separation of BCCR FX operations into: - Reserve accumulation/replenishment via preannounced schedule of daily FX auctions. - Intervention to address market dysfunction via Monex as needed. - Plans to introduce market makers in the spot foreign exchange market with obligations to quote prices based on minimum trading lots and maximum bid/ask spreads; incentives for market maker participation are being defined. - Plan to re-extend Monex’s trading hours gradually to cover heavy trading hours at commercial banks’ windows. - Introduced obligation to adhere to the FX Global Code in December 2022, to be implemented by December 2023. - Plan to revise FX intermediaries’ net open FX position requirements in line with international best practices. - Development of FX derivative market contingent on improved spot market liquidity: - Master agreement for negotiation of FX derivatives to be developed (in coordination with foreign exchange intermediaries) by end-April 2024. - FX swaps will be introduced as an instrument for BCCR participation by end-June 2024. - All reforms to be conducted consistent with Article VIII commitments and The IMF’s Institutional View on Liberalization and Management of Capital Flows. - Reforms complement measures to reduce financial dollarization (MEFP ¶30). ### BCCR Governance, Independence, and Safeguards - 2019 amendments to the BCCR Law improved personal autonomy by tightening dismissal rules for the Governor, delinking Governor’s term from political cycle, and removing Minister of Finance’s voting rights in the BCCR Board. - Draft amendments to the BCCR law, prepared with IMF staff, were submitted to the MOF by end-August 2021 (meeting a structural benchmark) but final amendments were not submitted to the Legislative Assembly by end-December 2022, missing the structural benchmark. - Adjusted implementation process: - In June (year not specified in source), a subset of previously foreseen changes was submitted to the Legislative Assembly. - Submitted to the MOF a proposal to award constitutional autonomy to the BCCR, to be presented to the Legislative Assembly during the ordinary legislative sessions in August-October. - Plan to prepare an assessment plan for remaining amendments in consultation with IMF staff during the next program review to align BCCR governance and operations with Safeguards Assessment recommendations. - Progress on safeguards: - The BCCR has completed nine of the twelve recommendations from the Safeguards Assessment. - Executive Branch will take steps to fill the current vacancy in the BCCR Board after the needed Constitutional Court decision. - Plan to develop a long-term roadmap to strengthen the BCCR’s equity position. ### Financial Sector Policies and Prudential Reforms - Progress and context: - Significant financial sector reforms implemented based on IMF 2018 FSSR, OECD recommendations, and WB FSAP Development Module. - Banking system entered COVID-19 crisis with strong capital and liquidity buffers; high levels of unhedged FX borrowing and indebtedness in household and corporate sectors remain important vulnerabilities. - Banking sector measures: - Transitional loan classification category created on January 1, 2023, to soften risk rating impacts when financial entities modify credit operations (extensions, restructurings, refinancings); measure records historical classification changes for transparency. - New regulation and guidelines for provisioning to be effective January 1, 2024, using updated methodology, risk parameters, credit segmentation, and similar treatment to credit restructurings/extensions/refinancing. - Strengthened reporting and monitoring as laid out in the attached TMU; continued monitoring via the Financial Stability Committee’s (FSC) Monitoring and Coordination Group (MCG). - Technical group supporting the MCG meets frequently to follow key systemic developments and detect sources of stress, including interest rate increases and FX movements. - Continued updates to bottom-up and top-down stress test results with publication in the annual Financial Stability Report. - Work to integrate climate considerations into monetary and financial policies, enhance climate risk management capabilities (including an integrated climate and economic model), and develop stress testing methodologies (MEFP ¶45). - SUGEF is setting up a working group to consider 2022 World Bank Financial Sector Assessment recommendations and to develop a roadmap for implementation. - Measures to reduce financial dollarization: - Since 2018, greater exchange rate flexibility has been allowed to help agents internalize exchange rate risks (MEFP ¶25-26). - FSC closely monitoring dollarization risks; SUGEF and CONASSIF actions include: - Establishing 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 effective January 1, 2023: - Revised definition of an unhedged borrower. - Issued new regulation imposing additional capital requirements on foreign currency loans to unhedged borrowers. - Definition of unhedged borrowers based on whether borrowers currently have a natural hedge or financial hedge covering at least 100 percent of the loan instalment. - Regulation establishes a gradual increase in the risk weight for credits to unhedged borrowers, starting on January 1, 2024, and ending on January 1, 2031; the risk weight applies gradually to both the loan balance by end-December 2023 and to marginal loans from the corresponding effective date. - SUGEF began regularly publishing data on unhedged FX borrowing since March 2023. - Strengthening prudential regulatory and supervisory regime: - 2019 reforms to consolidated banking supervision and securities market regulation (Law no. 9768) strengthened supervisors’ powers, including sanctioning. - Implementing consolidated supervision: - May 2022: CONASSIF approved regulation to strengthen governance of supervised financial entities, holding companies, and affiliated companies; took effect January 1, 2023, with transition arrangements. - September 2022: CONASSIF introduced regulations to implement consolidated supervision, update solvency and capital requirements for financial groups, phased from January 1, 2023. - Phasing in risk-based supervision and Basel III adoption in a phased manner: - SUGEF enhancing liquidity risk management; net stable funding ratio expected with transitional arrangements from January 1, 2024. - New provisioning regulation and guidelines finalized November 2021, effective January 1, 2024. - Revised banks’ capital definition, established conservation and systemic importance capital buffers, and definition of systemically important institutions in line with Basel III; regulation issued August 2021, to come into effect January 1, 2025. - Financial entities required to assess operational and financial impacts and send results to SUGEF quarterly, starting in the last quarter of 2022. - Continued strengthening toward fully risk-based supervision, broadening risk assessment beyond specific business lines and adding specialized expertise. - Strengthening supervisors’ legal powers and protection: - Intended legislative reforms to grant CONASSIF, SUGEF and other Superintendencies powers to: - Dismiss members of Boards and senior management for unsafe and unsound practices. - Impose additional capital requirements under Pillar II on individual banks. - Ease legal conditions for exercise of supervisory powers and establish separate appeal procedures for serious supervisory measures and intervention/resolution decisions (annulment could only result in monetary indemnification, not reversal of legal effects). - Plan to recalibrate sanctioning framework and strengthen legal protection for supervisors regarding coverage of legal costs and protection against good faith errors. - Aim to finalize by end-August 2023 a road map on necessary steps to take these reforms forward. - Cyber risk preparedness: - With IMF TA support, draft regulations prepared to address governance and risk management of cyber risk, including information sharing, incident reporting and testing frameworks, third-party risks, and response/recovery from cyber incidents. - Draft reviewed by IMF TA mission in April; regulations expected to be approved in January 2024. *Source: Excerpt from PDF chapter/section 1criea2023003 - 21. We stand ready to adopt a sovereign asset and liability management (SALM) at an* ### 32. We will continue to strengthen our financial safety net by enhancing our banking ### 32. We will continue to strengthen our financial safety net by enhancing our banking ### Banking resolution, deposit guarantee, and crisis preparedness - Legislative approval: law on banking resolution and creation of a deposit guarantee fund (DGF) (law no. 9816) approved by the Legislative Assembly in February 2020. - Implementing regulations effective since May 2021; quarterly payments into the DGF started in October 2021. - May 2023: CONASSIF approved the regulation on recovery and resolution plans, which establishes a period of 12 months, at SUGEF’s request, to present the recovery plan and the report to support the resolution plan. - Ongoing IMF TA-supported reforms: strengthen legal framework on bank resolution and deposit insurance, including: - adequate institutional arrangements for the DGF and the resolution authority; - sufficient resolution powers; - clear resolution triggers; - strengthening the legal regime for resolution and recovery plans. - Draft amendments: finalizing draft amendments to Law 9816 and other relevant laws, in coordination with CONASSIF and the BCCR. - Consultation with industry and stakeholders completed; plan to submit proposed amendments to the national supervisory council for approval by end-September 2023. - Structural benchmark: submit final legal amendments, once approved by the MOF and the President of the Republic, to the Legislative Assembly by end-December 2023. - Macro-financial surveillance and contingency measures: - continuous monitoring of macro-financial risks by the MCG (MEFP ¶29), including an updated early warnings system; - updated contingency plan for episodes of financial stress, with inclusion of a communications protocol; - BCCR enhancements: recent enhancement of its Lender of Last Resort mechanism. - Emergency liquidity facility: BCCR increased the tenure of the emergency liquidity facility from 24 hours to 84 days. ### Level playing field between public and private banks; competition measures - Policy objective: level the playing field between public and private banks to foster competition. - Identified distortions and regulatory asymmetries that hamper private- and state-owned banks. - Planned legislative measures to remove asymmetries: - (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 the requirement on state-owned financial institutions to comply with public procurement requirements; - (iii) gradually phase out the requirement for private banks, which have not opened agencies or branches in certain areas listed in the law, to transfer a part of their short-term deposits as a loan to state-owned banks (the peaje). - Parallel actions: identify alternative ways to channel resources to underserved sectors, limiting any fiscal contingent liabilities. - Timeline: develop a first legislative draft by end-October 2023. - Single Treasury Account: asymmetry from requirement for NFPS to do their banking with state-owned banks to be corrected with approval of legislation on the Single Treasury Account (MEFP ¶15). - Deposit guarantees: as the deposit guarantee covering the entire banking sector becomes fully effective, explore options to gradually phase out the existing blanket guarantee for state-owned banks. - Market information to foster competition: BCCR and MEIC launched a database comparing credit products across the financial system to enhance information for financial consumers and foster bank competition. ### Financial inclusion and digitalization - Pandemic-induced shifts: sharp increase in electronic transactions and allocation of Bono Proteger led to significant increase in bancarization and financial inclusion. - Structural constraints: limited banking competition and partial coverage of the credit registry push up lending rates and hinder financial inclusion. - Financial education: MEIC developed and started implementing a national strategy for financial education in coordination with the BCCR, CONASSIF, and the Superintendencies (in line with IMF’s FSSR recommendations). - Broaden payment system access and digital banking: - simplified requirements for opening a bank account; - launched an electronic payment system for public transport nationwide. - Public credit registry (Centro de Información Crediticia, CIC): committed to improving design and scope. - Deliverable: develop a plan covering technical design, a legal feasibility study for implementation and the corresponding draft bill by July 2023, to build a modern credit registry with information from supervised financial entities and non-supervised credit providers. - Financial consumer protection: CONASSIF and the four Superintendencies finalized draft legislation, currently under MEIC review before submission to the Legislative Assembly. - Fintech support: with IDB support, CONASSIF, BCCR and the Superintendencies inaugurated in April 2022 a Financial Innovation Center to support fintech startups and advise on fintech regulation. - Regulatory balance: commit to ensuring regulations strike a good balance between fostering innovation and protecting financial stability. ### AML/CFT strengthening and beneficial ownership transparency - FATF/GAFILAT compliance: - Application to GAFILAT for re-rating of four FATF recommendations (8, 17, 22, and 28) discussed at the GAFILAT Plenary Meeting in December 2022; all ratings were maintained or postponed until the next Plenary in July 2023. - Six other recommendations re-evaluated due to changes in the FATF standard: five were maintained; Recommendation 15 on new technologies was downgraded from Compliant to Non-Compliant. - Published the 7th Enhanced Follow-Up Report in January 2023. - Draft amendment law to subject virtual assets (VAs) and virtual asset service providers (VASPs) to AML/CFT supervision by SUGEF presented to the Legislative Assembly for consultation in October 2022 and currently under review. - Regulatory and supervisory enhancements: - CONASSIF approved regulations to make sanctioning framework more effective, proportionate and dissuasive; incorporate new regulated subjects; and adopt a new regulatory and legal framework related to beneficial ownership, including revised SUGEF Regulation 12-21 of September 2020. - CONASSIF 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. - CICAC (Centro de Información Conozca a su Cliente): - SUGEF regulation 35-21 approved January 2021 establishing CICAC as a centralized repository of customer information; effective January 2022. - All regulated entities required to ask for customer authorization to record their information in CICAC as of July 2022. - Approval of proposed amendment regulations to require upload of all customers’ information to CICAC expected to come into force in June 2023. - DNFBPs and registrations: - More than 5,000 legal entities and individuals are registered in SUGEF; as of December 2022 they are required to upload information to CICAC to register. - Technology developed to enable financial institutions’ legal entity clients to share beneficial ownership information provided to the centralized Transparency and Beneficial Ownership Register with CICAC. - Regulation allows SUGEF to “suspend” registration of entities/individuals that do not comply; as of March 2023, 620 registered legal persons and natural persons have been suspended. - Transparency and Beneficial Ownership Registry (BCCR): - Created in 2019 under Law 9416 and Decree No. 41040-H; started collecting shareholder and beneficial ownership information for all legal entities except trusts, third-party resource managers and non-profit organizations. - Registry accessible to the MOF and the Costa Rican Institute on Drugs. - As of October 2021, trusts have been included. - For non-profit organizations, the application form will be ready in August 2023 and its registry will be at the request of the MOF and the Costa Rican Institute on Drugs. - Ongoing commitment: CONASSIF and the Financial Intelligence Unit will continue to dedicate resources to AML/CFT supervision and collaboration between competent authorities and carry out inspections with the required frequency. ### Structural reforms to boost productivity and inclusive, green growth (selected measures linked to financial system) - OECD accession: Costa Rica became an OECD member in May 2021 after introducing 14 legal and administrative reforms. - Growth strategy objectives: (i) protect the most vulnerable and support inclusion including promoting female labor force participation; (ii) boost productivity growth by eliminating barriers to business formalization, investment, and job creation; (iii) promote a green recovery anchored by the National Decarbonization Plan and goal of becoming a zero net emission economy by 2050. - Formalization measures: - CCSS plans since 2017 to reduce social security contributions for populations with high informality. - 2020: CCSS created mechanism to provide coverage for coffee harvest workers changing tripartite to two-party contributions (state and ICAFE) eliminating employees’ contributions. - June 2022: CCSS Board formulated plan to adjust minimum contribution base (MCB) for part-time workers; final plan approved in September 2022. - Phased implementation of reduced MCB: 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. - Since May 2022, independent workers can contribute voluntarily to health and pension scheme for 6 months if income is below the MCB; thereafter, contributions become automatically mandatory. - Reduction in number of minimum wages across private sector job categories: from 26 to 16 over last four years and further reduced to 11 by end-May 2023. - Education and skills to boost productivity: - Roadmap for Education (Ruta de la Educación 2022-2026) launched February 2023; implementation progress report due May 2024. - Internal reorganization and decentralization plan for Ministry of Public Education by end-December 2024. - Guidelines for teachers on curricula competencies due end-December 2023 for: i) citizenship; ii) life; iii) employability and entrepreneurship. - Mandatory that all children in first grade know how to read and write to enter the next school year as of February 2023. - ABC Mouse and My Math Academy accelerators available for teachers as of August 2023. - Teachers’ performance-based evaluation model preliminary proposal milestones: define desired profile by end-December 2023; support teachers to identify real profile by end-July 2024; provide courses and support materials during 2024; evaluate teachers based on desired profiles in 2025. - Standardized digital test (Prueba Nacional Estandarizada) administered starting April 2023; students tested again in November 2023. - Agile Evaluation System (SEA) to replace registration systems to be assessed by end-January 2024. - Plan to provide internet and increase connectivity speed in about 2,500 centers by end of 2024. - Infrastructure and school support: build three educational centers in indigenous territories; launch plan by end-2024 to build and provide maintenance to 528 schools with sanitary orders. - School food and transport: food provision to nearly 28,000 new students in low-income areas; 24,000 poor students living far from education centers to start receiving school transportation during the 2023 school year. - Bilingualism Education Policy introduced February 2021 with Action Plan to improve second language proficiency by 2040. - Vocational curricula for four technical careers in context of Industry 4.0 to be implemented by end-December 2024; 24 new study programs already offered, 8 more by end-2023. - Investment climate and PPPs: - CABEI and IDB support for PPPs to reduce infrastructure gaps consistent with fiscal consolidation plans. - IDB-supported Program of Road Infrastructure and Promotion of PPPs and PPP training during 2022-2024. - February 2023: methodological guide to evaluate PPP appropriateness issued. - Identified PPP-capable projects including a new airport and highways. - National Telecommunications Plan 2022-2027 launched December 2022 to promote competition and 5G tender process in 2023; Law N° 10216 and derived regulations expected by end-December 2023. - Program Le Dejamos Trabajar: eliminated 132 obstacles for businesses by end-March 2023. - Costa Rica Fluye commitments implemented with 11 public institutions for 21 regulatory enhancements. - Single-window system (VUI) implemented in 42 local governments; simplify 125 procedures across public sector to start a business and centralize procedures by end-September 2023. - September 2022: issued 11 decrees to eliminate minimum fees in 10 professional associations; bill No. 23.357 submitted to eliminate mandatory fees for all 10 associations. - New bankruptcy law (Ley 9957) implementation expedited with necessary regulation to be approved by end-December 2023. - March 2023: amended Development Banking System Regulations to ease financing for entrepreneurs in rural areas, women, youth, vulnerable populations and SMEs; halved time to formalize guarantees. - Approved a regulation to promote investment in the renewable energy sector (MEFP ¶42). *Source: 1criea2023003 - 32. We will continue to strengthen our financial safety net by enhancing our banking* ### 38. As part of our efforts to promote inclusive growth, we continue to focus on increasing ### 1criea2023003 - 38. As part of our efforts to promote inclusive growth, we continue to focus on increasing ### Promoting female labor force participation - Objective: strengthen female labor force participation, which is "considerably lower than for men," despite women having better educational outcomes. - Policy instrument: Gender Parity Initiative (IPG), launched in September 2020 with support from the IDB, WB, and AFD. - Implementation horizon: over a minimum period of three years. - Measures: regulatory changes, awareness-raising initiatives, public and private sector involvement. - Complementary agenda: advancing gender budgeting to support IPG and other initiatives to reduce the gender economic gap (MEFP ¶15). ### Workplace discrimination and sexual harassment - Actions: - Certification program for gender equality in private companies and the public sector is ongoing. - Appointment of Ministry of Labor and Social Security inspectors in each region to monitor and sanction gender discrimination, including pay gaps, in private companies. - Gender focus inspections conducted in the first two months of the year across agriculture, commerce, industry, services and transportation sectors. - Infractions issued for gender discrimination, wage differentials, and lack of breastfeeding rooms; labor judges receiving training. - Strategy to combat sexual harassment launched in November 2022 (Decree 43771-MSP-MTSS-MCM): - Provides emotional and legal support to victims. - Increases resources for first-response centers. - Develops early warning devices to prevent harassment in public transportation. - Implements a broad communication campaign. ### Childcare expansion and measures - Fiscal and service milestones: - 2018 fiscal reform expanded public education definition to include early education centers to reallocate funds to public childcare. - Childcare services increased by 15,000 additional children (relative to 2017) in 2021, focusing on children up to 5 years old. - Target: reach about 64,700 children below 12 by end-2023 (a four percent increase relative to pre-pandemic levels). - Quality and governance: - Review completed of existing childcare supply, standardizing costing framework and basic certification. - Governance review of childcare network Red de Cuido to propose changes to increase coverage and improve services. - Labor leave reforms (Public Employment Bill, MEFP ¶13): - Introduced one month of paternity leave for public sector workers. - Two-month extension of maternity leave (in specific cases). - Paid leave to take care of a family member. ### Long-term care (SINCA and related measures) - Institutional creation and timeline: - SINCA (Sistema Nacional de Cuidados y Apoyos para personas adultas y personas adultas mayores en situación de dependencia) created in March 2022 (Law No. 10192). - SINCA regulation to be issued by end-July 2023 to implement governance established in the law. - Five-pillar progressive implementation: governance; data intelligence; strengthening care supply and benefits; closing gender gaps in labor markets; quality assurance. - Coordination and tools: - With IDB support, plan to make mandatory allocation of benefits through the tool baremo by August 2023 to unify access to long-term care. - Baremo to be integrated into SINIRUBE to identify dependent population and supply of national care services. - Coverage and targets: - Aim for 4,000 vulnerable caregivers (according to the baremo) to receive long-term care support by end-December 2026 (1,000 per year). - Effective May 2023, implementing a cash transfer (“cash for care”) to 3,000 households with a female head living in impoverished conditions and headed by a severely dependent person. - Quality, training, and service supply: - Ministry of Health to design accreditation standards for long-term care home services. - INA updating training and providing training in long-term caregivers’ services, with IDB support. - INA developing, with IDB support, a pilot mobile application to connect care providers with demand. - Development of a pilot of home care services (Cuidadores a domicilio) and a methodology to quantify cost of a minimum set of care services (Canasta de dependencia). ### Education, entrepreneurship, and financial inclusion for women - Entrepreneurship and financing: - Plan to boost regional FOMUJERES program, financing women-owned businesses and supporting formalization; implementation planned to start in July 2023. - Objective: make entrepreneurship more user-friendly for women; provide technical assistance and financing during planning and development phases. - Institutional support to develop a special financing program for vulnerable women via INAMU, Banco Popular and FODEMIPYME; MEIC and INAMU to amend regulations of Law 8262 to facilitate access to comprehensive financial services. - Pilot programs completed (state institutions, public banks, private entities) financed by CAF to strengthen financial inclusion and women’s empowerment by designing financial products based on women’s needs. - INAMU to launch a roadmap to guide women from entrepreneurship to export stage by end-October 2023. - STEAM and vocational training: - 2022: incorporated all regions into STEAM education strategy; 56 new public institutions added in 2022 to the 166 public educational institutions already implementing the STEAM strategy. - Plan to incorporate 27 new public institutions in 2023 to reach a total of 249 public institutions implementing the STEAM strategy. - National action plan for gender equality in scientific and technological fields to strengthen female labor force participation and productivity growth. - New scholarship program being developed to promote STEAM careers by reformulating incentives through INA’s Rompiendo moldes. - INA dual education program to create new alliances with 32 companies as of 2023. - INA revamping 46 percent of outdated technical programs to modernize 3,734 educational services, including STEAM. ### Adapting to climate change, decarbonization, and green growth - Strategic priorities: - (i) Adapting to climate change with emphasis on crisis preparedness, climate-resilient infrastructure, agriculture and agroindustry. - (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 climate costs within budget envelope. - Institutional readiness and governance: - MINAE has overall responsibility for climate change issues. - Bill 23.213 submitted June 2022 to integrate relevant decentralized bodies into MINAE; legislative committee approved in February 2023; expected approval in July 2023. - MINAE produced National Adaptation Plan and National Decarbonization Plan with MIDEPLAN and other ministries. - National Commission of Risk Prevention and Emergencies (CNE) coordinates disaster management. - MINAE’s National Directorate of Climate Change oversees Carbon Neutrality Country Program (PPCN 2.0). - Commitment to a data-driven, inclusive update of NDCs and long-term climate action plans; launch of National Development Plan for the environmental sector in October 2022. - BCCR is part of NGFS and established Group for Strategic Analysis of Climate Change (GAECC) to coordinate efforts to green the monetary and financial sector (MEFP ¶48). - Adaptation and disaster risk management: - National Adaptation Plan (NAP) launched April 2022 setting milestones for 2022-2026. - With WB support, strengthening National System for Disaster Risk Management, decentralizing and increasing access to early warning, preparedness, and response services, including coastal areas. - Business continuity policies to be in place in all providers of public services by August 2023. - Climate risk maps developed for extreme hydrometeorological events for 23 cantons; expect to cover all remaining cantons by end-June 2024. - Current spatial planning: 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 yet incorporate climate change considerations. - MIVAH and MINAE to develop and publish guidelines for including climate change considerations in Regulatory Plans by end-February 2024 (RSF reform measure); implementation to begin for all new urban and coastal regulatory plans and gradual adjustment of existing ones. - New insurance scheme introduced in 2019 to insure agricultural harvests against climate risks with lower premia for producers implementing adaptation measures. - Climate-resilient infrastructure and public investment management: - Roadmap to enhance infrastructure resilience developed in September 2022 (structural benchmark) to guide technical planning, assess medium-term investment needs and costs, and identify financing options. - Commitment to explore new green finance opportunities (MEFP ¶46) and improve public investment efficiency. - Strengthening institutional capacity to plan and manage green and resilient investment projects, building on PIMA recommendations and IMF TA. - Decree N°42465- MOPT-MINAE-MIVAH (2020) on incorporation of resilience measures in infrastructure. - With WB support, updating methodological guidelines for preparing and appraising public investment projects to incorporate exposure and resilience principles. - Planned publication of guidelines to expand project appraisal to assess the impact of projects on climate change through the social cost of carbon by end-September 2023 (RSF reform measure). - Development, with IDB and a private company, of a methodology to score and prioritize capital projects; pilot to be followed by publication of guidelines setting clear and transparent project selection criteria including climate change criteria for SNIP entities by end-December 2023 (RSF reform measure). - Emphasis on a more efficient and proactive approach to capital maintenance to strengthen infrastructure resilience. - With GIZ support, produced Methodology for the Evaluation of Climatic Risks in the Public Infrastructure of Costa Rica (MERCI); guidelines issued to assess needs and allocate resources to routine and capital repairs. - With CABEI and the WB, starting to strengthen infrastructure under imminent threat from natural disasters and identifying other infrastructure at risk. *Source: 1criea2023003 - 38. As part of our efforts to promote inclusive growth, we continue to focus on increasing (PDF chapter).* ### 42. We are strongly committed to promoting environmentally sustainable growth by ### 42. We are strongly committed to promoting environmentally sustainable growth by ### National Decarbonization Plan — targets and overall positioning - 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. - The Plan is assessed to be consistent with limiting global warming to 1.5°C, in line with the Paris Agreement. - Almost 100 percent of the electricity matrix currently sourced from renewables. ### Electrification of transport - Legislative Assembly approved a bill to extend tax incentives for electric vehicles to 2034. - Feebate scheme under development: - Sliding scale of fees on vehicles with above-average emission rates and sliding scale of rebates to light-duty private passenger vehicles with below-average emission rates. - Levied at the time of purchase or import of new or used vehicles that are up to 5 years old. - Design aim: revenue-neutral, with safeguards to reduce risks of revenue loss. - IMF TA will support completion of technical design. - Bill on the feebate scheme to be submitted to the Legislative Assembly by end-September 2023 (RSF reform measure). - Review of existing tax incentives with a negative effect on the environment to be appraised and published by end-February 2024 (RSF reform measure). - Public transport electrification measures: - New promotional electric tariffs for charging centers for electric buses to be incorporated into tariff schedules. - With IDB support, 55 fast charging centers installed nationwide by end-December 2022. - Scheme for new buses to follow National Decarbonization Plan and National Electric Transportation Plan; expected to take effect in September, 2023. - Plan to analyze self-sustainable financing options to electrify public transport buses and launch plan by end-March 2024. - Public transport sectorization plan (cost-efficient route redesign, electronic payment, integration of the urban train) to be launched by end-May 2024. ### Renewable energy policy and market reforms - Implementing regulation of Law No. 10086 published in February 2023 (RSF reform measure) to simplify administrative procedures for private participation in renewable power generation for self-consumption. - Regulation provisions: - Define responsibilities for safe and reliable interconnection of the electricity grid. - Authorize sale of energy surpluses and encourage use of price signals or time-differentiated tariffs. - Declare activities such as energy storage and electric vehicle charging as "services of general interest". - Complementary actions completed: - Costa Rican Institute of Electricity enacted tariff reductions by reducing operational costs, restructuring debt, and implementing IFRS. - ARESEP reduced electricity prices charged by other generators beyond ICE with IDB support via new tariff methodologies. - Measures to remove barriers to foreign participation in the energy sector under legislative consideration (MEFP ¶19). - Legal framework development: - Bill to allow private sector use of low-enthalpy geothermal energy in industrial processes, agriculture, and tourism to be submitted to the Legislative Assembly in December 2023. ### Agriculture and forestry — mitigation, adaptation, and PES scaling - GIZ support to promote resilient and low-carbon technologies, agricultural research, and financing instruments for farmers. - Scaling up nationally appropriate mitigation actions (NAMAs) for coffee, livestock, rice, sugarcane, and bananas with IDB, AFD, and GIZ-EU support and private-sector participation. - Scaling up entails sectoral capacity stocktake, mitigation scenarios and targets, operationalization through financing and innovation, and monitoring. - Advanced pilot in the rice sector; sugar pilot started. - Assessment of scaling-up costs and identification of suitable financing for priority sectors completed by end-March 2023. - Refinement of payment for ecosystems schemes to cover agriculture, livestock, and forestry with WB and Global Environmental Facility support; PSA 2.0 directive to be published in July 2023. - 2022 National Development and Investment Plan envisages additional training and land coverage; initiatives to promote job creation including in the wood industry. ### Marine ecosystems and blue economy - Exceeded goal to protect 30 percent of marine territory under conservation schemes by end-December 2022. - Decree 43368-MINAE (December 2021) expanded protection of Cocos Island National Park and Montes Submarinos Marine Area. - Regional strategy to establish a transboundary biosphere reserve connecting Cocos Island (Costa Rica), Galapagos (Ecuador), Malpelo (Colombia), and Coiba (Panama); technical papers ready and interim governance structures established; aim to file the application in March 2024. - Pilots to strengthen wetlands and mangroves with donor support; exploring payment for environmental services model extension to marine sectors (starting with fisheries) with WB support. ### Environmental trade and branding - Negotiating Agreement on Climate Change, Trade and Sustainability (ACCTS) with Fiji, Iceland, New Zealand, Norway, and Switzerland to: - Work towards eliminating tariffs on environmental goods trade, barriers to environmental services trade, and environment-damaging subsidies and commitments. - Roadmap to publish sustainable agro-landscapes strategy by June 2023 with IDB support; strategy will position agro products as sustainable and carbon neutral under a unified brand (Essential Costa Rica). - MINAE supporting Ministry of Foreign Trade in negotiations with trading partners. ### Transition mitigation strategy, modeling, and jobs - Territorial Economic Strategy for an Inclusive and Decarbonized Economy 2020-2050 issued in March 2021: - 12 development poles, six corridors, and 12,750 km2 of territorial management areas. - Policy measures on economic growth, social inclusion, human capital, gender, infrastructure and connectivity, and natural capital. - Fifty priority actions including expanding early English education and training programs on the green and blue economy. - Modeling (IDB and UN support) estimates National Decarbonization Plan economic benefits of US$41 billion in net present value terms and a net positive effect on jobs by 2050. - ILO-supported pilot study on new green and blue jobs on the North East coast: - Found women’s jobs tend to be more green and more blue than men’s, but women expected to account for a minority of new green and blue jobs. - Identified a growing gap between demand for jobs and graduates; policy work to promote enrollment, especially by women. - 2022 National Development and Investment Plan includes a pilot program to help women transition to a green urban economy. - Decree and accompanying strategy to promote gender equality in climate action issued in May 2023 with UN support. - AFD-supported analytical work on technical profiles for new green and blue jobs to be completed by end-September 2023; incorporation into just transition strategy expected in 2024. - Promotion of electricity and biomethane (produced from agricultural waste) as substitutes for bunker oil, LPG, and diesel. - Long-term green hydrogen strategy to be published in September 2023. ### Integrating climate risks into fiscal planning and budgeting - May 2022 approval of the functional budget classification system aligned with the 2014 IMF Government Finance Statistics Manual and international concepts for climate change and disaster risk expenditure. - Methodology for tagging climate-related expenditure developed with IDB and AFD; MOF published guidelines for climate budget tagging in January 2023 (RSF reform measure). - Capacities to be enhanced and financial management information systems modified to operationalize the new classification for the 2025 budget. - National Strategy for Financial Management of Disaster Risks published in September 2022: - Quantifies financial losses and identifies 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 publish an implementation plan to select optimal instrument combinations by end-June 2023. - National Development and Investment Plan target to increase emergency funds to 0.25 percent of GDP; seeking funding sources and conducting actuarial valuation with WB support. - Disaster Risk Management Policy Loan with Catastrophe Drawdown Option signed with WB in March 2023. - Inclusion of a preliminary introduction to transition risks in the September 2023 Medium-Term Fiscal Framework with IMF assistance. - Publication of a quantitative analysis of climate transition fiscal risks associated with the National Decarbonization Strategy planned for November 2023 (proposed revised RSF reform measure). - Integration of those findings into the risk analysis of the April 2024 Medium-Term Fiscal Framework. ### Financial sector: governance, data, modeling, and regulation - BCCR joined the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) in 2019. - BCCR established the Group for Strategic Analysis of Climate Change (GAECC) to address climate impacts and risks to central bank objectives; GAECC coordinates with CONASSIF and Superintendencies. - BCCR roadmap to integrate climate change into monetary, financial, and macro-prudential policies centered on four blocks: - (i) establishing reliable and comparable data and identifying systematic data gaps; - (ii) strengthening modeling and analytical capacity for scenario analysis; - (iii) promoting climate change risk management in the financial system; - (iv) greening international reserves. - Data and modeling actions: - BCCR compiled and published Material Flow Accounts for 2014-2019 and Environmental Protection Expenditure Accounts for the private sector for 2018-2020. - BCCR creating a data repository 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. - Completed RSF reform measure of creating a data repository covering 35 percent of the credit portfolio. - With IDB support, developed an integrated economic and environmental model to conduct impact analysis of climate and environmental policies. - Aim to advance climate scenario analysis combined with mitigation and adaptation policies by end-December 2024. - Climate change risk management and stress testing: - BCCR assessing interlinkages between climate-related and macro-financial variables and financial system risks. - Guided by NGFS recommendations for “top-down” stress-testing methodologies. - Plan to expand data repository coverage to map transmission channels of climate-related shocks and improve stress testing methodologies. - Incorporate climate effects on the banking sector (focused on physical risks) in a “top-down” stress test by end-February 2024 (RSF reform measure). - Aim to include preliminary information on the new stress test methodology in the Financial Stability Report in May 2024. - Plan to publish climate stress test results in future Financial Stability Reports and use outcomes to support macro- and micro-prudential policy design. - SUGEF started pilot work, supported by GIZ, to develop methodological guidelines and identify risk exposure in one bank. - Greening international reserves: - BCCR published a final selection of indicators of the “greenness” of reserve holdings in its 2022 Annual Report (published in April 2023) (RSF reform measure). - Indicators used to increase investment limits for issuers with best environmental performance via a “best in class strategy” while preserving capital preservation, liquidity, and return objectives. - 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 (RSF reform measure); draft to be sent for consultation in June 2023. - Regulation aims to require banks to: establish policies and processes to manage such risks; incorporate them into decision-making; specify Board and senior management roles; cover main risk areas (including physical and transition risks); classify credit operations according to socioenvironmental and climate change risk assessment; and impose disclosure requirements. - Strengthening of internal training for supervisors and compliance processes planned. - Future steps envisaged as information collection and taxonomies develop, including potential establishment of capital and liquidity requirements and requirements for market risk, operational risk, and other material climate-related risks. *Source: 1criea2023003 - 42. We are strongly committed to promoting environmentally sustainable growth by* ### 46. We are taking further steps to develop green financing. Our overall reform agenda, ### 46. We are taking further steps to develop green financing. Our overall reform agenda, ### Enabling reform agenda and sectors with FDI potential - Overall reform agenda elements that create an enabling environment for green public and private financing: - fiscal consolidation to reduce debt; - PFM reforms to improve monitoring, transparency, and accountability of green public investment projects; - enhanced financial sector risk management; - efforts to develop deeper and more open capital markets for foreign investors. - A study conducted with the support of GIZ identified activities with particular potential to attract foreign direct green investments: components for green hydrogen (¶43), green data centers for digitization, and development of materials from waste recovery. - FDI in these sectors will be supported by the overall agenda to improve the investment climate (¶37). ### Specific policy measures and regulatory actions to attract green financing - Legislative and regulatory milestones: - The Legislative Assembly approved in October 2021 Law 10051 to Promote Financing and Investment for Sustainable Development, through the use of Thematic Public Offering Securities, to promote such financing for investment in activities aimed at achieving the national goals for a sustainable development and a green economy. - CONASSIF approved updates to a series of associated regulations in May 2022 according to which supervised entities are: - (i) required to incorporate the sustainable or responsible component in their investment policies; - (ii) required to incorporate ESG risk management into their risk management framework; - (iii) allowed to issue ESG bonds; and - (iv) recommended to include voluntary disclosures on their ESG actions in their annual reports. - The first two of these measures were approved with a transitional period that ends in December 2023. - Green taxonomy and technical assistance: - CONASSIF and the Superintendencies formed a working group to develop a single green taxonomy for the financial sector. - Initial technical assistance from the WB provided general guidelines for a new taxonomy. - Authorities, including MINAE, are starting a two year project supported by the Green Climate Fund, with the United Nations Environment Programme as delivery partner, to create the taxonomy. ### Green sovereign and sub-sovereign bond strategy - Sovereign positioning and market instruments: - Sovereign bonds are already included in indices that recognize Costa Rica’s green credentials. - Authorities, together with advisors assisting planned Eurobond placements, are exploring recognition as an Environmental Social Governance (ESG) sovereign to catalyze further financing from private investors by leveraging ambitious climate actions. - Possible instruments under consideration include issuance of sustainability-linked Eurobonds (SLBs) or ESG bonds referencing key performance indicators related to forestry coverage, ecological integrity, and biodiversity. - Institutional arrangements to support issuance: - To support extensive monitoring and reporting requirements associated with such issuances, internal collaboration between ministries is being strengthened through a new interagency committee to facilitate collaboration between: - the Debt Management Office; - the relevant units in the MOF; - MINAE; and - other line ministries whose inputs are required for issuance. - Beyond the central government, the Costa Rican Institute for Electricity is exploring the issuance of a second sustainable bond with WB assistance. ### PPPs and fiscal risk management for green investments - PPPs as a financing vehicle: - Authorities are exploring the option of PPPs to finance green investments. - Steps to strengthen the institutional PPP framework include improving capacity for project selection and management of fiscal risks. - Measures include thorough analysis of contingent liabilities from PPPs through a centralized database, supported by WB and IMF technical assistance. ### Program risks and contingency stance - Principal external and domestic downside risks (program text ¶47): - Intensified regional conflicts and resulting further supply disruptions; - renewed global financial market turmoil and tightening in global financial conditions; - a greater-than-expected global downturn; - exposure to natural disasters, which continues to pose important risks and is likely to increase over time. - Potential macro-fiscal implications if risks materialize: - further slowdown in domestic activity; - increased domestic financial vulnerabilities; - weaker-than-expected revenue performance impacting fiscal consolidation strategy; - renewed concerns about debt sustainability. - Policy stance if risks materialize or the outlook improves: - government stands ready to adjust promptly its policies, in close consultation with IMF staff, if downside risks materialize; - on the upside, authorities stand ready to accelerate the adjustment and reform process should domestic or external developments support stronger economic performance. ### Monitoring, timelines, and reform measures relevant to greening and resilience - Program monitoring and review dates: - Progress is monitored through semi-annual reviews, performance criteria (PCs), indicative targets (ITs), structural benchmarks (SBs), and Reform Measures (RMs). - The fifth and sixth reviews will take place on or after October 15, 2023, and March 15, 2024, respectively. - Selected Reform Measures under the Resilience and Sustainability Facility Arrangement (Table 3) with climate and green-financing relevance (exact titles and dates preserved): - RM1. Ministry of Finance to develop and publish guidelines for climate budget tagging. — End-February 2023 — Fourth EFF Review — Completed - RM5. Ministry of Finance to publish a quantitative analysis of climate transition fiscal risks. — End-November 2023 — Fifth EFF Review — Proposed revision. Currently, “Ministry of Finance to expand the quantitative climate fiscal risk analysis in the Medium-Term Fiscal Framework to include climate transition risks.” - 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. — End-September 2023 — Fifth EFF Review — Ongoing - RM9. MIDEPLAN to publish guidelines on project selection criteria including a range of climate change criteria for SNIP entities. — End-December 2023 — Sixth EFF Review — Ongoing - RM10. MIVAH, in collaboration with MINAE, to develop and publish guidelines for including climate change analysis in Regulatory Plans. — End-February 2024 — Sixth EFF Review — Ongoing - 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. — End-February 2023 — Fourth EFF Review — Completed - RM4. BCCR to publish indicators of the “greenness” of its reserve holdings in its 2022 Annual Report. — End-February 2023 — Fourth EFF Review — Completed - RM8. CONASSIF to approve regulation on management of socioenvironmental risks and climate change risks in the credit portfolio. — End-September 2023 — Fifth EFF Review — Ongoing - 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. — End-February 2024 — Sixth EFF Review — Ongoing *Source: 1criea2023003 - 46. We are taking further steps to develop green financing. Our overall reform agenda,* ### 7. The performance criterion on the central government cash primary balance will have one ### 1criea2023003 - 7. The performance criterion on the central government cash primary balance will have one ### Performance criterion on the central government cash primary balance - The floor on the 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 (examples: transfers to the health system; transfers for targeted support to families, workers, and firms heavily affected by the pandemic; 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 MOF). - The adjustor is capped at CRC 95 billion for 2023 (about 0.2 percent of GDP) cumulatively. ### Performance criterion on Net Official International Reserves (Program NIR) - Program NIR definition: U.S. dollar value of (a) Gross international reserves of the BCCR minus (b) Gross reserve-related liabilities of the BCCR. - (a) Gross international reserves include: monetary gold; foreign exchange balances (foreign currency cash, deposits with foreign correspondents, and holding of foreign securities); the reserve position at the IMF; SDR holdings. - Excluded from gross foreign reserve assets: participation in international financial institutions; holdings of nonconvertible currencies; holdings of precious metals other than monetary gold; claims on residents (e.g., statutory reserves on foreign currency deposits of commercial banks and central bank foreign currency deposits with resident commercial banks); pledged, non-liquid, collateralized or otherwise encumbered foreign assets; and claims in foreign exchange arising from derivative transactions (such as futures, forwards, swaps and options). - (b) Gross reserve-related liabilities include: all short-term liabilities to nonresidents denominated in convertible foreign currencies with an original maturity of one year or less; all short-term liabilities to residents denominated in convertible foreign currencies; the stock of IMF credit outstanding; the nominal value of all short-term derivative positions (including swaps, options, forwards, and futures) implying a sale of foreign currency or other reserve assets. - Excluded from these liabilities: foreign exchange liabilities to the general government or related to deposit guarantees. - 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; cumulative flows are calculated with Program NIR at test dates and the end of the previous year evaluated at the program exchange rates and gold price specified in paragraph 4. - Adjustment rule for foreign financing and asset commercialization (paragraph 9): - If the sum of (i) foreign program financing by the central government and the BCCR net of IMF purchases (GRA and RST resources) and all debt service; (ii) external commercial borrowing by the central government net of debt service; (iii) project loans and grants disbursed to the central government net of debt service; (iv) foreign exchange-denominated domestic debt issued by the central government net of debt service; and (v) proceeds from commercialization of public assets to non-residents — as set out in Table 1 of the MEFP — are higher/lower in U.S. dollar terms than assumed under the program, the floor on the program NIR will be adjusted upward/downward by the cumulative differences on the test date. - Proceeds from commercialization of public assets are 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). - These adjustors apply to the NIR floor for end-July 2021 and thereafter. - Adjustment rule for official external debt service (paragraph 10): - If the sum of amortization of official external debt and interest payments on official external debt by the central government or the BCCR in U.S. dollar terms — as set out in Table 1 of the MEFP — is higher/lower than assumed under the program, the floor on the program NIR will be adjusted downward/upward by the cumulative differences on the test date. - Official external debt refers to external debt owed to multilateral and official bilateral creditors, as defined in the 2013 External Debt Statistics: Guide for Compilers and Users. - These adjustors apply to the NIR floor for end-July 2021 and thereafter. ### Continuous performance criterion on new external payment arrears - A continuous performance criterion prohibits the accumulation of new external payments arrears on external debt contracted or guaranteed by the nonfinancial public sector and the BCCR. - Definition of nonfinancial public sector: follows the 1986 Government Finance Statistics Manual and the 2008 System of National Accounts; 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: debt-service obligations (principal and interest) to nonresidents falling due after the date of Board approval of the arrangement that have not been paid at the time they are due, as specified in contractual agreements, subject to any applicable grace period. - Exceptions/exclusions: - Overdue debt and debt service obligations that are in dispute by the authorities with respect to their 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 debt under this PC. ### Monetary policy consultation clause - Inflation measurement for test dates: year-on-year inflation as measured by the headline Consumers Price Index (CPI) published by the National Institute of Statistics and Census (INEC), computed as: - {CPI*(t) – CPI*(t-12)} / CPI*(t-12)*100 - where CPI*(t) = { CPI(t-2) + CPI(t-1) + CPI(t) } / 3 and CPI*(t-12) = { CPI(t-14) + CPI(t-13) + CPI(t-12) } / 3. - Consultation triggers: - If observed year-on-year inflation falls outside the outer band limits of +/- 3 percentage points around the targets (specified in Table 1 attached to the MEFP) for the relevant semi-annual test dates, the authorities will complete a consultation with the IMF Executive Board. The consultation focuses on (i) the stance of monetary policy and whether the Fund-supported program remains on track; (ii) reasons for deviations from the specified band, taking into account compensating factors; and (iii) proposed remedial actions, as deemed necessary. - When 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 the reasons for the deviation and the proposed policy response. ### Indicative target on debt stock of the central government - Definition of “debt”: as in the Guidelines on Public Debt Conditionality in IMF Arrangements, Decision No. 15688-(14/107): a current (i.e., not contingent) liability created under a contractual arrangement through provision of value in the form of assets (including currency) or services, requiring the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s); payments discharge principal and/or interest. - Forms of debt include: loans, debt securities, bonds, commercial loans, buyers’ credits, and off-budget project loans. - Conversion rules: - 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. - The performance criterion on debt stock of the central government will have one adjustor for 2023: - The ceiling on debt stock of the central government will be adjusted upward by the full amount of any increase in COVID-19 emergency spending compared to budgeted amounts (examples: transfers to the health system; transfers for targeted support to families, workers, and firms heavily affected by the pandemic; 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 - General: Costa Rica shall provide the Fund, through reports at intervals or dates requested by the Fund, with such information as the Fund requests in connection with progress in achieving the objectives and policies set forth in the MEFP and Letters of Intent. Program monitoring data will be provided by the MOF, IMAS, FODESAF, BCCR, and SUGEF. - Fiscal monitoring data formats: Tables 2, 3, and 4. - Data on the cash primary balance of the central government: monthly, no later than three weeks after the end of the month to which the cash balance is calculated. - 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 and monetary data: - Data relating to the external targets (Table 5) and monetary consultation band: furnished within no more than three weeks after the end of each month. - Official reserve assets (Table 6): furnished within one week after the end of each week. - Social spending data: - Data regarding the level of social safety net spending (program spending only, not including wages and salaries and administrative costs of relevant agencies; see Table 7): quarterly, 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 (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 will not be published except in aggregate form. *Source: 1criea2023003 - 7. The performance criterion on the central government cash primary balance will have one* ### 1. Non-contributory pensions and healthcare ### 1. Non-contributory pensions and healthcare ### Non contributory pensiones regime (RNC) - Program title listed: "Non contributory pensiones regime (RNC)". ### Targeted social assistance programs - Conditional cash transfer programs: - "Conditional cash transfer Crecemos" - "Conditional cash transfer Avancemos" - Poverty reduction and income support: - "Basic needs (Atención a Familias)" - "Family allowance (Asignación Familiar)" - "Emergencies" - "Fishing subsidies (Veda)" - Childcare: - "Childcare transfer" - "Childcare transfer CIDAI" - "Childcare services (API intramuros)" - School programs: - "School lunch program" - "School transportation" - "Social scholarship program" - Housing subsidies: - "Housing improvement" - "Housing grants" - Food security and nutrition programs: - "Prestación alimentaria" - Active labor market programs: - "Employment National Program (PRONAE)" - "Small enterprises' support program (PRONAMYPE)" - "Productive ideas" - "Training aid" - "Training voucher program" - Other targeted programs: - "Subsidies for elderly persons" - "Subsidies for persons with disabilities" - "Subsidies for violence female victims" - "Subsidies for teenage mothers" ### Capital transfers to social assistance programs - "Community infrastructure and socio-productive projects" - Aggregate line: "TOTAL" ### Missed Inflation Target Under the Monetary Policy Consultation Clause (MPCC) — Attachment III - In December 2022 and March 2023, inflation stood at 7.9 and 4.4 percent (y-o-y), respectively. - The upper outer band limit agreed in the MPCC and defined in the TMU was breached by 2.4 percentage points (p.p) in December, and the upper inner band limit was breached by 1.4 p.p. in March. ### A. Inflation Trajectory - The increase in inflation began in the second half of 2021, manifesting more strongly in 2022, especially since the second quarter, reaching 12.1 percent in August, compared to 3.3 percent in December 2021. - During February 2022-March 2023, inflation stayed above the BCCR’s tolerance band (2-4 percent), and during May 2022-February 2023 it was above the upper outer and limit established in the MPCC. - The inflation shock from the second half of 2021 and the first three quarters of 2022 has been rapidly dissipating across headline inflation, core inflation, imported inputs, and inflation expectations. - During the first quarter of 2023, both headline and core inflation kept their downward trend. In April, headline inflation at 2.4 percent and core inflation at 3.4 percent returned within the BCCR’s tolerance band. - External factors aiding the reduction in local inflation include the decline in transportation costs, the continued normalization of supply chains, and the reduction in the price of raw materials, as evidenced by downward trends in food and fuel prices in the international market. - The Producer Price Index (IPP-MAN) decelerated since the second half of 2022, with a year-on-year average variation of 4.3 percent in the first quarter of 2023. - Internal factors contributing to the fall in inflation since September 2022 include the cumulative effect of monetary policy measures and the appreciation of the colón. - Monetary policy actions have contributed to reduce aggregate demand pressures and contain second-round inflationary effects. ### B. Policy Response - From December 2021 until October 2022 the Central Bank of Costa Rica increased its monetary policy rate by 825 basis points to 9 percent. - In July 2022 the BCCR raised the minimum legal reserve requirements rate for deposits and obligations in national currency from 12 percent to 15 percent. - The BCCR reduced its policy rate by 50 basis points (bps) in March and an additional 100 bps in April, moving to a less restrictive stance. - The BCCR board indicated the fast decrease in the inflation rate, continued decrease in inflation expectations, and base effects from the 2022 shock make it very likely that inflation will go below the BCCR’s tolerance band in the next two quarters; once base effects dissipate, inflation is likely to increase again to above the lower limit of the tolerance band by the end of 2023. - The monetary policy stance needs to remain restrictive given an upward balance of risks. - The Central Bank commits to continuous monitoring of macroeconomic indicators and will maintain a data-dependent and forward-looking stance to achieve the long-term inflation target of 3 percent. ### C. Inflation Projections - BCCR models project continued reduction of inflation during 2023. - Projections of headline inflation for the next two quarters will reflect base effects due to the 2022 shock, most likely leading to values below the lower limit of the BCCR’s tolerance band. - Models expect inflation to return within the tolerance band towards the end of 2023 and remain within that range through the rest of the projection horizon. - The BCCR will adjust policy stance as new information and forecasts become available. - Upward risks to inflation include higher prices of raw materials in international markets and depreciation pressures on the exchange rate motivated by faster than expected increases in external interest rates. - Downside risks include slow growth in main trading partners and international food and oil prices lower than baseline expectations. ### Statements and Recent Data - Statement by the Staff Representative on Costa Rica, June 20, 2023: - The Central Bank of Costa Rica lowered the policy interest rate by 50 basis points to 7 percent on June 14. The decision came amid a further decline of headline inflation to 0.9 percent y-o-y in May. - Statement by Mr. Guerra and Ms. Lankester Campos, Executive Board Meeting, June 26, 2023: - Authorities noted strong program performance: fiscal consolidation overperformed targets; Central Bank actions countered inflation and rebuilt reserve buffers; targets on the primary balance, government debt, and net international reserves (NIR) were met with large margins. - All performance criteria (PC) and indicative targets (IT) were met; all reform measures (RMs) of the RSF expected for its first review were implemented. - Authorities highlighted use of Fund technical assistance and collaborative work with the World Bank and Interamerican Development Bank. - Actions to establish a project preparation facility to identify and prepare a pipeline of bankable climate projects are being taken. ### Economic Outlook - Growth history and short-term outlook: - 2021 growth rebounded to 7.8 percent. - 2022 growth outturn was 3.7 percent. - First quarter of 2023 growth was 3.9 percent. - In April 2023 the monthly index of economic activity was 4.9 percent y-o-y. - BCCR forecasts real GDP growth of 3.3 and 3.6 percent for 2023 and 2024, respectively. - Labor market: - Unemployment rate peaked at 24.4 percent and decreased to 9.7 percent when considering the quarters of February, March, and April 2023 (13.3 percent for the same period in 2022), below pre-pandemic levels (12.2) and past average levels (9.9 percent from 2010 until 2019). - The 9.7 percent result is the lowest in the last 54 months. ### Monetary policy (additional details) - By mid-2022 inflation reached 10.1 percent. - From December 2021 (0.75 percent) until October 2022 (9.0 percent), the policy rate was increased by 825 b.p. - Annual inflation peaked at 12.13 percent in August 2022. - In March 2023 the BCCR lowered its policy rate by 50 bp; subsequent reductions occurred in April (100 bp) and June (50 bp), bringing the policy rate to 7 percent. - In May 2023 annual inflation was 0.9 percent and the core component was 2.5 percent. - The 12-month inflation expectation reached 4.0 percent in May (9.5 percent in August 2022) on average, while the 24-month expectation was 3.7 percent after six consecutive months of being at 4.0 percent. - Liquidity has been ample due mainly to foreign currency purchases by the BCCR. During the first four months of 2023, the BCCR bought US$2,751 million as administrator of the NFPS’s needs and to restitute reserves. - The increased FX supply translated into an appreciation of the nominal exchange rate, which accumulated for April at 8.4 percent and 18.1 percent y-o-y. - By end-May gross international reserves were US$11,023 million. ### Fiscal policy (additional details) - The fiscal reform approved by end-2018 comprised income and expenditure measures and a fiscal rule limiting expenditure growth in accordance with debt level intervals. - Fiscal consolidation has overperformed government and EFF program targets. - 2022 fiscal performance: - Primary balance: 2.1 percent of GDP (-0.3 percent in 2021). - Financial deficit: 2.5 percent of GDP (5 percent in 2021). - Total income: 16.6 percent of GDP, 0.8 percent more than same period last year. - Tax revenue: 14.3 percent of GDP. - Debt to GDP ratio: 63.8 percent. - Preliminary April 2023 figures: - Accumulated primary balance: 1.0 percent of GDP. - Financial deficit: 0.7 percent of GDP. - Authorities are on track to exceed their 2023 primary surplus target of 1.3 percent of GDP. - Public finances expected to register positive primary results of 1.6 and 1.8 percent for 2023 and 2024, respectively, and financial deficits of 3.5 and *Source: 1criea2023003 - 1. Non-contributory pensions and healthcare* ### 3.0 percent of GDP. To maintain these positive results, the Finance Ministry ́s strategic proposal for ### 1criea2023003 - 3.0 percent of GDP. To maintain these positive results, the Finance Ministry ́s strategic proposal for ### Fiscal strategy and decision-making pillars - The Finance Ministry’s strategic proposal focuses on three main pillars: control and reduction of public expenditure, a more equal and effective tax system, and a long run financial strategy. - Medium-term fiscal framework and debt strategy: - A Medium-Term Fiscal Framework (MTFF) for the entire Non-Financial Public Sector was approved and published for 2023-2026. - A Medium-Term Debt Strategy was approved for 2023-2026. - Institutional strengthening: - A macro fiscal unit is being formalized within the Ministry of Finance. - The Fiscal Council is being operationalized. ### Structural reforms to promote inclusive, green, and sustainable growth - Overall objectives: - Advance reforms aligned with OECD accession measures (which introduced 14 landmark legal amendments). - Align public governance and policies with international best practices to foster transparency, efficiency, and growth while reducing inequality and protecting the most vulnerable. - Promote greater female labor force participation, boost productivity growth, and eliminate barriers to business formalization, investment, and job creation. - Specific initiatives and progress: - Gender budgeting: an action plan to operationalize gender budgeting; pilot completed in December 2022. - Centralization and digitalization of the payment system for all cash transfer social assistance programs (proposed structural benchmark to produce a single window). - Execution of gender-related spending will be monitored during 2024 as part of initiatives to reduce the gender economic gap. - Reforms planned to public procurement, modernization of the tax and customs administration, and public financial management reforms. ### Public Employment Bill (PEB) — single wage spine reform - Purpose and design: - The PEB, a structural benchmark under the program, aims to improve efficiency and equity in the public sector by modernizing and streamlining public administration while containing the wage bill. - Creates a single wage spine across the public sector, eliminating salary components such as bonuses and annuities. - Timeline and implementation status: - Approved in March 2022. - Entered into force in March 2023. - Implementation delays due to methodological complexities and incomplete wage data resulting from a cyberattack on the Ministry of Finance. - Corrective actions and milestones: - With IMF TA support, authorities established a strict schedule to bring implementation back on track. - The Ministry of National Planning and Economic Policy (MIDEPLAN) produced a single wage spine in compliance with the PEB covering at least one-quarter of job positions in the executive branch (prior action for this review). - MIDEPLAN committed to incorporate 90 percent of the executive branch’s job positions by end-September 2023. - The ministry will begin administering payments for all employees covered by the law in line with transitional provisions by November 2023. ### Central Bank (BCCR) governance and independence efforts - Reforms since 2019: - 2019 amendments 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 on the BCCR Board. - Follow-up work with IMF legal experts after the IMF’s 2020 Safeguards Assessment. - Legislative engagement and timing: - The final draft of additional amendments was not submitted to the Legislative Assembly by end-December 2022, missing the structural benchmark. - Authorities judged that given political risks, global turmoil, and intentions from some parliamentarians to change the BCCR’s main objective, the downward risks outweighed benefits of submitting an integral reform then. - Current approach: - BCCR submitted to the Legislative Assembly a project to amend some articles of its law (a subset of foreseen changes) focusing on transparency, autonomy, and accountability practices, without involving the main objectives and functions. - In parallel, the BCCR drafted a law project to award constitutional autonomy to the BCCR, to be submitted in the following months. ### Resilience and Sustainability Facility (RSF) — climate and financial resilience agenda - Rationale: - Costa Rica remains exposed to higher temperatures, rising sea levels, and more frequent and severe droughts, storms, and floods; adaptation and decarbonization plans entail significant costs within a tight spending envelope. - The RSF aims to unlock critical resources to support these plans. - Four reform priorities under the RSF: - (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. - First RSF review outcomes (all scheduled reform measures completed): - Ministry of Finance published guidelines for budget tagging and is developing information systems to operationalize it. - Government approved implementation of regulations aligned with global best practices to facilitate private-sector participation in renewable energy for self-consumption. - BCCR’s Group for Strategic Analysis of Climate Change (GAECC) established a data repository on climate hazards and vulnerabilities. - Superintendency of Financial Entities included granular data on banks’ exposure to vulnerable industries and regions, covering 35 percent of the banking system’s credit portfolio. - BCCR published indicators of the “greenness” of reserve holdings while maintaining objectives on capital preservation, liquidity, and rate of return. - Forward plans: - Authorities will continue climate-related reforms, build on the RSF’s catalyzing effect, and continue work with the World Bank and other IFIs. - The facility will support issuance of securities focused on sustainability. - Authorities view resilience and decarbonization efforts as financially costly but likely to generate new and sustainable business and growth opportunities. *Source: 1criea2023003 - 3.0 percent of GDP. To maintain these positive results, the Finance Ministry ́s strategic proposal for* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1criea2023003.pdf_