## 1criea2023005

## Source details

**Canonical URL:** [1criea2023005](https://www.imf.org/-/media/files/publications/cr/2023/english/1criea2023005.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2023/english/1criea2023005.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2023/english/1criea2023005.pdf.json)

---

### Program context and implementation
- Arrangement size and timing:
  - 554.1 million (150 percent of quota in the IMF or about US$ 725 million 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.
  - Costa Rican Legislative Assembly ratified the RSF on October 17, 2023, enabling requests for disbursements upon completion of assessments.
- Performance overview:
  - Performance under the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF) arrangements remains strong.
  - All quantitative performance criteria have been met for this review; June Indicative Target on public debt was exceeded as the government built liquidity buffers.
  - All reform measures for this RSF arrangement review have been completed (RM5, RM6, RM7, RM8 completed for this review).
  - Public Employment Bill fully implemented across the executive branch; central bank governance and autonomy reform has stalled due to lack of societal consensus.
- Financing and capacity to repay:
  - Program remains fully financed with firm commitments over next 12 months and good prospects thereafter.
  - Outstanding Fund credit peaks in 2024 at: 2.7 percent of GDP; 7.1 percent of exports; or 522.5 percent of quota (372.5 percent of quota without RSF financing).
  - Staff supports disbursement of SDR 206.23 million under the EFF and SDR 369.4 million under the RSF based on completed RMs.

### Macroeconomic outlook and recent developments
- Growth and output:
  - Real GDP growth expected to reach around 5 percent this year.
  - Growth expected to moderate to 3½ percent in 2024 and converge to about 3¼ percent thereafter.
  - Real GDP grew by 5.3 percent in the first three quarters of 2023, up from 4.6 percent in 2022.
  - Real GDP (annual percentage change): 2019 2.4; 2020 -4.3; 2021 7.9; 2022 4.6; 2023 5.1; 2024 3.5; 2025–2028 3.3 each year.
- Inflation and exchange rate:
  - Headline inflation negative as global commodity prices fell and stronger colón reduced goods prices.
  - Inflation: peak 12.1 percent one year earlier; -3.3 percent (y-o-y) in August 2023; -1.3 percent as of October 2023.
  - Core inflation: 0.5 percent y-o-y in October 2023.
  - Inflation expected to rise back within BCCR’s tolerance band by mid-2024; staff baseline suggests return to neutral policy by mid-2024 supports convergence.
  - Colón stabilized near historical average in real effective terms.
- External and financial buffers:
  - Gross international reserves reached US$11.5 billion by October 2023 (118.2 percent of IMF’s ARA metric) and were on an upward path.
  - Banking sector metrics: NPL ratio low at 2 percent; capital and liquidity metrics comfortable; provisioning adequate.
  - Dollarization remains high; de-dollarization progress noted but deposit-dollarization remains elevated.
- Selected projections and key series (exact figures preserved in source tables):
  - GDP deflator (annual %): 2019 2.6; 2020 0.8; 2021 2.4; 2022 6.3; 2023 1.0; 2024 2.9; 2025–2028 3.2 each year.
  - Consumer prices (period average, annual %): 2019 2.1; 2020 0.7; 2021 1.7; 2022 8.3; 2023 0.7; 2024 1.9; 2025–2028 3.0 each year.
  - Gross international reserves (US$ millions): 2019 8,937; 2020 7,232; 2021 6,921; 2022 8,724; 2023 11,944; 2024 11,693; 2025 12,015; 2026 12,746; 2027 13,319; 2028 14,006.

### Fiscal performance and public finances
- Recent outcomes:
  - Cumulative primary surplus to September 2023 was 1.7 percent of 2023 GDP.
  - All performance criteria (PCs) were met; primary fiscal balance and NIR targets met with large margins.
  - June and September ITs met except June debt IT breached by 0.3 percent of GDP as authorities rebuilt liquidity buffers.
  - Interest costs remain high (around one-third of fiscal revenue).
  - In November, government issued a 31-year Eurobond of US$1.5 billion.
- Fiscal balances and debt (central government, percent of GDP series preserved):
  - Central government primary balance: 2019 -2.6; 2020 -3.7; 2021 -0.3; 2022 2.1; 2023 1.5; 2024 1.9; 2025–2028 2.0 each year.
  - Central government overall balance: 2019 -6.7; 2020 -8.4; 2021 -5.1; 2022 -2.8; 2023 -3.3; 2024 -3.0; 2025 -2.6; 2026 -2.3; 2027 -2.1; 2028 -1.9.
  - Central government debt (percent of GDP): 2019 64.5; 2020 66.9; 2021 67.6; 2022 63.0; 2023 60.8; 2024 60.2; 2025 59.2; 2026 58.0; 2027 56.6; 2028 55.1.
- Financing and medium-term outlook:
  - Staff projects primary surplus of 1.5 percent of GDP in 2023 and around 2 percent of GDP over the medium term.
  - Gross financing needs projected around 9 percent of GDP in 2023-24, falling to 7 percent by 2028.
  - Debt projected to fall below 60 percent of GDP by end-2025 and below 50 percent of GDP before 2035 under baseline.

### Revenue policy, tax administration, and fiscal measures
- Revenue dynamics and policy priorities:
  - Revenue growth weakening as benefits from higher inflation reverse.
  - Ongoing spending restraint enforced by fiscal rule remains central.
  - Passage of income and value added tax bills recommended to improve equity and efficiency.
  - Proposals: dual personal income tax reform (bill 23.760); broaden CIT base; abolish income tax exemptions (aguinaldo and salario escolar noted cost 0.4 percent of GDP per year); eliminate ineffective VAT exemptions (bill 23.763); strengthen automatic exchange of tax information (bill 23.088).
  - Recent legislative actions reduced revenues by an estimated 0.1 percent of GDP per year (Law 10.381; Law 10.390), incorporated in staff baseline.
- Tax and customs administration:
  - Tax Compliance Improvement Plan in place; IT improvements and information sharing increased.
  - From September-2022 to November-2023, risk assessments recouped approximately US$ 38.5 million in owed taxes.
  - Customs: New Customs Law approved May 2022; implementing regulation approved June 2023; operational measures to curb smuggling and evasion underway.

### Monetary policy, FX market, and macro-financial framework
- Monetary policy stance:
  - BCCR raised policy rate to 9 percent then cut by 275 basis points; staff recommends return to neutral stance by mid-2024 (ex ante real rate around 1 percent).
  - Policy to remain data-dependent, forward-looking, and allow flexible exchange rate response.
- FX market functioning and interventions:
  - Recommend allowing exchange rate to respond flexibly; targeted FX interventions appropriate only for large shocks.
  - FX market structural reforms: revisit macroprudential requirements, introduce market makers, extend MONEX trading hours, develop FX derivatives, align timing of BCCR FX purchases on behalf of NFPS with sales of FX to these entities.
  - BCCR accounted for 68 percent of MONEX turnover in first ten months of 2023, of which 52 percent were FX transactions on behalf of NFPS (footnote).
  - Gross international reserves: 2019 8,937; 2020 7,232; 2021 6,921; 2022 8,724; 2023 11,944 (tables provide detailed series with and without RSF).
- Macroprudential measures:
  - Measures adopted: capital requirements for FX loans to unhedged borrowers; generic provisions to unhedged FX loans; LCR by currency; limits on FX NOP.
  - Provisioning and capital requirements: phased increase to 150 percent by 2031; generic provision introduced in 2016 to be phased out by January 2024.
  - Supervisory actions: dynamic provisioning reactivated; strengthened top-down stress testing; enhancements to oversight and climate risk incorporation.

### Financial sector stability, resolution, and competition
- Soundness indicators (selected):
  - Risk-adjusted capital ratio: Dec 2021 16.8; Dec 2022 16.7; Sep 2023 17.5.
  - Nonperforming loans to total loans: Dec 2021 2.0; Dec 2022 2.1; Sep 2023 2.4.
  - Loan loss provisions to total loans: Dec 2021 2.8; Dec 2022 3.3; Sep 2023 3.5.
  - Liquid assets to total short-term liabilities: Dec 2021 102.7; Dec 2022 98.6; Sep 2023 96.8.
- Resolution framework and deposit insurance:
  - Law on banking resolution and DGF (law no. 9816) approved Feb 2020; implementing regulations in effect since May 2021; quarterly DGF payments started Oct 2021.
  - Draft amendments to bolster resolution powers to be submitted to Legislative Assembly by end-December 2023 (SB).
- Level playing field and competition:
  - Recommendations to remove parafiscal contributions of state-owned banks, replace with dividend transfers, and discontinue peaje requirement on private banks.
  - Promote competition, transparency, and regulatory neutrality between public and private banks.

### Structural reforms, inclusion, and labor markets
- Public Employment Bill (PEB):
  - PEB approved March 2022; single pay spine implemented for executive branch by early-September 2023.
  - PEB mechanics: freeze wages above spine until spine reaches them; gradual transition expected to generate savings.
  - Implementation: 100 percent of executive branch job positions incorporated in single wage spine in early-September 2023; payroll system Integra updated November 2023.
- Labor market and inclusion:
  - Poverty declined somewhat in 2023 due to lower inflation, stronger labor market, and better targeting of benefits.
  - Unemployment rate series: 2019 12.4; 2020 20.0; 2021 13.7; 2022 11.7; 2023 8.1; 2024 8.7; 2025 9.3; 2026–2028 9.3 each year.
  - Female labor force participation and migrant integration highlighted as priorities to broaden employment and equity.
  - Foreign-born employees account for 11 percent of labor force; staff estimates foreign-born labor contributed around 6.5 percent of GDP during 2017-21.
- Education and skills:
  - High education spending but mediocre learning outcomes; Roadmap for Education proposes curriculum reform, testing improvements, universal K-12 meals and transport, expanded internet access.
  - Vocational training and alignment of higher education curricula with labor market needs are priorities.

### Climate agenda, RSF-supported reforms, and green finance
- RSF reform measures completed or on track (selected):
  - RM1: climate budget tagging guidelines published (End-February 2023) — completed.
  - RM5: quantitative analysis of climate transition fiscal risks (End-November 2023) — completed.
  - RM6: guidelines to expand project appraisal using social cost of carbon (End-September 2023) — completed.
  - RM7: feebate bill for vehicles submitted to Legislative Assembly (End-September 2023) — completed.
  - RM8: regulation on socioenvironmental and climate-change risks in credit portfolios approved (End-September 2023) — completed.
  - RM12: methodology for climate stress testing (End-February 2024) — proposed modification due to legal constraints on data access; staff supports unchanged access level.
- National Decarbonization Plan and targets:
  - Net absolute maximum of 9.11 million tons CO2e by 2030; zero net emissions by 2050.
  - Transport accounts for 43 percent of emissions (2020); agriculture 21 percent; industrial processes 9.6 percent.
- Green transition costs and financing:
  - Building charging network, EV incentives, and revenue loss from fuels estimated to cost around 2.4 percent of GDP over next 30 years (IMF CD estimates).
  - Authorities exploring sustainability-linked or Use of Resources Eurobonds with UNDP support and a Project Preparation Facility with IDB to pipeline sustainable projects.
  - Greening reserves: BCCR published indicators of the “greenness” of reserve holdings (End-February 2023).

### Risks, stress scenarios, and policy priorities
- Key risks highlighted:
  - Domestic: stalled central bank governance/autonomy reforms; political fragmentation delaying reforms; El Niño and natural disasters.
  - External: lower U.S. growth, tightening global financial conditions, commodity price increases, abrupt global slowdown.
  - Financial: high dollarization, shallow FX market, large unhedged FX liabilities (about 60 percent of USD loans to unhedged borrowers; unhedged FX loans ~10 percent of GDP).
  - Contingent liabilities: disputed CCSS claim about 6 percent of GDP.
- Probabilities and stress impacts:
  - Probability of economic contraction in 2024 around 5 percent.
  - Financial tightening in the U.S. could reduce mode of growth distribution by 0.3 percentage points and reduce 10th percentile by 1.5 percentage points.
- Staff and Directors’ policy guidance (priorities):
  - Continue fiscal prudence and spending restraint while protecting social assistance.
  - Pass income and VAT bills; broaden CIT base; abolish exemptions (aguinaldo and salario escolar).
  - Return monetary policy to neutral by mid-2024; allow flexible exchange rate; restrain frequent FX interventions and improve transparency.
  - Deepen FX market functioning: revisit FX NOP limits, introduce market makers, extend MONEX hours, develop FX derivatives, align NFPS FX operations with market transactions.
  - Institutionalize BCCR governance and autonomy, follow up on unaddressed 2020 Safeguards Assessment recommendations (constitutional autonomy pursued when political context allows).
  - Advance inclusion: boost female labor force participation, integrate migrants into formal market, improve digital connectivity, reduce electricity costs, and improve educational outcomes.
  - Advance climate fiscal and regulatory measures: publish climate impact guidelines for public projects, introduce feebate scheme, expand climate transition fiscal risk analysis, evaluate climate-related credit risks.

### Selected headline indicators and projections (exact figures preserved)
- Real GDP (annual % change): 2019 2.4; 2020 -4.3; 2021 7.9; 2022 4.6; 2023 5.1; 2024 3.5; 2025–2028 3.3 each year.
- Central government primary balance (percent of GDP): 2019 -2.6; 2020 -3.7; 2021 -0.3; 2022 2.1; 2023 1.5; 2024 1.5; 2025 1.9; 2026 1.9; 2027 2.0; 2028 2.0; 2029 2.0; 2030 2.0.
- Central government debt (percent of GDP) — consolidated projections (selected): 2022 63.0; 2023 62.4; 2024 60.8; 2025 61.4; 2026 60.2; 2027 59.2; 2028 58.0; 2029 56.6; 2030 55.1.
- Gross international reserves (US$ millions, with RSF in some tables): 2019 8,937; 2020 7,232; 2021 6,921; 2022 8,724; 2023 10,541; 2024 11,944; 2025 11,205; 2026 11,693; 2027 12,015; 2028 12,746; 2029 13,319; 2030 14,006.
- Current account balance (percent of GDP): 2019 -1.3; 2020 -1.0; 2021 -2.5; 2022 -3.6; 2023 -2.3; 2024 -2.1; 2025 -1.9; 2026 -1.7; 2027 -1.6; 2028 -1.5.
- Unemployment rate (percent): 2019 12.4; 2020 20.0; 2021 13.7; 2022 11.7; 2023 8.1; 2024 8.7; 2025 9.3; 2026–2028 9.3 each year.

*Source: IMF staff report (COSTA RICA — STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION, FIFTH REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, SECOND REVIEW UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY AND REQUEST FOR MODIFICATION OF REFORM MEASURE), December 6, 2023.*

### 554.1 million (150 percent of quota in the IMF or about US$ 725 million at the time of approval

### 1criea2023005 - 554.1 million (150 percent of quota in the IMF or about US$ 725 million at the time of approval

### Program context and implementation
- Arrangement size and timing:
  - 554.1 million (150 percent of quota in the IMF or about US$ 725 million 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.
  - Costa Rican Legislative Assembly ratified the RSF on October 17, 2023, enabling requests for disbursements upon completion of assessments.
- Performance overview:
  - Performance under the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF) arrangements remains strong.
  - All quantitative performance criteria have been met for this review, although the June Indicative Target on public debt was exceeded as the government built liquidity buffers.
  - All reform measures for this RSF arrangement review have been completed.
  - The Public Employment Bill has been fully implemented across the executive branch.
  - Critical central bank governance and autonomy reform has stalled due to lack of societal consensus.

### Macroeconomic outlook and recent developments
- Growth and output:
  - Real GDP growth is expected to reach around 5 percent this year.
  - Growth is expected to moderate to 3½ percent in 2024, broadly in line with the medium-term potential growth rate.
  - Real GDP grew by 5.3 percent in the first three quarters of 2023, up from 4.6 percent in 2022.
  - Real GDP (annual percentage change) series:
    - 2019: 2.4
    - 2020: -4.3
    - 2021: 7.9
    - 2022: 4.6
    - 2023: 5.1
    - 2024: 3.5
    - 2025–2028: 3.3 each year
- Inflation and exchange rate:
  - Headline inflation has been negative as global commodity prices fell and a stronger currency reduced goods prices.
  - Inflation fell to -3.3 percent (y-o-y) in August 2023 from a peak of 12.1 percent one year earlier, then picked up to -1.3 percent as of October 2023.
  - Core inflation was 0.5 percent y-o-y in October 2023.
  - Inflation is expected to rise back within the Central Bank of Costa Rica (BCCR)’s tolerance band by mid-2024.
  - The value of the colón has stabilized near its historical average in real effective terms.
- External and financial buffers:
  - Gross international reserves reached US$11.5 billion by October 2023 (118.2 percent of the IMF’s Assessing Reserve Adequacy metric) and were on an upward path.
  - Banking sector: capital and liquidity metrics are comfortable; provisioning is adequate; NPL ratio remains low at 2 percent.
  - Dollarization remains high.
- Public finances and debt:
  - Ratio of gross debt-to-GDP has continued to decline despite efforts to build liquidity buffers.
  - Staff projects a primary surplus of 1.5 percent of GDP this year and of around 2 percent of GDP over the medium term.
  - Central government primary balance (percent of GDP): 2019 -2.6; 2020 -3.7; 2021 -0.3; 2022 2.1; 2023 1.5; 2024 1.9; 2025–2028 2.0 each year.
  - Central government overall balance (percent of GDP): 2019 -6.7; 2020 -8.4; 2021 -5.1; 2022 -2.8; 2023 -3.3; 2024 -3.0; 2025 -2.6; 2026 -2.3; 2027 -2.1; 2028 -1.9.
  - Central government debt (percent of GDP): 2019 64.5; 2020 66.9; 2021 67.6; 2022 63.0; 2023 60.8; 2024 60.2; 2025 59.2; 2026 58.0; 2027 56.6; 2028 55.1.

### Executive Board and staff recommendations
- Monetary policy and FX market:
  - The central bank should return to a neutral stance by mid-2024; the BCCR has appropriately lowered the policy rate and should continue to do so to ensure inflation converges decisively to the target.
  - The exchange rate should be allowed to respond flexibly to market conditions.
  - A more flexible exchange rate and greater transparency in central bank FX operations would allow monetary policy to have its full effect on activity and inflation and would incentivize deepening of the FX market.
  - Further institutional and technical reforms should target improving functioning of the FX market and strengthening market participants’ ability to manage currency risks.
  - Encouraged improvements to the central bank’s governance and autonomy, including through legislation, and follow up on unaddressed recommendations from the 2020 Safeguards Assessment.
- Fiscal policy and revenue:
  - Ongoing spending restraint should continue to reduce the debt and interest burden.
  - Passage of the income and value added tax bills would improve the equity and efficiency of the tax system and raise revenues eroded by recent reforms.
  - Broadening the CIT base and abolishing income tax exemptions would further reduce debt faster and create space for spending to improve public services.
  - Implementation of the public employment bill by the executive branch is an important milestone.
- Structural and inclusion reforms:
  - Continue efforts to boost female labor force participation and integrate migrants into the formal labor market to make growth more equitable.
  - Increase digital connectivity, reduce electricity costs, and improve educational outcomes to boost productivity.
- Climate and green transition:
  - RSF-supported reforms help advance an ambitious climate agenda and decarbonize the economy.
  - Recommended reform measures: publish guidelines to assess the climate impact of public projects; introduce a vehicle feebate scheme; expand climate transition fiscal risk analysis; better evaluate climate change-related credit risks to make the economy greener and more resilient.
- Directors’ guidance:
  - Directors encouraged continued fiscal prudence while supporting social assistance, carefully calibrated monetary policy, and structural reforms to broaden employment and support the green transition.
  - Directors supported actions to deepen FX market functioning, improve central bank governance and autonomy through legislation, and implement tax and fiscal transparency reforms.

### Selected indicators and projections (exact figures from the report)
- Output and prices (annual percentage change):
  - Real GDP: 2019 2.4; 2020 -4.3; 2021 7.9; 2022 4.6; 2023 5.1; 2024 3.5; 2025–2028 3.3 each year.
  - GDP deflator: 2019 2.6; 2020 0.8; 2021 2.4; 2022 6.3; 2023 1.0; 2024 2.9; 2025–2028 3.2 each year.
  - Consumer prices (period average): 2019 2.1; 2020 0.7; 2021 1.7; 2022 8.3; 2023 0.7; 2024 1.9; 2025–2028 3.0 each year.
- Savings and investment (percent of GDP):
  - Gross domestic saving: 2019 14.8; 2020 15.2; 2021 16.1; 2022 14.7; 2023 13.8; 2024 15.0; 2025 15.6; 2026 15.8; 2027 15.8; 2028 16.0.
  - Gross domestic investment: 2019 16.1; 2020 16.2; 2021 18.6; 2022 18.3; 2023 16.2; 2024 17.1; 2025 17.5; 2026 17.5; 2027 17.4; 2028 17.5.
- External sector:
  - Current account balance (percent of GDP): 2019 -1.3; 2020 -1.0; 2021 -2.5; 2022 -3.6; 2023 -2.3; 2024 -2.1; 2025 -1.9; 2026 -1.7; 2027 -1.6; 2028 -1.5.
  - Trade balance (percent of GDP): 2019 -6.0; 2020 -3.2; 2021 -4.3; 2022 -6.6; 2023 -5.3; 2024 -5.9; 2025 -6.1; 2026 -6.0; 2027 -6.0; 2028 -6.1.
  - Gross international reserves (millions of U.S. dollars): 2019 8,937; 2020 7,232; 2021 6,921; 2022 8,724; 2023 11,944; 2024 11,693; 2025 12,015; 2026 12,746; 2027 13,319; 2028 14,006.
  - Reserves as percent of ARA metric: 2019 132.5; 2020 108.4; 2021 97.8; 2022 101.7; 2023 122.9; 2024 115.8; 2025 114.3; 2026 114.4; 2027 113.7; 2028 113.8.
  - External debt (percent of GDP): 2019 47.8; 2020 49.6; 2021 49.7; 2022 51.7; 2023 47.3; 2024 45.4; 2025 45.0; 2026 45.2; 2027 44.9; 2028 44.6.
- Money and credit:
  - Credit to the private sector (percent change): 2019 -2.3; 2020 3.4; 2021 3.7; 2022 3.3; 2023 1.4; 2024 6.0; 2025–2028 6.2 each year.
  - Monetary base (narrow definition): 2019 7.1; 2020 8.3; 2021 7.8; 2022 8.0; 2023 8.1; 2024 7.8; 2025–2028 7.8 each year.
  - Broad money (percent of GDP): 2019 44.8; 2020 54.8; 2021 53.8; 2022 47.3; 2023 48.3; 2024 48.0; 2025 47.5; 2026 47.3; 2027 47.3; 2028 47.3.
- Memorandum items:
  - Nominal GDP (billions of colones): 2019 37,832; 2020 36,495; 2021 40,327; 2022 44,810; 2023 47,588; 2024 50,681; 2025 54,026; 2026 57,592; 2027 61,393; 2028 65,445.
  - Output gap (percent of potential GDP): 2019 0.2; 2020 -3.6; 2021 0.1; 2022 -0.3; 2023 0.7; 2024 0.2; 2025–2028 0.0 each year.
  - GDP per capita (US$): 2019 12,691; 2020 12,164; 2021 12,539; 2022 13,240; 2023 16,552; 2024 17,813; 2025 18,705; 2026 19,590; 2027 20,530; 2028 21,466.
  - Unemployment rate: 2019 12.4; 2020 20.0; 2021 13.7; 2022 11.7; 2023 8.1; 2024 8.7; 2025 9.3; 2026–2028 9.3 each year.

### Risks and policy priorities
- Risks highlighted:
  - Need to institutionalize central bank governance and autonomy reforms; lack of consensus poses risks to institutional-strengthening progress.
  - High dollarization and the relative shallowness of the FX market warrant reforms to improve market functioning and risk management.
- Policy priorities:
  - Continue fiscal restraint while mobilizing additional revenue through tax reform (income and value added tax bills, broadening CIT base, abolishing exemptions).
  - Return monetary policy to neutral by mid-2024 and allow a flexible exchange rate to support inflation convergence.
  - Deepen FX market functioning and transparency of FX operations.
  - Advance structural reforms to broaden employment, boost female labor force participation, integrate migrants, improve digital connectivity, reduce electricity costs, and raise educational outcomes.
  - Implement climate-related fiscal and regulatory measures to green the economy and expand climate financing.

*Source: IMF staff report (COSTA RICA — STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION, FIFTH REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, SECOND REVIEW UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY AND REQUEST FOR MODIFICATION OF REFORM MEASURE), December 6, 2023.*

### 5.      Fiscal outturns continue to overperform program targets. The cumulative primary

### 1criea2023005 - 5.      Fiscal outturns continue to overperform program targets. The cumulative primary

### Fiscal performance and public finances
- The cumulative primary surplus to September was 1.7 percent of 2023 GDP.
- Main driver: spending restraint imposed by the fiscal rule.
- Revenue growth is weakening as some benefits from higher inflation are moving into reverse.
- Interest costs remain high (at around one-third of fiscal revenue).
- Sovereign spreads have fallen abruptly since 2020.
- In November, the government issued a 31-year Eurobond of US$1.5 billion.
- All performance criteria (PCs) were met; both the primary fiscal balance and the NIR targets were met with large margins.
- June and September indicative targets (ITs) were met except for the June debt IT, which was breached by 0.3 percent of GDP as authorities rebuilt liquidity buffers.

### Poverty, inequality, and labor market
- Poverty rate declined somewhat in 2023 thanks to lower inflation, a stronger labor market, and better targeting of social benefits.
- The gap between formal and informal employment has widened.
- Income inequality has increased as past income gains favored the formal sector and urban households.
- Source for poverty and inequality data: National Institute of Statistics and Census.

### Program implementation, structural reforms, and RSF measures
- Implementation of the Public Employment Bill for executive branch employees completed; the single pay spine was put in place for all executive branch employees in September.
- All institutions covered by the law are expected to adopt a single wage spine by early in 2024, addressing the unmet March 2023 structural benchmark (SB).
- Progress on central bank governance and autonomy reform (2020 Safeguards Assessment recommendation and end-2022 SB) has stalled.
- The authorities completed the four Reform Measures (RMs) scheduled for this review:
  - RM5 and RM8: improve integration of climate issues into fiscal and financial sector risk analysis.
  - RM6: improve integration of climate issues in project appraisal.
  - RM7: bill submitted to encourage use of low-pollution vehicles through feebates.

### Outlook and risks
- Growth projections:
  - Growth is projected to reach 5.1 percent in 2023.
  - Growth is expected to moderate to 3½ percent in 2024.
  - Growth expected to converge toward potential of about 3¼ percent thereafter.
- Drivers and near-term dynamics:
  - Upward revision relative to the fourth review mainly from stronger-than-expected export growth in H1 2023 despite sharp exchange rate appreciation.
  - Economy expected to decelerate in Q4 2023 as net exports normalize and investment growth levels off.
- Current account:
  - Expected to narrow to 2.3 percent of GDP in 2023.
  - Expected to be around 1.5 percent over the medium term.
- Growth-at-risk analysis:
  - Probability of economic contraction in 2024 is around 5 percent.
  - A material tightening of financial conditions in the U.S. could reduce the mode of the growth rate distribution by 0.3 percentage points and reduce the 10th percentile by 1.5 percentage points.
- External and domestic risks:
  - External downside risks: lower growth in the U.S., sustained tightening of global financial conditions, rises in global commodity prices.
  - Domestic risks: El Niño, political fragmentation leading to delays or weakening of reforms.
  - Upside: continued strong FDI inflows could lift potential growth.

### Inflation and monetary policy outlook
- Inflation dynamics:
  - Falling prices—due to recent appreciation and lower global commodity prices—alongside contractionary monetary and fiscal policies are expected to result in negative headline inflation until end-2023.
  - Inflation is expected to return to target by end-2024.
  - Risks to the outlook judged to be balanced: possibility of prolonged weak domestic price pressures offset by risk of higher import prices.
- Monetary policy stance and guidance:
  - The BCCR raised the policy rate to 9 percent then cut by 275 basis points.
  - Staff baseline conditioned on a gradual return to a neutral policy stance by end-2024; staff assess return to a neutral stance—an ex ante real rate of around 1 percent—by mid-2024 may better support sustainable return of inflation to target.
  - Policy should remain forward-looking and allow the exchange rate to move flexibly.
- FX market and interventions:
  - Costa Rica’s shallow FX market and currency mismatches argue for deploying targeted foreign exchange interventions (FXI) in response to large shocks; FXI should be infrequent.
  - With FX reserves at comfortable levels, little need for the central bank to actively purchase additional reserves.
  - BCCR’s FX market activities should be more restrained; align timing of BCCR purchases of FX on behalf of the non-financial public sector (NFPS) with sale of FX to these entities.
  - Longer-term strategy: NFPS to meet FX needs through direct market transactions and manage currency risks.
  - Reforms to improve FX market functioning: revisit macroprudential requirements, introduce new market makers, extend MONEX trading hours, develop FX derivative markets.
  - Footnote: The BCCR accounted for 68 percent of the turnover in the MONEX market in the first ten months for 2023, of which 52 percent were FX transactions on behalf of NFPS.

### Macroprudential and financial sector stability
- Adopted macroprudential measures:
  - Capital requirements for FX loans to unhedged borrowers.
  - Generic provisions to unhedged FX loans.
  - Applying the liquidity coverage ratio by currency.
  - Limiting FX net open positions (NOP).
- Effects and calibrations:
  - Combined actions materially mitigate FX financial stability risks from currency mismatches on household, corporate and bank balance sheets.
  - There is scope to loosen the daily and monthly NOP limits.
  - Capital requirements scheduled for further gradual increase to 150 percent by 2031.
  - The requirement of generic provision to unhedged FX loans was introduced in 2016 but will be phased out by January 2024.
- Supervisory actions:
  - Authorities reactivated dynamic provisioning and strengthened top-down stress testing, incorporating contagion risks.
  - Supervisory agency working to enhance oversight capabilities and incorporate climate risks into bottom-up stress testing.
- Structural improvements and legislation:
  - Proposed amendments to bank resolution and deposit insurance law to allow orderly resolution of non-viable banks; aim to submit these amendments to the Legislative Assembly later this year (end-December 2023 SB).
  - In October, regulation approved requiring supervised financial intermediaries to incorporate socioenvironmental and climate risks into decision-making and meet specific disclosure requirements by end-2026 (RM8).
- Competition and regulatory neutrality:
  - Authorities should promote competition in financial services and level playing field between public and private banks.
  - Legislation needed to replace parafiscal contributions of state-owned banks with transfers of dividends to the budget and discontinue requirement that private banks contribute part of short-term deposits to Sistema de Banca para el Desarollo.
  - If the central bank establishes limits on card system fees, such limits should promote efficiency and competition while attending to consumer protection.

### Debt sustainability and fiscal policy over the medium term
- Debt trajectory and projections:
  - Debt is sustainable in the medium term and the risk of sovereign debt distress is low.
  - Debt projected to decline to 61 percent of GDP at end-2023 despite government initiatives to opportunistically build deposits in anticipation of debt service due in early 2024.
  - Debt will fall below 60 percent of GDP by end-2025.
- Interest burden and financing needs:
  - Interest burden expected to remain high (about 5 percent of GDP in 2023-24).
  - Gross financing needs projected to remain around 9 percent of GDP in 2023-24 (falling to 7 percent of GDP by 2028).
- Risks to outlook:
  - Potential realization of contingent liabilities (including a disputed claim from the social security fund of about 6 percent of GDP).
  - Weaker real exchange rate.
- Fiscal consolidation and medium-term framework:
  - 2018 tax reforms and spending restrictions imposed by the fiscal rule were critical in maintaining reduction in debt-to-GDP ratio.
  - Draft budget targets further fiscal consolidation in 2024—largely through reduction in primary current spending—with a headline primary balance of 1.9 percent of GDP.
  - Staff baseline projects a primary balance of 2 percent of GDP over the medium term, lower than authorities’ MTFF but sufficient to bring debt below 50 percent of GDP before 2035.
  - Fiscal revenues expected to stabilize at 15¼ percent of GDP as transition period from 2018 tax reform ends.
  - Primary spending projected to stabilize at 13¼ percent of GDP as fiscal rule’s unchanged limit on spending becomes less restrictive.
  - Costa Rica assessed to have growing fiscal space and would be well-placed to employ countercyclical measures if negative shocks materialize.

### Recent legislative changes and tax policy
- Recently approved bills may reduce revenues and make the tax system less equitable and less efficient:
  - Changes to taxation of vehicles (Law 10.381) reduced progressivity and revenue collection.
  - Establishing an economic substance criterion and amending Permanent Establishment definition (Law 10.390) contains double-non taxation risks and may reduce corporate tax base.
  - These policy changes are estimated to reduce tax revenues by 0.1 percent of GDP per year and are incorporated in staff’s baseline.
  - Note: Law 10.390 was effective in removing Costa Rica from the EU’s Annex I List of Non-Cooperative Jurisdictions for Tax Purposes in October 2023.
- Government proposed tax reforms aimed at improving equity and efficiency and generating around 0.1 percent of GDP in additional revenues. Proposals include:
  - Implementing a dual personal income tax system, increasing progressivity, and taxing domestic and offshore capital income and capital gains at a flat rate (bill 23.760).
    - The bill does not eliminate tax exemptions for the Christmas bonus (Aguinaldo) and the 14th salary for public employees (salario escolar), which cost an estimated 0.4 percent of GDP per year.
  - Moving to a single tax rate for corporate income.
  - Improving the simplified tax regime for small taxpayers.
  - Strengthening automatic exchange of tax information on non-residents (bill 23.088).
  - Ensuring all tax incentives for firms in free trade zones are consistent with the OECD/G20 Pillar 2 minimum global tax.
  - Eliminating ineffective VAT exemptions on airfares, medical equipment, and forestry products (bill 23.763), and reassessing effectiveness of all tax exemptions with a view to eliminating ineffective ones.
  - Introducing a revenue-neutral feebate scheme to accelerate private transportation’s transition to electrical vehicles (RM7).
- The baseline does not include yields from the proposals nor possible gains from improvements in tax and customs administration.

### Authorities’ views (summarized)
- Authorities broadly agreed with staff’s macroeconomic outlook but are more optimistic on potential growth (authorities estimate potential growth at 3¾-4 percent, about ½ a percentage point higher than staff’s estimate).
- Authorities see somewhat higher upside risks to inflation due to geopolitical tensions and potential impacts of natural disasters.
- On monetary policy, BCCR broadly agreed with staff advice but favors a more gradual approach; may reach neutral stance only in second half of 2024.
- Central bank plans to bolster reserves by purchasing FX when market conditions are favorable due to external pressures in 2022H1 and large FX debt repayment needs in 2024.
- Authorities agree with objectives of less FX intervention, greater exchange rate flexibility, and reforms for deeper FX market, while noting institutional and market structure impediments.
- On macroprudential measures, authorities prefer to assess impacts of current measures before implementing new ones; agree scope exists to relax NOP restrictions to facilitate FX market development.
- On central bank governance and autonomy reforms, authorities commit to pursue constitutional autonomy for the central bank when political context allows.

*Source: IMF staff summary of the Costa Rica program review content unit.*

### 24.      Improvements in tax and customs administration are underway. The authorities have

### 1criea2023005 - 24.      Improvements in tax and customs administration are underway. The authorities have

### Tax and customs administration
- Important progress under the Tax Compliance Improvement Plan to improve compliance on VAT, income tax, and international taxation with a strategic focus on large taxpayers.
- Information technology improvements and greater information sharing amongst different institutions.
- Strengthening customs regulations to curb smuggling and evasion.

### Social assistance and public capital spending (medium term)
- Greater resources will be needed for both social assistance and capital spending, building on institutional reforms to make such spending more effective.
- Social spending developments:
  - During the last decade, social spending helped compensate for declining labor incomes at the lower end of the income distribution, but more recently social spending has sagged as a share of GDP.
  - The reversal of this trend in the draft 2024 budget is encouraging.
  - Well-targeted increases in social assistance coverage—for example through cash transfers targeted to poor children—can materially reduce poverty.
  - The newly centralized and digitalized cash transfer system and the forthcoming launch of a single window for social assistance (a February 2024 SB, for which an online form and self-service module are already complete) should facilitate a scaling up of spending on such programs.
  - Covid-related one-off spending of 0.8 percent of GDP is noted in the sources.
- Public capital spending:
  - Public capital spending is expected to rise to around 2 percent of GDP over the medium term.
  - Costa Rica has persistently under-executed its capital budget (by an average of 40 percent during the last decade).
  - Under-execution has worsened the quality of infrastructure and underlines the need to improve public investment management to increase execution and efficiency.
  - A bill to modernize public investment processes and reduce institutional fragmentation is under discussion in the Legislative Assembly.
  - Efforts underway to strengthen project appraisal and selection and ensure projects are consistent with the MTFF.
  - Better investment planning would support decarbonization and ensure the social cost of carbon is incorporated into project appraisal (completed RM6) and climate-related criteria are systematically considered in project selection (RM9).

### Pensions and aging population (long term fiscal implications)
- The aging population will have important long-term fiscal implications.
- The non-contributory pension regime plays an effective role in poverty reduction but coverage of the elderly poor is incomplete.
- Government intends to substitute spending on the non-contributory pension with a contribution to a universal basic pension (UBP bill 23.625) that will be gradually phased in over the next several years.
  - Risk noted: if the statutory minimum pension is not simultaneously phased out, the actuarial position of the system will worsen.
  - Alternative approach: increase coverage of the non-contributory pension combined with steps to reduce informality more broadly.
- Need for a more strategic assessment of the whole pension system to restore actuarial balance.

### Fiscal transparency, public sector governance, and related reforms
- Public Employment Bill modernizes the wage structure, improving performance incentives and reducing wage expenditure growth in the medium term (Annex V).
- Amendment to the fiscal rule (in line with IMF CD) excluded financially sound public institutions that operate under market conditions or without government control; however, other public institutions should not be excluded.
  - The amendment maintains the coverage of spending categories subject to the rule and the formula for determining the ceiling but weakens the coverage of NFPS expenditure.
  - Recommendation: the fiscal rule should have broad coverage and apply to aggregate spending (i.e., not to disaggregated entities within the consolidated central government), including externally-financed capital expenditure.
  - Ex-post verification should compare fiscal outturns (not the final budget) with the previous year’s initial budget and include externally financed capital expenditure.
- Ongoing implementation of new public procurement regulations should reduce procurement costs and increase transparency; need to improve the information system for public procurement consistent with Hacienda Digital.
- Adoption of International Financial Reporting Standards by State-Owned Enterprises will improve transparency.
- Authorities are working towards adoption of fiscal and debt data in accordance with the 2014 standards to produce consistent data for the non-financial public sector.
- Gender budgeting was incorporated into the 2024 budget submitted to the Assembly; next step is to expand coverage to decentralized institutions.
- Establishing a Macro-Fiscal Unit to enhance analytical and forecasting capabilities.

### Debt management and cash strategy
- Establishment of a single debt management office would significantly improve the government’s ability to develop and implement a clear debt strategy; government submitted a bill to establish the office in May (end-June 2023 SB).
- To facilitate implementation of the debt management strategy:
  - Greater flexibility for the Executive to issue external debt is recommended.
  - Government cash management strategy should more systematically decide the trade-off between maintaining liquidity and minimizing interest costs.
  - Debt exchanges, reverse auctions, and plans to potentially convert FX financing to domestic currency are welcomed.
- Authorities finalizing an investment strategy and will produce a sovereign asset and liability management roadmap, drawing on IMF CD.

### Authorities’ fiscal intentions and concerns
- Authorities committed to sustaining fiscally responsible policy and institutionalizing macroeconomic, social, and climate-related progress.
- Intent to reduce debt quickly, targeting a ratio of 60 percent by 2025.
- Authorities share staff concerns about passed bills that reduced tax revenue and weakened institutional coverage of the fiscal rule; concerned further tax cuts would imperil fiscal consolidation without restricting social and other spending.
- Income tax bill (23.760) aims for greater efficiency and equity, with restoring revenues by removing outdated and ineffective exemptions noted as important.
- Authorities see upside risks to improving revenue collection through Hacienda Digital and stress targeting tax incentives in the special regime to avoid ceding tax revenues to other jurisdictions.
- Efforts to build liquidity buffers intended to improve market confidence by reducing rollover risks and signaling responsible macroeconomic management.
- Implementing the PEB and improving public investment management remain high priorities, but compliance by all institutions requires strengthening the implementing ministry and enforcement beyond the executive.

### Promoting equitable growth: free trade zones and business environment
- Free trade zones’ contribution:
  - Free trade zones have been an important growth engine, increasingly broad-based and knowledge-intensive.
  - During the past year the free trade zones have contributed more than a third of GDP growth, about 80 percent of FDI inflows and over 10 percent of total employment.
  - Wages in the free trade zones are around 20 percent higher than in the rest of the economy.
  - An estimated 60 percent of free trade zone inputs are sourced domestically, creating linkages to the domestic economy.
  - Free trade zones are mostly concentrated in the greater metropolitan area of San José, contributing to widening income inequality across regions.
  - The fiscal cost of various tax preferences associated with the zones is estimated at around 1.5 percent of GDP per year.
  - The OECD/G20 Pillar 2 minimum tax can help limit this source of tax expenditure by ensuring incentives are consistent with the minimum tax.
- Improving the business environment:
  - Upcoming installation of a 5G network will improve digital connectivity.
  - Planned increase in infrastructure investments will help mitigate regional disparities.
  - Easier entry into power generation should reduce electricity costs.
  - Broader product market reforms needed to boost competition, productivity, and investor confidence.
  - Strengthening the role of women in entrepreneurial activities should increase female labor force participation, reduce gender wage gaps, and boost productivity.
  - Recommendations include reduction in the number of minimum wage categories and reduced payroll contributions for part-time workers to reduce incentives to operate in the informal economy.

### Education, gender, and migration policies for inclusive growth
- Education:
  - Costa Rica’s spending on education as a share of GDP is high (especially at the tertiary level) but learning outcomes are mediocre and vocational education take-up is low.
  - Inequalities in access and high learning losses from strikes, the pandemic, and policy discontinuity.
  - Authorities’ “Roadmap for Education” proposes reforming the school curriculum, improving testing for students and teachers, providing free meals and transport to all K-12 students, and expanding internet access for students.
  - International experience suggests prioritizing early-stage education spending yields high returns; authorities are strengthening childcare networks.
  - Ongoing efforts to better align higher education curricula with labor market demand and reforms to vocational training aim to address skills gaps and sustain FDI attraction.
- Female labor force participation:
  - Large gender gap in participation and employment contributes to relatively high income inequality.
  - Family care responsibilities constrain women from taking paid jobs; improving childcare is critical.
  - Policy recommendations: reductions in minimum contribution for part-time workers, public funding for vocational training, technical assistance and financial aid to female entrepreneurs, and scholarship programs for women in STEAM fields.
- Migrants and refugees:
  - Foreign-born employees account for 11 percent of Costa Rica’s labor force.
  - Staff estimates foreign-born labor contributed to around 6.5 percent of GDP during 2017-21.
  - Foreign-born population contribute, on net, around 0.5 percent of GDP to the fiscal position (social security, income and consumption taxes exceed the costs of their use of public education, health services and social transfers).
  - Most foreign-born workers hold informal and low-paying jobs and experience relatively high poverty rates.
  - Government programs providing health insurance and facilitating transportation services for seasonal migrants in the coffee sector have generated positive outcomes and should be expanded to other sectors.
  - Scope to integrate migrants and refugees into the formal labor market by simplifying procedures, shortening the time for acquiring legal resident status, and facilitating migrants’ access to social security benefits (e.g., by reducing minimum vesting periods for the contributory public pension).

### Making the economy greener and more resilient (climate and green finance)
- Progress on adaptation and mitigation:
  - Climate change risks chiefly through potential damage to transportation infrastructure and agriculture from flooding.
  - Completed RMs are integrating climate risks in fiscal planning, strengthening public investment and infrastructure resilience, supporting decarbonization, creating green reserves, and strengthening financial sector resilience.
  - National Decarbonization Plan targets emissions reductions more ambitious than Costa Rica’s Paris Agreement commitments with a central role for transportation decarbonization.
  - Building a comprehensive charging network, incentivizing electric vehicle adoption, and reduced tax revenue from fuels is expected to cost around 2.4 percent of GDP over the next 30 years according to IMF CD estimates.
  - Decarbonization incentivized through review of tax incentives (RM11).
  - Addressing skills mismatches and strengthening the social safety net during the transition are essential.
  - 2022-2026 National Adaptation Plan targets improvements in disaster risk management, investing in climate-resilient infrastructure (supported by RM9), including climate change considerations in regulatory plans (supported by RM10), and increasing financial sector resilience (supported by RM8 and RM12).
- Green financing and partnerships:
  - Authorities exploring issuance of sustainability-linked or Use of Resources Eurobonds with UNDP support.
  - Project preparation facility work started with IDB support to create a pipeline of sustainable projects for private financing.
  - Strengthening PPP capacity with IDB support and creating a single green taxonomy with help from the Green Climate Fund and the UNDP.
- Authorities reaffirmed commitment to the climate agenda, noting risks to fiscal and financial positions and welcoming the RSF’s catalytic role in mobilizing climate finance.

*Source: IMF country material provided in content unit 1criea2023005.*

### 39.      All quantitative performance criteria were met for the fifth review under the EFF and

### 1criea2023005 - 39.      All quantitative performance criteria were met for the fifth review under the EFF and

### Program performance and conditionality
- All quantitative performance criteria were met for the fifth review under the EFF.
- All RMs were met for the second review under the RSF arrangement.
- ITs were met for September and the authorities are on track to meet end-December PCs.
- Inflation was below the inner band of the MPCC in June (a semi-annual test date) and the outer band of the MPCC in September.
- The central bank’s reduction of the policy rate is expected to support the return of inflation toward the center of the MPCC in 2024.
- The SB for this review related to the Public Employment Bill was met.
- Government actions taken (RM5, RM6, RM7 and RM8):
  - Expanded climate risk analysis.
  - Published guidelines to assess the impact of public projects on climate change.
  - Submitted legislation to introduce a feebate scheme for vehicles.
  - Approved regulation on managing banks’ climate change-related credit risks.
- Authorities are on track to:
  - Launch a single window for social programs (SB for the final review).
  - Submit amendments to the deposit insurance and bank resolution laws (both are SBs for the final review).

### Modification to RM12 (RSF) on climate risk stress testing
- A modification to RM12 under the RSF arrangement on incorporating climate risks in stress testing is proposed.
- An ongoing legal process determining the central bank’s right to access micro data on banks’ credit portfolio may create delays in implementation (the information is needed to specify the geographic location of the financed activities to assess the credit risks of climate events).
- Given differences in banks’ business models and the geographic concentration of their lending, stress tests based on the incomplete information of bank credit, which the central bank has conducted, could be misleading.
- The authorities propose modifying the RM requiring the finalization of the stress test methodology, which would then be applied once the requisite data is available.
- In combination with previously completed work to define and gather needed data, the finalization of the methodology would bring the authorities very close to the objective of the original RM, which the authorities are committed to accomplishing.
- Staff’s view: an unchanged level of access is warranted.

### Capacity to repay the Fund and financing outlook
- Costa Rica’s capacity to repay the Fund remains adequate and the program is fully financed.
- The EFF program remains fully financed with firm financing commitments over the next 12 months and good prospects thereafter.
- Costa Rica has an adequate capacity to repay the Fund, with outstanding Fund credit peaking at:
  - 2.7 percent of GDP,
  - 7.1 percent of exports,
  - or 522.5 percent of quota (372.5 percent of quota without RSF arrangement financing) in 2024.
- The bill to ratify the RSF arrangement was approved by the Legislative Assembly in October (a requirement for all sovereign foreign borrowing).
- Access to the EFF is helping Costa Rica meet its existing balance-of-payments needs.
- Both the EFF and the RSF arrangement financing will continue to be used for direct budget support.
- RSF resources provide Costa Rica with financing at longer maturities, substituting shorter-term private financing and improving their capacity to repay.
- Financing from other multilateral creditors, particularly project financing, has been rescheduled from 2023 to 2024-2028.
- The program remains subject to downside risks, particularly from the external environment, but there are buffers in place to respond to shocks.
- If needed, additional financing could be mobilized from domestic financial institutions or regional partners.

### Staff appraisal, macroeconomic assessment, and policy recommendations
- Program benefits and implementation:
  - Strong implementation of the EFF program since 2021 has enabled restoration of confidence in policy frameworks, withstanding multiple external shocks, and advancing key reforms.
  - Fiscal outturns have exceeded expectations and placed the authorities on track to overperform their end-2023 primary balance target.
  - The institutional framework for fiscal policy has been particularly valuable in achieving these results.
  - Monetary policy has demonstrated its ability to react to inflation shocks and anchor expectations.
  - The external position in 2022 is assessed to be stronger than medium-term fundamentals and desirable policies, and reserves are adequate.
- Monetary policy guidance:
  - The central bank should return to a neutral stance by mid-2024 with the exchange rate being allowed to respond flexibly to market conditions.
  - The BCCR has appropriately lowered the policy rate and should continue to do so in the coming months to ensure that inflation converges decisively to the target.
  - Policy decisions should continue to be data-dependent, forward-looking, and supported by clear and transparent communications, with due attention to the two-sided risks to inflation.
  - While Costa Rica’s shallow FX market and existing currency mismatch could justify deploying targeted FX intervention to mitigate excessive exchange rate fluctuations, in most circumstances the exchange rate should be allowed to move freely in response to market conditions.
  - A more flexible exchange rate and greater transparency in central bank FX operations would allow monetary policy to have its full effect on activity and inflation and would also incentivize the deepening of the FX market.
  - To complement a more restrained approach to FX intervention, further institutional and technical reforms should be targeted at improving the functioning of the FX market and strengthening market participants’ ability to manage currency risks.
- Central bank governance:
  - The authorities should continue pursuing improvements to the central bank’s governance and autonomy.
  - While the central bank is conducting monetary policy in an independent manner, these practices should be institutionalized through legislation.
  - It is critical that the central bank’s autonomy and other areas of improvements recommended in the 2020 Safeguards Assessment that remain unaddressed be followed up on as soon as possible.
- Fiscal and structural recommendations:
  - Due to the authorities’ commendable fiscal efforts, the risk of sovereign debt distress is low.
  - Ongoing spending restraint is expected to continue to reduce the debt and interest burden.
  - Passage of the income and value added tax bills would improve the equity and efficiency of the tax system and raise revenues that have been eroded in recent reforms.
  - Broadening the CIT base and abolishing the income tax exemption on the aguinaldo and salario escolar would further these objectives, thus reducing debt faster and creating more space for spending to improve public services and respond to shocks.
  - The implementation of the Public Employment Bill by the executive branch marks an important milestone and ongoing public financial and debt management reforms will further strengthen the fiscal position.
- Productivity, inclusion, and green transition:
  - Authorities should deepen efforts to boost female labor force participation to boost potential growth and reduce gender gaps that contribute to high income inequality.
  - Simplifying the process for migrants to obtain residency and enroll in the social security system would boost formal sector employment.
  - Efforts to increase digital connectivity, reduce electricity costs, and improve educational outcomes will boost productivity throughout the economy.
  - Authorities’ efforts to publish guidelines to assess the climate impact of public projects, introduce a vehicle feebate scheme, expand climate transition fiscal risk analysis, and better evaluate climate change-related credit risks are all important steps forward.
- Staff recommendations on disbursements and RM modification:
  - Staff supports completion of the fifth EFF review and the second review under the RSF arrangement.
  - Based on the strong macroeconomic performance and important progress on structural reforms, staff supports disbursement of SDR 206.23 million under the EFF.
  - Based on completion of RM1-RM8, staff supports disbursement of SDR 369.4 million under the RSF arrangement.
  - Staff also supports the authorities’ request for modification of RM12.

*Source: 1criea2023005 - 39. All quantitative performance criteria were met for the fifth review under the EFF and (PDF).*

### 48.      It is expected that the next Article IV consultation will be held on the 24-month cycle,

### It is expected that the next Article IV consultation will be held on the 24-month cycle, in accordance with Decision No. 14747-(10/96).

### Timing and institutional note
- It is expected that the next Article IV consultation will be held on the 24-month cycle, in accordance with Decision No. 14747-(10/96).

### Fiscal sector: outcomes, projections, and financing
- Central government primary balance (percent of GDP):
  - 2019: -2.6
  - 2020: -3.7
  - 2021: -0.3
  - 2022: 2.1
  - 2023: 1.5
  - 2024: 1.5
  - 2025: 1.9
  - 2026: 1.9
  - 2027: 2.0
  - 2028: 2.0
  - 2029: 2.0
  - 2030: 2.0
- Central government overall balance (percent of GDP):
  - 2019: -6.7
  - 2020: -8.4
  - 2021: -5.1
  - 2022: -2.8
  - 2023: -3.4
  - 2024: -3.3
  - 2025: -2.8
  - 2026: -3.0
  - 2027: -2.6
  - 2028: -2.3
  - 2029: -2.1
  - 2030: -1.9
- Central government debt (percent of GDP):
  - 2019: 64.5
  - 2020: 66.9
  - 2021: 67.6
  - 2022: 63.0
  - 2023: 62.4
  - 2024: 60.8
  - 2025: 61.4
  - 2026: 60.2
  - 2027: 59.2
  - 2028: 58.0
  - 2029: 56.6
  - 2030: 55.1
- Central government revenues and expenditures (billions of colones):
  - Revenue (2023): 7,320
  - Tax revenue (2023): 6,554
  - Nontax revenue (2023): 766
  - Expenditure (2023): 8,903
  - Current noninterest (2023): 5,827
  - Interest (2023): 2,300
  - Capital (2023): 705
- Total financing (billions of colones):
  - 2019: 2,476
  - 2020: 3,377
  - 2021: 2,158
  - 2022: 1,207
  - 2023: 1,583
  - 2024: 1,585
  - 2025: 1,399
  - 2026: 1,501
  - 2027: 1,380
  - 2028: 1,300
  - 2029: 1,266
  - 2030: 1,225
- Memorandum: Nominal GDP (billions of colones) projections:
  - 2023: 46,483
  - 2024: 47,588
  - 2025: 49,500
  - 2026: 50,681
  - 2027: 54,026
  - 2028: 57,592
  - 2029: 61,393
  - 2030: 65,445

### External sector: balances, reserves, and external debt
- Current account balance (percent of GDP):
  - 2019: -1.3
  - 2020: -1.0
  - 2021: -2.5
  - 2022: -3.6
  - 2023: -3.4
  - 2024: -2.3
  - 2025: -2.7
  - 2026: -2.1
  - 2027: -1.9
  - 2028: -1.7
  - 2029: -1.6
  - 2030: -1.5
- Trade balance (percent of GDP):
  - 2019: -6.0
  - 2020: -3.2
  - 2021: -4.3
  - 2022: -6.6
  - 2023: -5.7
  - 2024: -5.3
  - 2025: -5.7
  - 2026: -5.9
  - 2027: -6.1
  - 2028: -6.0
  - 2029: -6.0
  - 2030: -6.1
- Foreign direct investment, net (percent of GDP):
  - 2019: -4.2
  - 2020: -2.6
  - 2021: -4.8
  - 2022: -4.4
  - 2023: -3.4
  - 2024: -3.6
  - 2025: -3.2
  - 2026: -3.6
  - 2027: -3.6
  - 2028: -3.6
  - 2029: -3.6
  - 2030: -3.5
- Gross international reserves (millions of U.S. dollars, with RSF):
  - 2019: 8,937
  - 2020: 7,232
  - 2021: 6,921
  - 2022: 8,724
  - 2023: 10,541
  - 2024: 11,944
  - 2025: 11,205
  - 2026: 11,693
  - 2027: 12,015
  - 2028: 12,746
  - 2029: 13,319
  - 2030: 14,006
- Gross international reserves (as percent of the ARA metric):
  - 2019: 132.5
  - 2020: 108.4
  - 2021: 97.8
  - 2022: 101.7
  - 2023: 110.5
  - 2024: 122.9
  - 2025: 110.1
  - 2026: 115.8
  - 2027: 114.3
  - 2028: 114.4
  - 2029: 113.7
  - 2030: 113.8
- External debt (percent of GDP):
  - 2019: 47.8
  - 2020: 49.6
  - 2021: 49.7
  - 2022: 51.7
  - 2023: 47.5
  - 2024: 47.3
  - 2025: 48.4
  - 2026: 45.4
  - 2027: 45.0
  - 2028: 45.2
  - 2029: 44.9
  - 2030: 44.6

### Monetary and financial sector indicators
- Credit to the private sector (percent change):
  - 2019: -2.3
  - 2020: 3.4
  - 2021: 3.7
  - 2022: 3.3
  - 2023: 3.8
  - 2024: 1.4
  - 2025: 6.0
  - 2026: 6.0
  - 2027: 6.2
  - 2028: 6.2
  - 2029: 6.2
  - 2030: 6.2
- Monetary base (annual percent change, memorandum):
  - 2019: 7.1
  - 2020: 8.3
  - 2021: 7.8
  - 2022: 8.0
  - 2023: 7.9
  - 2024: 8.1
  - 2025: 7.8
  - 2026: 7.8
  - 2027: 7.8
  - 2028: 7.8
  - 2029: 7.8
  - 2030: 7.8
- Broad money (annual percent change, memorandum):
  - 2019: 44.8
  - 2020: 54.8
  - 2021: 53.8
  - 2022: 47.3
  - 2023: 47.9
  - 2024: 48.3
  - 2025: 47.9
  - 2026: 48.0
  - 2027: 47.5
  - 2028: 47.3
  - 2029: 47.3
  - 2030: 47.3

### Financial soundness (selected indicators)
- Risk-adjusted capital ratio (percent):
  - Dec 2021: 16.8
  - Dec 2022: 16.7
  - Sep 2023: 17.5
- Nonperforming loans to total loans:
  - Dec 2021: 2.0
  - Dec 2022: 2.1
  - Sep 2023: 2.4
- Loan loss provisions to total loans:
  - Dec 2021: 2.8
  - Dec 2022: 3.3
  - Sep 2023: 3.5
- Liquid assets to total short-term liabilities:
  - Dec 2021: 102.7
  - Dec 2022: 98.6
  - Sep 2023: 96.8

### Balance of payments and financing needs
- Current Account (US$ millions):
  - 2019: -826
  - 2020: -632
  - 2021: -1,605
  - 2022: -2,469
  - 2023: -2,951
  - 2024: -2,036
  - 2025: -2,406
  - 2026: -2,017
  - 2027: -1,895
  - 2028: -1,821
  - 2029: -1,845
  - 2030: -1,822
- Gross external financing needs (US$ millions):
  - 2019: -8,143
  - 2020: -10,002
  - 2021: -10,427
  - 2022: -11,972
  - 2023: -16,220
  - 2024: -15,724
  - 2025: -14,125
  - 2026: -14,244
  - 2027: -13,854
  - 2028: -14,103
  - 2029: -14,340
  - 2030: -14,484
- Gross external financing sources (US$ millions):
  - 2019: 7,648
  - 2020: 8,622
  - 2021: 9,273
  - 2022: 10,397
  - 2023: 14,498
  - 2024: 15,381
  - 2025: 12,160
  - 2026: 11,628
  - 2027: 12,753
  - 2028: 13,016
  - 2029: 13,479
  - 2030: 14,393
- Memorandum: Gross multilateral support (US$ millions):
  - 2019: 495
  - 2020: 1,380
  - 2021: 1,154
  - 2022: 1,575
  - 2023: 1,783
  - 2024: 405
  - 2025: 2,211
  - 2026: 2,864

### IMF-related financing and program access
- Outstanding IMF credit (existing and prospective, millions of SDRs):
  - 2023: 1,723.9
  - 2024: 1,930.1
  - 2025: 1,791.6
  - 2026: 1,740.0
  - 2027: 1,636.9
  - 2028: 1,447.8
  - 2029: 1,241.6
  - 2030: 1,035.3
- Fund obligations based on existing credit (principal, millions of SDRs):
  - 2023: 46.2
  - 2024: 184.7
  - 2025: 138.5
  - 2026: 51.6
  - 2027: 103.1
- Table of Access and Phasing Under the Extended Fund Facility (selected lines):
  - March 1, 2021: 206.34 (Millions of SDR) — 55.86 (Percent of Quota)
  - October 15, 2021: 103.11 (Millions of SDR) — 27.91 (Percent of Quota)
  - March 15, 2022: 103.11 (Millions of SDR) — 27.91 (Percent of Quota)
  - October 15, 2022: 206.23 (Millions of SDR) — 55.83 (Percent of Quota)
  - March 15, 2023: 206.23 (Millions of SDR) — 55.83 (Percent of Quota)
  - October 15, 2023: 206.23 (Millions of SDR) — 55.83 (Percent of Quota)
  - March 15, 2024: 206.23 (Millions of SDR) — 55.83 (Percent of Quota)
  - Total1237.49335

### Resilience and Sustainability Facility (RSF) reform measures — priorities, timelines, and expected outcomes
- Integrating climate risks into fiscal planning:
  - RM1: Ministry of Finance to develop and publish guidelines for climate budget tagging. End-February 2023 (completed). Expected outcome: Improved tracking of climate-related spending in the budget and financial reporting.
  - RM5: Ministry of Finance to publish a quantitative analysis of climate transition fiscal risks. End-November 2023 (completed). Expected outcome: Integration of key possible fiscal effects of decarbonization efforts into fiscal planning (e.g., MTFF).
- Strengthening public investment and infrastructure resilience:
  - RM6: MIDEPLAN to develop and publish guidelines to expand project appraisal to assess impact on climate change through social cost of carbon. End-September 2023 (completed). Expected outcome: Reduced greenhouse gas emissions from public investments and improved project quality and execution.
  - RM9: MIDEPLAN to publish guidelines on project selection criteria including climate change criteria for SNIP entities. End-December 2023 (on track). Expected outcome: Methodology to score and prioritize resilient, decarbonizing public infrastructure projects.
  - RM10: MIVAH, with MINAE, to develop and publish guidelines for including climate change analysis in Regulatory Plans. End-February 2024 (on track). Expected outcome: Improved spatial planning to promote resilient infrastructure.
- Supporting decarbonization:
  - RM2: Government to approve implementing regulation to simplify administrative procedures for private participation in renewable power generation for self-consumption. End-December 2022 (completed). Expected outcome: Improved competition in the electricity sector, accelerating electrification.
  - RM7: Government to submit to the Legislative Assembly a bill to introduce a feebate scheme to strengthen incentives for low-pollution private vehicles. End-September 2023 (completed). Expected outcome: Reduced emissions from private cars.
  - RM11: Government to appraise and publish a review of existing tax incentives with negative environmental effects. End-February 2024 (on track). Expected outcome: Facilitated removal of incentives for environmentally harmful activities and reduction of tax expenditures.
- Greening reserves and strengthening financial sector resilience:
  - RM4: BCCR to publish indicators of the “greenness” of its reserve holdings in its 2022 Annual Report. End-February 2023 (completed). Expected outcome: Prioritization of environmentally friendly investment of reserve holdings.
  - RM3: BCCR to create a repository with data on climate hazards, vulnerability, and banks’ lending exposure. End-February 2023 (completed). Expected outcome: Integrated database to capture climate-related financial sector risks.
  - RM8: CONASSIF to approve regulation on management of socioenvironmental risks and climate change risks in the credit portfolio. End-September 2023 (completed). Expected outcome: Improved management of socioenvironmental credit risks by regulated entities.
  - RM12: BCCR to develop a methodology to incorporate climate effects on the banking sector in top-down stress testing, based on aggregated granular data. End-February 2024 (on track). Expected outcome: Diagnostic of climate-related credit risks to support risk management.

*Sources: National authorities; Central Bank of Costa Rica; Ministry of Finance; Superintendency of Banks (SUGEF); IMF staff estimates and tables as presented in the source content.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall assessment and policy implications
- Overall assessment: The external position of Costa Rica in 2022 was stronger than the level implied by fundamentals and desirable policies.
- 2022 headline current account (CA): -3.6 percent of GDP.
- Staff cyclically adjusted CA (after removing pandemic-related factors): -1.5 percent of GDP.
- Potential policy responses:
  - Continue authorities’ fiscal consolidation and BCCR’s data-dependent monetary policy approach to support external sustainability.
  - Maintain an adequate level of international reserve buffers to respond to adverse external shocks.
  - Advance structural reforms to provide conditions for growth and support a robust external position in the medium-term.

### Foreign assets and liabilities: position and trajectory
- NIIP (2022): -57.1 percent of GDP.
- 2022 balance-sheet snapshot (percent of GDP):
  - Gross Assets: 62.8
  - Debt Assets: 27.3
  - Gross Liabilities: 119.9
  - Debt Liabilities: 36
- External debt (2022): 51.7 percent of GDP; projected to stabilize at 44.6 percent of GDP.
- Maturity and currency:
  - About 15.7 percent of external debt is at short-term maturity.
  - Nearly all external debt is denominated in foreign currency.
- Liability composition (2022):
  - FDI: 69.3 percent of total liabilities.
  - Non-portfolio external debt: 21.1 percent.
  - Portfolio external debt: 9.6 percent.
- Assessment highlights:
  - The substantial share of FDI mitigates risks from the large net debtor position.
  - Strong FDI inflows between 2020 and 2022 resulted in FDI liabilities equal to 83 percent of GDP; trend continued in 2023 y-t-d.
  - ES model results indicate the CA is higher than needed to stabilize the NIIP (positive CA gap).

### Current account: drivers and model assessments
- 2022 CA: -3.6 percent of GDP (above the five-year average of 2.3 percent).
- 2022 dynamics:
  - 2022H1: high commodity prices and weak tourism recovery increased BOP pressures.
  - 2022H2: lower commodity prices, strong export performance (especially free zones), recovery of tourism, and robust FDI inflows eased BOP pressures.
  - These drivers persisted in 2023H1 and may imply further medium-term CA improvement.
- EBA model estimates (2022):
  - EBA CA model CA gap: 2.3 percent of GDP (after pandemic adjustor).
  - 2021 CA gap: 0.5 percent of GDP.
  - Main domestic driver of the policy gap in 2022: fiscal balance gap (relative to world average) driven by fiscal consolidation under the EFF program.
  - EBA external sustainability (ES) model CA gap: 2.4 percent of GDP (current account deficit is smaller than level needed to stabilize net foreign assets at the 2022 level).
- Trade policy note:
  - Costa Rica signed a free trade agreement with Ecuador (March 2023), requested membership to the Pacific Alliance and the CPTPP, and began negotiations with UAE and Israel—expected to expand trade-based growth opportunities.

### Real exchange rate (REER) and NEER
- 2022 averages:
  - REER appreciated 1.8 percent.
  - NEER appreciated 0.5 percent.
- 2022 sub-periods:
  - 2022H1: REER and NEER averaged depreciation of 2.7 and 3.4 percent, respectively.
  - 2022H2 (vs 2022H1): REER and NEER appreciated 9.3 and 7.9 percent, respectively.
- As of September 2023 (vs average 2022):
  - REER appreciated 14.1 percent.
  - NEER appreciated 18.1 percent.
- Model-based REER gaps (EBA estimates, elasticity = -0.29):
  - CA model REER gap: -8.0 percent.
  - REER index model gap: -7.5 percent.
  - REER level model gap: 11.3 (units as in source).
  - Fit of REER models is weaker than CA model; assessment relies on CA model.

### Capital and financial accounts: flows and structure
- Capital flows dominated by FDI for many years.
- 2022 flow details:
  - Inward FDI: 54 percent of net inward capital flows (debits).
  - Net FDI (debit and credit): accounted for 123.9 percent of the CA.
  - Other investment inflows: US$4.1 billion (61.6 percent of net inward capital flows).
    - Drivers of other investment inflows: lending to the Central Bank (US$1.1 billion from FLAR), the government (US$1.1 billion), and the non-financial sector (US$0.9 billion).
  - Net portfolio outflows increased US$0.9 billion (associated with pension fund outflows and reduced portfolio inflows in government bonds).
  - Net flows of other investments accounted for 66.5 percent of the CA.
- Assessment highlights:
  - Robust external financing structure with strong FDI inflows that can cover the current account.
  - Portfolio investments abroad by pension funds slowed since 2022H2 as domestic yields increased, easing exchange rate pressure.
  - Changes in external/domestic financial conditions could trigger acceleration of capital outflows.

### FX intervention and reserves level
- Gross international reserves (GIR):
  - Increased US$1.8 billion in 2022 to US$8.6 billion.
  - Equivalent to 101.8 percent of the IMF’s ARA metric for countries with floating exchange rates (2022).
- BCCR operations through end-October 2023:
  - Net purchases by BCCR: about US$3.1 billion.
  - GIR by end-October 2023: US$11.5 billion.
- 2022 FX intervention:
  - Intervention to address volatility: US$192 million in net FX sales.
  - Intervention on behalf of SOEs: US$195 million in net purchases.
  - 2022H1 net FX sales: US$851 million (driven by higher import energy bill, SOE FX needs, and pension fund outflows).
  - 2022H2 net FX purchases: US$853 million as BOP pressures eased.
- Reserve adequacy outlook:
  - 2022: GIR above 100 percent of ARA adequacy metric.
  - 2023 expected GIR: reach 123 percent of the ARA metric.
  - Projection: stabilize around 114 percent of the ARA metric at the end of the projection period.
- Reserve adequacy metrics (2022, level and benchmarks from IMF staff estimates):
  - Metric Level / Benchmark / Million of US dollars:
    - ARA metric (floating): 100.4 / 100-150 / 8,577 (Million of US dollars)
    - Short-term debt at remaining maturity: 84.8 / 100
    - Broad money: 24.6 / 20
    - Months of next year's imports: 3.4 / 3

### Risks and policy responses (selected entries from Risk Assessment Matrix)
- External risks:
  - Intensification of regional conflict(s) / Escalation of Russia’s war in Ukraine:
    - Likelihood: High
    - Impact: Medium
    - Policy response: Maintain adequate international reserve buffers; forward-looking data-dependent monetary policy; exchange rate flexibility; use fiscal space to protect social goals during fiscal consolidation and secure debt sustainability.
  - Abrupt global slowdown or recession (including U.S. scenario of higher-for-longer rates and “hard landing”):
    - Likelihood: Medium
    - Impact: High
    - Policy response: Maintain exchange rate flexibility; calibrate monetary and fiscal mix based on cyclical position; maintain adequate reserves; preserve financial sector capital adequacy buffers.
  - Commodity price volatility:
    - Likelihood: High
    - Impact: Medium
    - Policy response: Data-dependent forward-looking monetary policy; exchange rate flexibility; prioritize social spending during fiscal consolidation.
- Domestic risks:
  - Climate event El Niño 2023:
    - Likelihood: High
    - Impact: High
    - Policy response: Maintain monetary policy stance to mitigate food-price driven inflation; use fiscal space to support growth while prioritizing social spending.
  - Political fragmentation affecting reform passage:
    - Likelihood: Medium
    - Impact: Medium
    - Policy response: Rebuild coalitions; assess macrocriticality of reforms and devise approval strategies.
  - Vulnerability to cyber-attacks:
    - Likelihood: Medium
    - Impact: Medium
    - Policy response: Continue public sector training; strengthen supervisory capacity in financial sector; raise awareness; approve cybersecurity regulation by end-January 2024.
  - Sudden surge of migration flows:
    - Likelihood: Medium
    - Impact: Medium
    - Policy response: Increase priority social spending while safeguarding fiscal consolidation; coordinate with stakeholders and development partners.

*Source: Annex I. External Sector Assessment (content unit: 1criea2023005 - Annex I. External Sector Assessment).*

### 5. Debt consolidation across sectors:

### 5. Debt consolidation across sectors:

### Public debt structure and composition
- Perimeter shown is central government.
- Commentary: Consistent with the Medium-term Debt Strategy, the authorities are expected to continue to benefit from multilateral funding in the short term. The authorities returned to the Eurobond market in 2023 and have legislative approval for issuance in future years.
- Indicators shown (central government, percent of GDP):
  - Debt by Holder, by Instrument, by Maturity, by Currency (figures depicted graphically in source).
  - Residual maturity: 5.2 years.
  - Public Debt by Governing Law, 2022 (percent): Domestic law 75, International law 13, Multilateral 13 (percent values shown in figure).

### Baseline scenario and medium-term projections (Table 3: Baseline Scenario)
- Actual and projected public debt (percent of GDP):
  - 2022: 63.0
  - 2023: 60.8
  - 2024: 60.2
  - 2025: 59.2
  - 2026: 58.0
  - 2027: 56.6
  - 2028: 55.1
  - 2029: 53.6
  - 2030: 52.3
  - 2031: 50.9
  - 2032: 49.6
- Change in public debt (percent of GDP):
  - 2022: -4.6
  - 2023: -2.2
  - 2024: -0.6
  - 2025: -1.0
  - 2026: -1.2
  - 2027: -1.4
  - 2028: -1.5
  - 2029: -1.4
  - 2030: -1.4
  - 2031: -1.3
  - 2032: -1.3
- Contribution of identified flows (percent of GDP):
  - 2022: -5.1
  - 2023: -0.2
  - 2024: -0.6
  - 2025: -0.9
  - 2026: -1.1
  - 2027: -1.2
  - 2028: -1.4
  - 2029: -1.4
  - 2030: -1.4
  - 2031: -1.3
  - 2032: -1.3
- Primary deficit (percent of GDP): actual/projected
  - 2022: -2.1
  - 2023: -1.5
  - 2024–2032: -1.9 to -2.0 (baseline stabilizes at about 2 percent of GDP; source text: "the primary balance is expected to stabilize at about 2 percent of GDP")
- Noninterest revenues (percent of GDP): 2022: 16.4; 2023–2032: 15.3 (repeated)
- Noninterest expenditures (percent of GDP): 2022: 14.3; 2023–2032: 13.8 down to 13.3 (table lists 13.8,13.4,13.3,... stabilizing at 13.3)
- Automatic debt dynamics (percent of GDP):
  - 2022: -3.7
  - 2023: 0.5
  - 2024: 1.2
  - 2025: 1.1
  - 2026: 0.9
  - 2027: 0.7
  - 2028: 0.6
  - 2029: 0.5
  - 2030: 0.6
  - 2031: 0.6
  - 2032: 0.6
- Interest rate–growth differential contributions (percent of GDP):
  - 2022: -1.9
  - 2023: 1.2
  - 2024: 1.1
  - 2025: 0.8
  - 2026: 0.6
  - 2027: 0.4
  - 2028: 0.3
  - 2029: 0.3
  - 2030: 0.4
  - 2031: 0.4
  - 2032: 0.4
- Real interest rate (percent): 2022: 1.1; 2023: 4.2; 2024: 3.2; 2025 onward: values declining to 1.9 by 2032.
- Real growth rate (percent): 2022: -2.9; 2023: -3.1; 2024: -2.1; 2025–2032: from -1.9 down to -1.5.
- Gross financing needs (percent of GDP):
  - 2022: 8.1
  - 2023: 9.1
  - 2024: 8.9
  - 2025: 8.0
  - 2026: 8.1
  - 2027: 6.8
  - 2028: 7.1
  - 2029: 6.8
  - 2030: 6.6
  - 2031: 6.4
  - 2032: 6.2
- Debt service (percent of GDP) and currency split:
  - Debt service: 10.2 (2022); 10.6 (2023); 10.8 (2024); 10.0 (2025); 10.1 (2026); 8.8 (2027); 9.0 (2028); 8.8 (2029); 8.6 (2030); 8.3 (2031); 8.1 (2032).
  - Local currency (percent of GDP): 6.9 (2022); 6.9 (2023); 7.6 (2024); 6.3 (2025); 7.3 (2026); 5.9 (2027); 7.1 (2028); 6.9 (2029); 6.7 (2030); 6.5 (2031); 6.4 (2032).
  - Foreign currency (percent of GDP): 3.2 (2022); 3.6 (2023); 3.2 (2024); 3.7 (2025); 2.9 (2026); 2.8 (2027); 2.0 (2028); 1.9 (2029); 1.9 (2030); 1.8 (2031); 1.8 (2032).

- Memo macro assumptions:
  - Real GDP growth (percent): 2022: 4.6; 2023: 5.1; 2024: 3.5; 2025–2032: mostly 3.3 then 3.1 in later years.
  - Inflation (GDP deflator; percent): 2022: 6.3; 2023: 1.0; then 2.9, 3.2,... 3.0 by end.
  - Nominal GDP growth (percent): 2022: 11.1; 2023: 6.2; 2024: 6.5; 2025 onward: around 6.6 to 6.4.
  - Effective interest rate (percent): 2022: 8.0; 2023: 8.2; 2024: 8.4; then 8.0,7.7,7.4... 7.2 by 2032.

- Commentary: A sizeable frontloaded fiscal consolidation and a stronger currency reduced debt in 2022 and in 2023 despite increases in cash balances and interest payments. The end-2024 debt forecast is about 5½ percentage points lower than in the last assessment. Under the baseline, debt is expected to continue to decline over the medium term. Following the existing parameters of the fiscal rule, which are expected to allow progressively more spending room, especially after debt falls below 60 percent of GDP, the primary balance is expected to stabilize at about 2 percent of GDP. Debt is expected to fall below 50 percent of GDP before 2035 and enter a range that provides a prudent safety buffer to respond to adverse shocks while keeping debt below standard stress thresholds with a high probability.

### Realism and forecast track record
- Commentary: Realism analysis does not trigger major concerns.
  - Structural improvement in the primary balance is underpinned by EFF program commitments, which have thus far been exceeded, and the fiscal rule.
  - Baseline does not include yields from recently implemented tax compliance measures or savings from the Public Employment Bill's implementation.
  - The spread is expected to decline in 2024 due to large use of more favorable multilateral financing sources and less pressure on local markets.
  - GDP growth projections are in line with recent averages, implied fiscal multipliers, and potential growth estimates.

### Medium-term risk analysis (Figure 3)
- MTI (Medium-term Index) has fallen to just below the low-risk threshold.
- Fanchart estimates: risks, including those from forecast uncertainty, are moderate.
- GFN module indicates lower risks than comparators; cash buffers have been rebuilt.
- Contingent liabilities included in the test:
  - Debts of local government and the CCSS: ½ percent of GDP.
  - Central government contingent liabilities: 8½ percent of GDP.
  - Contingent liabilities include 6 percent of GDP that is the subject of a disputed claim by the CCSS (within general government) on the central government.
- Stress-test setup and effects:
  - Contingent liabilities test where 9 percent of GDP is paid over four years postpones further debt reduction but does not increase GFNs as much as the default stress scenario.
  - Default stress scenario components: growth reduced by 1 standard deviation for 2 years; interest rates rise by up to 300 bps; a depreciation equal to the largest of the last 10 years; shorter borrowing maturities; incomplete rollover; no new financing by foreign private creditors.
- Probabilities (2023-2028):
  - Prob. of missed crisis (if stress not predicted): 9.1 pct.
  - Prob. of false alarm (if stress predicted): 43.2 pct.
- Selected indicator values:
  - Probability of debt not stabilizing (pct): 9.4 0.1 (values shown in figure).
  - Average GFN in baseline: 8.0 2.7 (values shown in figure).
  - Bank claims on government (pct bank assets): 10.8 3.5.
  - Chg. in claims on govt. in stress (pct bank assets): 7.7 2.6.
  - GFN financeability index: ...8.8 (figure layout shows these values).

### Long-term risk analysis and scenario modules (Figures 4–5)
- Large amortization module:
  - Default large amortization module calculates GFNs and debt under three illustrative scenarios (custom, baseline variations).
  - Custom scenario: conservative baseline with primary balance averaging 1.4 percent of GDP over the long term; GDP growth slowing by 0.04 percent per year to about 2 percent in 2060.
  - Debt and financing needs are projected to keep falling over the long run under the customized baseline.
  - Lower interest rate and long maturity of RSF financing reinforce the declining trend.
- Climate change modules:
  - Standardized climate change adaptation module adds costs of associated investments of 0.4 percent of GDP in the medium term and declining thereafter (interpreted as adverse scenario of unexpected additional net costs).
  - Standardized mitigation module adds costs averaging about 0.3 percent of GDP over the projection period, frontloaded.
  - Scenarios assume investments sufficient to offset adverse effects on GDP growth; unanticipated additional mitigation and adaptation costs do not pose a large risk to the debt trajectory under these assumptions.
- Pensions and health (pensions module and healthcare modules):
  - Pensions module focuses on old-age, death, and disability pension managed by the CCSS.
  - In 2022, benefits exceeded contributions (excluding claims from central government), requiring the use of interest income.
  - Modelled demographic pressures run down assets in 2034, generating fiscal pressures and debt risks.
  - Policy levers: indexation to inflation instead of wages and linking retirement age to life expectancy could reduce costs by 2 percent of GDP by 2050.
  - Healthcare module: a scenario of higher spending per capita by 0.6 percent per year suggests contingent fiscal pressures that could prevent sustained declines in debt.
- Pensions metrics (figure values):
  - Permanent adjustment needed in the pension system (pp of GDP per year) to keep pension assets positive for 30 years, 50 years, until 2100 are shown in figure alongside pension financing needs and total benefits paid trajectories.
  - Demographics: Pension financing needs plotted across horizons; specific numeric series depicted graphically (e.g., 30 years 0.92%, 50 years 2.40%, Until 2100 4.09% appear as labels in figure).

### External debt sustainability (Table 4 and Figure 6)
- Baseline external debt (percent of GDP):
  - 2018: 46.7
  - 2019: 47.8
  - 2020: 49.6
  - 2021: 49.7
  - 2022: 47.3
  - 2023: 45.3
  - 2024: 45.4
  - 2025: 45.0
  - 2026: 45.2
  - 2027: 44.9
  - 2028: 44.6
- Debt-stabilizing non-interest current account (percent of GDP): -4.1 (table footer).
- Change in external debt (percent of GDP): values shown 2018–2028 (e.g., 2018: 2.2; 2019: 1.1; 2020: 1.8; 2021: 0.1; 2022: .0; 2023: -4.4; etc., as tabulated).
- Identified external debt-creating flows (percent of GDP): -2.4 (2018); -4.4 (2019); -0.2 (2020); -4.5 (2021); -4.1 (2022); -3.5 (2023); -3.1 (2024); -3.2 (2025); -3.4 (2026); -3.4 (2027); -3.5 (2028).
- Components:
  - Current account deficit, excluding interest payments (percent of GDP): values from 1.4 (2018) to 0.0–0.3 in later projections.
  - Deficit in balance of goods and services: -1.5 (2018), -3.8 (2019), -4.0 (2020), -3.2 (2021), -3.0 (2022), -2.8 (2023) ... projections at -3.0 to -3.2.
  - Net non-debt creating capital inflows (negative): -4.0 (2018); -4.3 (2019); -2.7 (2020); -5.0 (2021); -4.6 (2022); -3.8 (2023); and projected -3.7 across 2024–2028.
  - Automatic debt dynamics and contributions from interest, growth, and price/exchange changes are shown in table.
- External debt indicators:
  - External debt-to-exports ratio (percent): 2018: 135.6; 2019: 135.4; 2020: 154.7; 2021: 134.4; 2022: 124.8; 2023: 125.0; down to 111.8 by 2028.
  - Gross external financing need (US$ billions): 2018: 5.9; 2019: 5.6; 2020: 5.5; 2021: 6.2; 2022: 7.9; 2023: 12.3; 2024: 11.1; 2025: 10.5; 2026: 10.0; 2027: 10.4; 2028: 10.6.
  - Gross external financing need (percent of GDP): 9.5 (2018); 8.7 (2019); 8.8 (2020); 9.6 (2021); 11.5 (2022); 10-year and other averages listed in table.
- Key macro assumptions underlying baseline (selected):
  - Real GDP growth (percent): 2018: 2.6; 2019: 2.4; 2020: -4.3; 2021: 7.9; 2022: 4.6; 2023: 3.1; 2024: 3.1; 2025: 3.5; 2026: 3.3; 2027 onward: 3.3 then 3.3/3.3/3.3/3.3/3.3.
  - Nominal external interest rate (percent): 2018: 3.6; 2019: 3.4; 2020: 3.4; 2021: 3.1; 2022: 4.2; 2023: 3.3; projections around 4.1–4.4.
  - Growth of exports (US$ terms, percent): 2018: 10.7; 2019: 5.9; 2020: -12.1; 2021: 20.2; 2022: 19.4; projections vary.
- Bound tests and shock scenarios (Figure 6):
  - Various single and combined shocks (interest rate, real depreciation, non-interest current account shock, growth shock, combined shock) are shown graphically.
  - Example: One-time real depreciation of 30 percent occurs in 2024 (scenario label in figure).
  - Baseline and scenario paths of external debt (percent of GDP) are plotted for 2018–2028 under shocks.

### Decomposition of public debt and debt service by creditor (Table 5)
- Total public debt (millions of US$ and percent of GDP):
  - Total debt stock (end of period) 2022: 47,225.0 (100.0 percent); Nominal GDP: 74,044.1 (memo item).
  - Debt service: 63.8 (percent? table formatting shows header; debt service values per creditor listed in columns).
- External vs Domestic split (2022 totals, percent of total debt and percent of GDP as shown in table):
  - External: 12,063.7 (25.5 percent of total debt); 16.3 percent of GDP (table column headings indicate percent total debt and percent of GDP).
  - Domestic: 35,161.2 (74.5 percent of total debt); 47.5 percent of GDP.
- Multilateral creditors (2022, millions US$ and percent of total debt / percent of GDP from table):
  - Total multilateral: 5,985.4 (12.7 percent of total debt); 8.1 percent of GDP.
  - IMF: 1,315.1 (2.8 percent; 1.8 percent of GDP).
  - World Bank: 1,561.6 (3.3 percent; 2.1 percent of GDP).
  - ADB/AfDB/IADB: 1,888.5 (4.0 percent; 2.6 percent of GDP).
  - Other Multilaterals, o/w: 1,220.2 (2.6 percent; 1.6 percent of GDP).
  - CAF: 523.0 (1.1 percent; 0.7 percent of GDP).
  - Central American Bank for Economic Integration (CABEI): 697.3 (1.5 percent; 0.9 percent of GDP).
- Bilateral creditors and Paris/Non-Paris Club breakdown shown (values in table; e.g., Bilateral creditors total 578.3 representing 1.2 percent of total debt).
- Bonds (external and domestic combined presentation in table):
  - Bonds: 5,500.0 (11.6 percent of total debt); 7.4 percent of GDP (table columns contain further breakdowns by year and debt service).
- Domestic holdings (2022):
  - Held by residents, total: 34,762.1 (73.6 percent of total debt).
  - Held by non-residents, total: 399.2 (0.8 percent of total debt).
  - Domestic bonds: 34,892.9 (73.9 percent of total debt).
  - Domestic loans: 268.4 (0.6 percent of total debt).
- Memo items:
  - Contingent liabilities: 6,453.7 (13.7 percent of total debt; 8.7 percent of GDP).
  - Public guarantees: 817.5 (1.7 percent of total debt; 1.1 percent of GDP).
  - Other explicit contingent liabilities: 5,636.1 (11.9 percent of total debt; 7.6 percent of GDP).
- Commentary: Debt service figures reflect budgetary execution, which is not forecast beyond the current year at the creditor level.

*Source: Costa Rica — IMF staff compilation (content unit: 1criea2023005 - 5. Debt consolidation across sectors).*

### Annex IV. Foreign Exchange Intervention in Costa Rica through

### Annex IV. Foreign Exchange Intervention in Costa Rica through the Lens of the Integrated Policy Framework

### Context and FXI practice
- Since Costa Rica’s transition to a managed floating exchange regime in February 2015, foreign exchange interventions have remained frequent.
- Under the regime the Central Bank of Costa Rica (BCCR) “allows the exchange rate to be freely determined by foreign currency supply and demand, but it may participate in the market to meet its own foreign currency requirements and those of the non-financial public sector and, at its discretion, to prevent drastic fluctuations in the exchange rate”.
- FXI explicitly designated for stabilization has been rare and concentrated in times of sharp colón (CRC) depreciation (examples cited: late-2020 and mid-2022), but the BCCR participates in the FX market almost every month for transactions with and on behalf of the non-financial public sector (NFPS), and to a much lesser extent for reserve accumulation.
- The direction of intervention is highly correlated with the exchange rate: the BCCR sells FX when the exchange rate depreciates and purchases when the opposite is true.

### Market structure and shallowness
- Two main FX spot markets: the Electronic Foreign Exchange Market (MONEX) and Over-the-Counter windows; the OTC is around 9 times MONEX in turnover, but price making is done in centralized MONEX.
- Daily spot market turnover as a share of GDP: about 0.25 percent in 2022.
- FX derivatives market: almost non-existent in Costa Rica.
- Onshore-offshore dollar market premium: narrowed since 2021; premium of Costa Rica 1-year interbank dollar rate against the 1-year US treasury rate dissipated since 2021 and has remained negative since late 2022.
- UIP premium (definition as in source): showed a downward trend and turned negative recently; volatility large and the premium required to hold CRC after removing trend is high when CRC is weak vis-à-vis USD.
- The volatility of the UIP premium is driven mainly by the expected CRC appreciation against USD; misalignment between spot and expected rates suggests either a shallow spot FX market or lack of hedging instruments.

### Currency mismatches and sectoral FX balance sheets
- Sectoral net FX positions (highlights):
  - Corporate sector: large net FX liabilities of 63 percent of GDP (mainly from foreign direct investment into Costa Rica).
  - Government: net issuer of USD denominated debt by 20 percent of GDP.
  - Other depository corporations (mainly banks), other financial corporations (mainly pension and insurance companies), and households: structurally long FX positions.
- Banking sector size context:
  - Total assets of the banking sector: about the same as one year of GDP.
  - Total loans: about 60% of GDP.
  - Total deposits: about 40% of GDP.

### De-dollarization progress and remaining risks
- Over the last two decades USD denominated assets as a share of total assets, and USD denominated liabilities as a share of total liabilities and equity, have fallen by more than 10 percentage points to about 35 percent.
- 2023 dip in dollarization mainly associated with valuation effects of large CRC appreciation.
- De-dollarization drivers: active prudential regulations (capital charge, provision requirement, FX position limit, currency-based liquidity coverage requirement) and a more flexible exchange rate.
- Deposit-side de-dollarization: muted; USD deposits growth outpaced CRC deposits from mid-2021 until early 2023.
- Elevated deposit dollarization poses liquidity risks because BCCR’s lender of last resort ability for USD is limited to its FX reserves.
- Unhedged FX loans:
  - Within USD denominated loans, about 60 percent is extended to unhedged (or not fully hedged) borrowers, which is about 10 percent of GDP.
  - Private banks extend 66 percent of total FX loans, with a majority unhedged.
  - About 60 percent of FX loans are obtained by the corporate sector; small- and medium-size firms have a higher share of unhedged borrowers.
  - Households are more unhedged than corporates; unhedged FX debt particularly high for mortgage loans.

### Macroprudential and capital flow management measures (selected)
- Macroprudential measures (highlights and timeline from source):
  - Credit risk weight of unhedged FX loans:
    - mortgage: increased to 62.5 percent in 2013; revised by LTV in 2016 up to 100 percent; for non-mortgage increased from 100 percent in 2013 to 125 percent in 2015 and cut back to 100 percent in 2018. Both will be increased to 150 percent by 2030.
  - Loan loss provisions to unhedged FX loans: introduced in 2016, generic provisions of 1.5 percent on FX loans to unhedged borrowers; reduced to 1 percent in 2018. It will be phased out in January 2024.
  - Liquidity coverage ratio by each major currency: announced in 2013 and phased in from 2015 at 60 percent to 2019 at 100 percent.
  - FX Net Open Position (NOP) limit: introduced in 2016 and revised in 2017 to be within ±100 percent of bank’s core capital; daily NOP changes cannot exceed ±3 percent of core capital; monthly average NOP must be within a narrow band (1 percent of core capital to the upside and 3 percent to the downside) from a bank-specific target level agreed with BCCR.
  - Reserve requirement for FX deposits: 15 percent (currently at the cap).
- Capital flow management measures:
  - External debt issuance restrictions: authorization requirement for the government and selected nonbank public sector.
  - Contracting credit abroad restrictions: banks must inform the BCCR in advance and credit unions must obtain approval.
  - Outbound portfolio investment restrictions: pensions can invest up to 50 percent of assets overseas (currently not binding).

### Costs, benefits, and transmission considerations for FXI
- Rationale supporting targeted FXI (from IPF logic and Costa Rica specifics):
  - Shallow FX market (thin trading volumes, onshore-offshore differentials, volatile UIP premium) can lead to large inefficient overshooting of exchange rates from capital flow and risk appetite shocks.
  - Large unhedged FX liabilities in some sectors raise solvency risk from large exchange rate depreciation and can force deleveraging and fire-sales, exacerbating depreciation pressure.
  - FXI can be used to address premia from arbitrage frictions and to mitigate financial stability risks from FX mismatches.
  - IPF use case of preventing de-anchoring of inflation expectations is less applicable given Costa Rica’s well-anchored inflation expectations (including during recent surges of imported inflation and large exchange rate swings).
- Costs and trade-offs:
  - A dominant central bank role in FX operations, largely from daily transactions on behalf of NFPS, can hinder FX market development and create incentives for dollarization by reducing perceived exchange rate risk.
  - Dominant FX interventions weaken the exchange rate’s role as shock absorber and as a monetary policy transmission channel.
  - Some macroprudential measures (notably strict FX NOP restrictions) can exacerbate FX market shallowness by constraining banks’ ability to quote and execute large FX orders and by encouraging risk aversion.

### Policy recommendations and near-term priorities
- FXI stance:
  - FXI should be more restrained and targeted going forward, focusing on large and relevant shocks rather than frequent interventions for small shocks.
  - Targeted FXI is appropriate to guard against excessive FX shocks given the shallow FX market and unhedged FX liabilities in some sectors.
- FX market development:
  - Phase in active FX market deepening policies, including revisiting banks’ FX NOP limits, introducing market makers, extending MONEX trading hours, and developing the FX derivatives market building on an improved spot market.
  - Continue aligning the timing of FX purchases on behalf of NFPS with sales of FX to NFPS to enhance transparency (practice already being followed in recent months).
- Macroprudential calibration:
  - Maintain ex-ante macroprudential policies that internalize the financial stability cost of dollarization; these have helped reduce dollarization and remain important.
  - Revisit measures such as FX NOP restrictions so they do not excessively reduce FX market depth or amplify UIP volatility.
- Overall approach:
  - Balance the uncertain and non-linear benefits of FXI in stabilization against the significant costs to market development and monetary transmission; prioritize targeted interventions in response to large shocks while advancing market deepening and carefully calibrating macroprudential tools.

*Prepared by Chao He. Annex IV. Foreign Exchange Intervention in Costa Rica through the Lens of the Integrated Policy Framework.*

### 13.      Strengthening market participants’ incentives   and capacity to manage international oil

### 13.      Strengthening market participants’ incentives   and capacity to manage international oil

### Role of hedging and market reforms
- Hedging instruments can help market participants mitigate international oil price and FX risks, reducing shocks to the FX market and enhancing financial system stability.
- Further institutional and technical reforms are needed to create the right incentives for public oil companies and pension funds to better manage risks.

### Scale of foreign exchange intervention (Figure 6 notes)
- Sources: BCCR, Haver and IMF staff calculations.
- Note: NFPS = Non-financial public sector. In the right-hand side chart, coefficient of variation is standard deviation divided by mean. “Other” includes Brazil, Bulgaria, Chile, Czechia, Denmark, Hungary, Iceland, Israel, Mexico, New Zealand, Norway, Peru, Switzerland, and Uruguay.

### Key findings from Annex V — Public Compensation Control and Public Employment Reform
- Containing the government's compensation bill has been key to the fiscal turnaround and has had beneficial effects on inflation, private employment, and income inequality.
- The Public Employment Bill (PEB) is a landmark reform under the authorities’ home-grown reform program.

Findings and quantitative facts:
- Between 2007 and 2010, the central government including autonomous entities increased the number of employees by about 15 percent and increased wages.
- The central government’s spending on compensation of employees as a share of revenues rose to the highest in the OECD (reference: OECD (2023), OECD Economic Surveys COSTA RICA).
- For the non-financial public sector, the wage bill was 7 percent of GDP in 2007, 9.6 percent in 2011, 8.7 percent in 2019, and 7.9 percent in 2022.
- Contributions to Change in Primary Balance, 2019-2023 (Central Government, percent of GDP):
  - Employee compensation decrease1.3
  - Public transfers decrease0.5
  - Other primary spending decrease2.0
  - Revenues increase0.3
  - Total4.1
  - Source: Ministry of Finance and IMF staff estimates.
- Public employment comprises about 60 percent of formal employment in the top decile and 3 percent in the bottom decile.
- The share of public-sector employees in total employment is 12 percent for general government.
- A 1 percent-of-GDP fall in government spending translates to approximately half a percentage point fall in inflation (see April 2023 Fiscal Monitor).
- Wage premia determinants (2022) — empirical regressions referenced (coefficients reproduced in source):
  - Public employment 1 0.37
  - Secondary education 1 0.31
  - Tertiary education 1 0.89
  - Female 1 -0.14
  - (Public employment)*(Secondary education) 2 0.15
  - (Public employment)*(Tertiary education) 2 0.16
  - (Public employment)*female 2 0.06
  - (Public employment)*age 3 0.01
  - Notes: 1 Coefficient on dummy variable from regression with no interaction terms. 3 Coefficient on dummy variable interacted with age in years. 2 Coefficient on interacted dummy variable terms. For narrower public employment definition, premium does not increase with education.
- The trend of increasing public-sector pay premia reversed after the 2018 reforms, but wage premia remain high by global and regional standards.
- The PEB was approved by congress in March 2022 after two constitutional reviews; following entry into force in March 2023, a transitional global wage for new hirings in the executive branch was introduced.
- As of September 2023, a definitive wage spine has been designed and adopted for 7 job families.
- Debt exceeded 60 percent of GDP in 2020; the fiscal rule mandated a nominal pay freeze starting in 2022.
- Implementation details and transitional arrangement effects:
  - Employees hired after March 2023 adhere to the final single wage spine.
  - Employees below the spine will receive the same composite increases as before the PEB until the reference wage within the single wage spine is reached.
  - Employees above the spine’s reference wage have their wages frozen until the wage spine reaches them.
  - The PEB transition will require building administrative capacity, careful monitoring, and managing wages to avoid hiring inflexibility in high-skill areas.
- Simplifying non-wage compensation and centralization of wage bill management are associated with improved fiscal planning and transparency; automatic inflation wage indexation poses risks to fiscal objectives but is mitigated by the fiscal rule.

### Key findings from Annex VI — Costa Rica’s Free Trade Zones
- Free trade zones have been critical in attracting FDI, diversifying exports, and generating formal jobs; they supported growth during the COVID-19 pandemic and recent global slowdown.
- Growth and export performance:
  - In 2022, real GDP under the special regime increased by 7.1 percent (y-o-y) vs. 4.1 percent for the rest of the economy.
  - So far in 2023, real GDP growth under the special regime was 16.0 (y-o-y) vs. 3.9 percent in the rest of the economy.
- FDI composition and sources:
  - The average share of FDI to the free trade zones in total annual FDI during 2017-2022 was 66 percent vs. 36 precent during 2000-2016.
  - In 2021 the share was 74 percent and in 2022 it was 81 percent.
  - The lion’s share of FDI to Costa Rica is coming from the United States; the contribution to total FDI to Costa Rica averaged 54 percent in 2005-2022.
  - The average U.S. share of total FDI during 2017-2022 increased to 69 percent.
- Sectoral and employment impacts:
  - From 2017 to 2021, the number of free trade zone companies grew on average by 6 percent per year, with growth driven by the service sector.
  - About half of the companies are in the services sector, including software engineering, leasing services, outsourced business processes, logistics, and technical support centers.
  - The medical- and dental devices sector is an important driver of recent export diversification.
  - The authorities estimate the free trade zones contributed 221,295 direct- and indirect jobs in 2021.
    - 164,212 (74 percent of total) were direct employment, of which 60 percent in the services sector.
    - 44 percent of the employed were women.
  - In 2021, the average salary in the free trade zones was about 20 percent higher than in the private sector nationwide.
  - Greenfield investment evidence suggests FDI to Costa Rica generates a significantly higher number of jobs per USD invested than in other countries in the region, particularly in software and IT services.
- Backward linkages and spillovers:
  - An estimated 60 percent of free trade zone purchases are from the local economy.
  - Local suppliers to multilateral companies were 8 percentage points more likely to become exporters themselves.
  - Multinational companies in free trade zones generate larger intangible benefits for domestic suppliers and workers than those outside the regime.
- Fiscal cost and cost-benefit considerations:
  - According to the authorities’ estimates, fiscal incentives to free trade zone companies amounted to CRC 597 bn in 2021 or

1.5   percent of GDP.
  - This is equivalent to CRC 2.7 mn (appr. US$ 4.350) per direct- or indirect job stemming from the free trade zones, or 3.6 mn (appr. US$ 5.860) per direct job per year.
  - Cost-benefit analyses by the authorities and IDB staff find net positive contributions, with quantified benefits more than double the costs.
  - However, these analyses do not question whether fiscal incentives are the most cost-efficient long-term mechanism to achieve the same results.
  - Tax exemptions could distort competition, incentivize resource misallocation, create tax evasion or avoidance opportunities, and lead to rent-seeking.
  - There is an opportunity cost: foregone tax revenue might be better spent on infrastructure, education, or healthcare to attract FDI.
  - The upcoming implementation of the global minimum tax will render some tax incentives redundant, raising the question of gradual phasing out.

### Policy implications and recommendations (implicit in analysis)
- Strengthen incentives and capacity of market participants (including public oil companies and pension funds) to use hedging instruments to mitigate oil price and FX risks.
- Continue institutional and technical reforms to align public entities’ incentives with risk management objectives.
- Maintain fiscal rule discipline to contain wage indexation risks and preserve fiscal gains from compensation reforms.
- Implement PEB carefully with administrative capacity building, monitoring, and measures to avoid hiring inflexibility in critical skills.
- Reassess the long-term cost-efficiency of fiscal incentives to free trade zones, considering:
  - Potential gradual phasing out of tax incentives, especially given the global minimum tax.
  - Redirecting foregone revenues to address infrastructure, education, or healthcare improvements that can attract FDI without fiscal concessions.

*Source: 1criea2023005 - 13.      Strengthening market participants’ incentives   and capacity to manage international oil (IMF staff content).*

### 8.      The OECD/G20 Pillar 2 minimum tax will be helpful in setting a floor for the tax level

### 8.      The OECD/G20 Pillar 2 minimum tax will be helpful in setting a floor for the tax level

### Role of the OECD/G20 Pillar 2 minimum tax
- Ensuring tax incentives granted to firms in the free trade zones are consistent with the tax policy implications of the OECD/G20 Pillar 2 minimum global tax will allow the authorities to reduce the costs of tax exemptions without a commensurate effect on competitiveness.
- The Pillar 2 implementation is an opportunity to revisit and reevaluate the overall fiscal incentives package to optimize cost–benefit outcomes.
- In the more immediate term, follow-up is needed on observations in the recent report by the Comptroller’s office to ensure adequate control and follow-up of free trade zone concessions.

### Risks from a dual economy and geographic concentration of FDI
- Unless productivity and real GDP growth in the non-free trade zone economy keep pace with that of the free trade zones, there is a risk that the dual economy translates into increased inequality, especially from a regional perspective.
- FDI concentration:
  - During 2018-2022, more than 90 percent of FDI was concentrated in the greater metropolitan area.
- Legislative response:
  - In May 2022 the Legislative Assembly approved a new law, Law No. 10234, including eleven new incentives to strengthen territorial competitiveness to attract FDI outside of the greater metropolitan area, targeting sectors such as:
    - the food processing industry,
    - agricultural input companies,
    - specialized health centers, and
    - sustainable recreational and adventure activities.
- The success of this initiative may indicate the relative importance of tax incentives versus other factors in attracting FDI.

### Policy recommendations to broaden benefits and raise productivity outside free trade zones
- Create the right conditions for businesses outside free trade zones to raise productivity and competitiveness by:
  - Moving towards a more competition-friendly regulatory framework.
  - Facilitating entry and reducing costs for starting a company.
  - Continuing ongoing efforts to reduce regulations.
  - Improving physical and digital infrastructure.
- Maintain Costa Rica’s edge in terms of a skilled labor force by pressing ahead with ongoing educational reform efforts, including adapting higher education curricula to labor market demand.

### Supporting evidence and context
- Comptroller’s office report referenced: Informe de auditoría sobre los otorgamientos y la revisión de requisitos de permanencia para empresas en el régimen de zonas francas, 27 de setiembre de 2023, Informe N° DFOE-FIP-IAD-00003-2023, Contraloría General de la República.
- OECD assessment: According to the OECD’s Product Market Regulation indicator, Costa Rica has more stringent regulations than any other OECD country. OECD Economic Surveys, Costa Rica, OECD, February 2023.

*Source: 1criea2023005 - 8.      The OECD/G20 Pillar 2 minimum tax will be helpful in setting a floor for the tax level*

### 7. In 2022, we entrenched further improvement in the fiscal accounts, in line with the

### 7. In 2022, we entrenched further improvement in the fiscal accounts, in line with the program targets.

### Fiscal performance and targets (2022)
- Despite a cyberattack and rising external pressures, the authorities "comfortably met all primary balance and debt targets under the program."
- End-September primary balance: CRC 1,003 billion (program target: CRC 215 billion).
- End-December primary balance: CRC 927 billion (program target: CRC 287 billion).
- One-off revenues used to accelerate debt reduction included transfers of surpluses accumulated by decentralized entities before incorporation into the central government.

### Revenue measures implemented (2022)
- Main tax collection systems were shut down in late April 2022 due to a breach, but revenue performance remained strong for corporate income, VAT, and import-related taxes because contingency plans ensured continuity for large taxpayers.
- Continued implementation of the 2018 tax reform generated durable incremental yields through scheduled rate increases of VAT on construction-related services and tourism and the capital income tax.
- Delayed the scheduled inflation adjustment to the fuel tax for six months until December 2022 to mitigate the global commodity price shock.
- Used one-off transfers from decentralized entities’ surpluses to accelerate debt reduction.

### Spending measures and execution (2022)
- Fiscal rule envisages tighter spending constraints for 2022-2025 due to 2020 GDP contraction and debt ratio exceeding 60 percent of GDP.
- Total spending growth in 2022: 1.4 percent.
- Primary spending: fell in nominal terms and by 1.6 percent of GDP in 2022.
- Total and current spending grew within fiscal rule limits after accounting for relevant exclusions.
- Spending restraint measures included:
  - Freeze in base salaries, annuities, and new hiring; elimination of vacancies (2018 fiscal reform).
  - Until September 2022: annual nominal reductions of temporary wage components by 8.5 percent; freezes in pensions of public sector retirees and current transfers to the public sector excluding transfers to the Social Security Fund (CCSS); cuts in non-pension private transfers, non-CCSS public transfers, and transfers with external resources; annual nominal reduction in spending on goods and services.
- Regulation related to these constraints was abrogated in September 2022 to provide more budgetary flexibility, but MOF circular issued in November 2021 continues to ensure tight spending controls.
- Monthly monitoring and appropriation adjustments to line ministries; delays and reprioritization of capital projects and unused guarantee fund resources led to under-execution of capital spending.
- Supplementary budgets issued; FODESAF resources excluded from the fiscal rule; operational efficiencies identified; higher-than-anticipated revenues from IMAS commercial activities reallocated to mitigate higher prices’ effects on vulnerable groups.
- Additional social cash transfers and support provided amounted to an additional 0.2 percent of GDP versus the budget.
- Consideration (not enacted) of a temporary gasoline price limit: if enacted in future, commit to duration ≤ 9 months, fiscal cost capped at CRC 3 billion (or less than 0.01 percent of GDP), and covered by fiscal rule spending ceiling.

### Fiscal performance and commitments (2023, progress to mid-2023)
- Primary balance up to end-June 2023: CRC 646 billion (QPC: CRC 305 billion).
- On track to exceed primary surplus target of CRC 609 billion (about 1.3 percent of GDP) by end-December 2023.
- Revenue measures in 2023:
  - 2018 tax reform generated additional income tax yields due to delayed enforcement of thin capitalization rules: yield of 0.1 percent of GDP.
  - January 2023 measure: taxing imports of certain goods with VAT throughout production stages until sold to final consumer: yield of 0.06 percent of GDP.
  - Fully phased-out reduced VAT rates to tourism sector and construction services.
  - Legal framework adopted in September 2022 to periodically appraise tax expenditures and remove ineffective ones; first appraisal expected to mobilize at least 0.07 percent of GDP by removing lenient VAT treatment of airfares, medical equipment, and wood, and exemptions on car rentals (legislation submitted May 2023).
  - Submitted tax bill 23.760 (May 2023) to reform the PIT to tax employed, pensioners, and self-employed under a single recalibrated schedule; harmonize PIT rate on capital income and gains; broaden base (including dividends distributed by firms in free zones to residents); remove progressive schedule within CIT while retaining and updating simplified regime for SMEs; include capital income earned abroad by residents; simplify taxation of non-residents.
  - Legislative Assembly passed law 10.381 to amend permanent establishment definition to align with international standards; President partially vetoed aspects but veto was overridden by the Legislative Assembly.
  - Submitted bill 23.088 to improve financial institutions’ compliance with due diligence on non-residents’ financial information required for automatic exchange of information.
  - Legislative Assembly actions in September 2023 that reduced tax efficiency: extension/expansion of tax exemption for SMEs (setback) and reduction in recurrent property tax on vehicles via introduced bill.
  - Submitted in November 2023 a revenue-neutral feebate scheme to incentivize replacement of high-polluting private vehicles.

- Spending measures in 2023:
  - 2023 budget envisages total spending growth of 3 percent (consistent with fiscal rule limit of 2.6 percent after accounting for emergency spending).
  - Given budgeted interest bill increases, implies zero growth in budgeted primary current spending.
  - As of September 2023, primary current spending grew by 1 percent.
  - 2023 budget increases social spending by more than CRC 30 billion (4 percent) relative to initial 2022 budget, including new non-contributory pensions for elderly in poverty.
  - Reallocated under-executed resources of CRC 55 billion through extraordinary budgets to social spending (main cash transfer, non-contributory pension, childcare programs), while stepping up efforts to verify eligibility.
  - As per 2018 fiscal reform, effectively reallocating spending away from legally mandated uses (except constitutional mandates) when debt-to-GDP > 50 percent.
  - Committed to staying current on payment obligations and not accumulating spending arrears.
  - Approval in November 2022 of external loans and multi-year Eurobond issuance, together with market improvements and debt management, expected to help contain interest expenditure and create space for priority spending.
  - Verified CCSS claims and made additional payments.

- COVID-19 contingency: program targets allow an adjustor to accommodate increased COVID-19 emergency spending up to 0.2 percent of GDP in 2023.

- Commitment to save any revenue over-performance or windfalls to accelerate debt reduction plans.

### Draft 2024 budget and fiscal stance
- Draft 2024 budget targets a primary balance of at least 1.85 percent of GDP (consistent with Legislative Assembly conditions for further Eurobond issuance).
- Budget permits nominal primary current spending growth of 2.4 percent; current and overall spending expected to continue declining as a share of GDP despite higher interest costs.
- Increase in priority social spending of 16 percent relative to ordinary 2023 budget, with expectation of further increases via extraordinary budgets.
- Ongoing improvements in tax and customs administration expected to support revenue yields.
- If revenues underperform, will propose compensating tax measures and reprioritize non-critical spending to meet primary targets required for Eurobond issuance.

### Medium-term objectives and measures (debt and spending)
- Aim to reduce debt to below 60 percent of GDP "as soon as possible"; target to reach 60 percent threshold in 2025 and continue reducing thereafter.
- Additional measures to be underpinned by planned income tax reform and rationalization of tax expenditures.
- Freeze in basic wage to be extended until 2027 in line with fiscal rule and debt forecasts; expect fiscal savings from public-sector employment reform to begin materializing from 2027.
- Continue modernizing and strengthening social safety net and allocating additional resources to improve coverage.
- Expected upsides: consolidation of ministries and institutions, planned asset sale program, modernization of tax and customs administration (¶12) and PFM reforms (¶15), and verification/settlement of additional CCSS claims to reduce contingent liability risks.

### Structural fiscal reforms: medium-term revenue strategy (¶11)
- Strategy elements include:
  - Redesigning PIT to tax wages, self-employed profits, and pensions under a single recalibrated progressive schedule.
  - Broaden base by taxing dividends from firms in free trade zones and passive capital income earned abroad by Costa Rican residents.
  - Rationalize and simplify income taxation of non-residents.
  - Further broaden VAT base by removing services taxed at reduced rates and performing systematic cost-benefit analyses of tax exemptions, including review of those with negative environmental impact.
  - Remove progressive schedule within CIT while protecting small firms via revamped special tax regime, broadening the base and correcting non-neutralities.
  - Revise incentives under free trade zones to protect domestic base in line with Pillar 2 (WB support).
  - Support environmental agenda with feebates and periodic recalibration to support transition to low-emission vehicles while safeguarding revenues.
- Aim for the comprehensive package to compensate for revenue losses from recent legislation on CIT and property tax on vehicles.

### Strengthening revenue administration and customs (¶12)
- Tax Compliance Improvement Plan approved December 2021 (structural benchmark), updated December-2022 and December-2023, with IMF TA support; focuses on recovering delinquent tax arrears, large-scale automated cross-matching, and revamped audit programs on VAT on services and CIT base erosion.
- Rollout delayed by hacking but implementation resumed August 2022 with quarterly monitoring.
- From September-2022 to November-2023, risk assessments recouped approximately US$ 38.5 million in owed taxes, including interest and penalties.
- Developed guideline (ficha) for risk assessments of large net-wealth taxpayers in November 2023.
- Submitted bill 23.759 (May 2023) to modernize tax code—fiduciary responsibility, simplified enforcement, penalties updates, coercive collection, and precautionary administrative measures.
- Bill 23.088 proposed changes to general tax code to ensure financial institutions comply with due diligence for automatic exchange of information.
- Strengthened taxpayers’ registry with IMF TA; on track with monthly debugs May-November 2023.
- International taxation risk assessment guideline developed; pilot on CRS non-compliance started August 2023.
- Use administrative and third-party information (CRS, CbC reports, shareholder and beneficial ownership registers) to enhance compliance.
- Started exploiting electronic invoice data samples to detect unusual activity and improve enforcement.
- Require large cross-border service providers to register for VAT to enhance compliance on cross-border services consumed in Costa Rica.
- Update framework to estimate non-compliance for VAT and CIT by end-March 2024 (with IMF TA).
- Customs reforms:
  - New Customs Law approved May 2022 with IMF TA support; implementing regulation approved June 2023.
  - Directorate of Customs prioritized operational/procedural changes; organizational changes delayed until operational guidelines in place.
  - Executive decree by end-January 2024 to curb abuses and improve oversight of service logistics firms in free trade zones (requiring shared inventories and limiting some activities).
  - 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 imports.
  - Use of non-intrusive scanners at Moin Port with risk-selection criteria.
- Digital transformation: MOF’s Hacienda Digital (WB-supported) to upgrade tax and customs procedures and information systems; replace abandoned National Integrated Risk Management Systems; Commercial-Off-The-Shelf modules under discussion for interoperability and improved risk management.
- Cybersecurity: aggressive strategy to minimize cyber risks through communication, training for MOF staff, investments in updating security measures to reduce vulnerabilities.

*Source: IMF content unit 1criea2023005 — chapter text provided.*

### 13. We are rationalizing and improving the efficiency and quality of government spending

### 13. We are rationalizing and improving the efficiency and quality of government spending

### Public employment reform — implementation and expected fiscal impact
- The landmark Public Employment Bill (PEB) was approved in March 2022. The related structural benchmark was not met by end-May 2021 due to legislative delays.
- Reform design:
  - Replaces the composite salary system with a single pay spine to enhance fairness and productivity and to bring the public wage bill on a sustainable path, in line with OECD recommendations.
  - Consolidates other wage supplements (annuities, bonuses, incentives and others) within the single salary spine.
  - Introduces new rules for recruitment and selection, professional development, and performance evaluation, including for top-ranked officials.
  - Introduces new employee benefits: one-month parental leave, two-month extension of maternity leave (for special cases), and sick leave to take care of a family member.
- Fiscal mechanics and transition:
  - Due to the large wage premium in the public sector, the reform freezes salaries that fall above the spine until the single pay spine reaches them.
  - Gradual transition to the single wage spine for existing workers whose salaries fall below the reference wage (Transitory Disposition XI) is expected to generate savings.
- Implementation milestones and technical work:
  - MIDEPLAN created a Public Employment Unit and, in coordination with DGSC and with IDB support, finalized the methodology to create a single wage spine with all seven job families in June 2023.
  - Oversight of the spine’s design was shared with autonomous institutions (Judiciary and Legislative Branches, Supreme Electoral Tribunal, public universities, municipalities, and CCSS) following criteria and ceilings approved by the Bill.
  - Public consultation occurred in January 2023; implementing regulation approval was envisaged by March 2023.
  - A National Dialogue was set up in March 2023 and held for 10 days to communicate implementation and address technicalities.
  - MIDEPLAN issued general methodological guidelines in May 2023 for job data collection, job-family analysis, and spine formulation; guidelines are non-binding for institutions not under MIDEPLAN’s tutelage.
- Program-related actions and compliance:
  - With IMF TA support, MIDEPLAN produced a single wage spine covering at least one-quarter of job positions in the executive branch in June 2023 (a met prior action).
  - 100 percent of the executive branch’s job positions were incorporated in the single wage spine in early-September 2023 (structural benchmark) by publishing the wage spine and its directives.
  - The payroll system, Integra, was updated and began administering payments for all employees covered by the law in line with transitional provisions in November 2023.
  - All institutions covered by the PEB will have complied with the design and enforcement of a global wage spine by January 2024, meeting the missed end-March 2023 structural benchmark.
- Ongoing validation and regulatory work:
  - With IDB support, a simulation on a representative sample of jobs will contrast the sample-derived spine with the published global spine by end-December 2023; adjustments to the published wage spine, if necessary, will be made in the appropriate annual directive by March 2024 in coordination with MOF and STAP as mandated by the PEB.
  - Guidelines will be published on how to revalue points within the global wage spine over time to preserve fiscal savings while maintaining capacity to attract qualified human capital.
  - Drafting and approval of other human resource management guidelines and regulations envisioned in the law and its regulation will be completed by March-2024.
  - Amendments to specific articles in the PEB have been drafted to close loopholes allowing institutions to declare positions exclusive and carve out staff from the PEB.

### Social protection — centralization, digitalization, targeting, and the Single Window
- Strategic objective: enhance targeting accuracy and delivery of social protection programs leveraging digitalization and consolidation.
- Institutional reform:
  - Bill 23.436 (presented October 2022) aims to integrate functions of various bodies within IMAS; expected to be available for plenary discussion by May 2024.
- Centralization and digitalization of payments:
  - The payment system for all cash transfer social assistance programs at the MOF’s National Treasury (SUPRES) was centralized and digitalized in December 2021 (structural benchmark).
  - By July 2023, the system included all IMAS programs and numerous other institutions’ programs, representing 97 percent of cash payments financed with resources from the national budget.
  - Target: all main institutions and programs that provide cash benefits to be fully compliant with the new system by end-December 2023.
  - Estimated effect: reduced payment processing time from 3-5 days to less than 24 hours (often in real time).
  - Next technical steps: develop round-the-clock real-time payments and the ability to compensate third parties for in-kind services; tailor data interfaces and support remaining institutions to adopt the system.
- Targeting and coverage improvements:
  - SINIRUBE (Sistema Nacional de Información y Registro Único de Beneficiarios del Estado) is being strengthened as the main instrument to target social protection benefits and services.
  - A study by Programa Estado de la Nación confirmed the robustness of the SINIRUBE algorithm for targeting beneficiaries.
  - Two out of 17 remaining autonomous social sector institutions (the judiciary and higher education) remain to adopt SINIRUBE; the government is persuading municipalities to adopt it.
  - SINIRUBE incorporates the baremo tool to quantify intensity of needs and aid prioritization.
  - IMAS is progressing on removing ineligible duplicate benefits identified by SINIRUBE; Bill 23.436 will safeguard powers to address duplication.
  - With UN support, legal options are being assessed to increase or decrease conditionality of cash transfers.
- Social Assistance Single Window (ventanilla única):
  - With WB technical support, IMAS is designing a Single Window to consolidate social programs and prioritize needs rather than operate first-come-first-serve.
  - An online form to change contact details has been launched; back-office systems are being strengthened.
  - IMAS is on track to launch a single window for social programs under its authority by end-February 2024 (structural benchmark); exceptions specified include emergency care and certain program areas.
  - Functionality to be automated: from request submission to appointment assignment; integration with SINIRUBE for real-time validation and eligibility assessment.
  - Recent completions: user self-service module, improved database interoperability, and automated prioritization of beneficiaries.
  - Target extension: extend access rights beyond registered social workers by the end of 2023; inventory of programs from other institutions to link to the single window in early 2024.
  - Expected benefits: one-stop-shop for beneficiaries; consolidated benefit information; eligibility signaling for beneficiaries and social workers; facilitation of legal document preparation; easier updating of personal information; improved coordination among managing institutions.
  - Financing: ongoing efforts to secure financing to maximize the single window’s effectiveness.

### Public financial management (PFM), fiscal rule, and investment management
- Fiscal rule amendments and coverage effects:
  - September 2023 amendments adjusted the rule’s regulatory perimeter to exclude public institutions operating under market conditions or without government control consistent with budgetary classifiers, following IMF TA recommendations.
  - Amendments also excluded other non-IMF advised institutions (national security sector, donations to the non-financial public sector, royalties paid to ARESEP and other transitory arrangements), complicating verification of compliance.
  - The amendment reduced institutional coverage and thus the amount of spending covered by the rule by 5.8 percent of non-financial public sector spending.
  - The rule retains spending ceilings and its role in containing spending and reducing debt at the central government level, but its influence on non-financial public sector expenditure has been considerably weakened.
  - MOF produced an assessment (September 2023) on legal changes needed to empower STAP to make the expenditure limit applicable to overall central government (including extrabudgetary entities) on aggregate rather than to individual entities; assessment concluded that including extrabudgetary entities in the aggregate requires constitutional and other supporting reforms.
  - Policy stance: limit further changes to the rule to holistic periodic reviews and oppose ad hoc institutional exclusions.
- Medium-Term Fiscal Framework (MTFF):
  - MOF published an MTFF covering the NFPS for 2022-2027 in April 2022 (meeting the relevant structural benchmark) with IMF TA support.
  - MTFF features: analysis and reporting of fiscal risks with contingent liabilities, debt guarantees, explicit fiscal contingency reserve schemes, and integration of a medium-term public investment plan/framework.
  - Updates: MTFF updated in September 2022 (2023 budget submission) and March 2023; revised September 2023 MTFF explicitly states goal to reduce debt to 50 percent of GDP by 2035.
  - MTFF includes climate transition risks (¶44).
- Public Investment Management Assessment (PIMA) and project appraisal:
  - MOF and MIDEPLAN undertook the IMF PIMA (including a Climate Change Module) in November-December 2021 with WB and IDB support.
  - A plan was defined to strengthen public investment efficiency and create fiscal space for climate-related and other critical infrastructure needs (¶41).
  - Bill No. 22.470 submitted to extend SNIP procedures to decentralized entities, Legislative and Judicial Branches, Supreme Electoral Tribunal, dependencies, auxiliary entities, autonomous and semiautonomous SOEs, and municipalities; bill viewed favorably and expected to be approved by the Legislative Assembly by end-February 2024.
  - Climate integration: social cost of carbon incorporated into project appraisal; September-2023 guidelines published with specific illustrations in the transport sector (¶41).
  - Deliverables and timelines:
    - Publish by end-December 2023 a set of clear and transparent project selection criteria including climate change criteria (¶41).
    - 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 with stock and condition of public assets to inform investment planning, selection, and maintenance.
- PFM institutional reforms and modernization:
  - Introduced gender budgeting in the 2024 national budget proposal; a gender budget statement was published as an annex to respective 2024 budgets (completed in October 2023) for selected ministries and institutions.
    - Intermediate steps: pilot exercise to identify gender-related expenditures completed by end-December 2022; adjusted budget call circulars by end-April 2023; coordination established between MOF, STAP and Comptroller’s Office for adoption of technical budgeting standards in decentralized sector.
    - Execution of gender-related spending will be monitored during 2024.
  - Fiscal Council: resourcing and operationalization underway to enable the first public assessment of fiscal strategy, fiscal rule compliance, debt sustainability, and macro-fiscal projections included in the March 2024 MTFF; support to develop communication tools and a memorandum of collaboration with MOF is planned.
  - Macro-fiscal Unit: process initiated to formalize a permanent MOF unit in charge of macro-fiscal issues by end-December 2023 (in line with IMF TA).
  - Other reforms:
    - Continued MOF–Comptroller collaboration across the budget cycle to ensure fiscal rule compliance despite added complexity from recent changes.
    - Plan to consolidate public services within fewer public institutions as part of public sector reform: proposed consolidation within MOPT, creation of a new Ministry of Housing, and a new Social Ministry; restructuring several ministries including elimination of the Ministry of Governance and reallocation of some directorates.
    - Treasury Single Account (TSA) extension: revised bill (No. 22.661) submitted in September 2022, expected approval by end-December 2023, to require phased transfer of cash held by decentralized and autonomous entities in commercial bank accounts to the TSA to reduce idle cash and central government borrowing costs.
    - MOF’s digital transformation plan, Hacienda Digital (WB-supported), will modernize and integrate PFM information systems to align expenditure policies across core PFM entities, planning, and spending units.

*Italic: Content derived from 1criea2023005 - 13. We are rationalizing and improving the efficiency and quality of government spending*

### 16. We modernized our public procurement processes. In line with the Social Dialogue’s

### 16. We modernized our public procurement processes. In line with the Social Dialogue’s

### Modernization of procurement systems and legal framework
- 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 managing and implementing umbrella contracts for goods and services, eliminated past exceptions to public bidding processes, and increased competition for government contracts.
- New procurement legal framework entered into force in December 2022 and requires bidders’ registration in the e-procurement system, ‘Electronic Registry of Official Suppliers and Subcontractors of the Unified Digital System’, to be incorporated into SICOP.
- Regulation published in November 2022 requires all competing bidders to submit accurate and current beneficial ownership information through affidavits as part of the bidding process.
- Required beneficial ownership information includes identification of the beneficial owner, including full name, and type and number of official identification document(s) for legal persons.
- Although SICOP is publicly accessible, beneficial ownership information will be held within MOF’s supplier registry for consultation by the Comptroller General of the Republic, Office of the Attorney General of the Republic or other judicial authority upon request.
- Authorities will be able to cross-check information with the Transparency and Final Beneficiary Registry, administered by the BCCR to combat tax fraud and money laundering (¶35).
- Procurement law updates expected to:
  - Update, streamline, and modernize public procurement processes.
  - Ensure greater efficiency savings through bulk purchases of certain goods.
  - Differentiate procurement by public works, goods, and services and set different thresholds and processes for each category, reducing complexity.
- Commitment to upskill procurement offices within the public sector to improve public procurement planning in line with the National Procurment Plan for 2024.

### Transparency and oversight of COVID-related spending
- Comptroller’s Office developed a Fiscal Transparency Portal for COVID-19 publishing information on public purchases and audit results on the use of emergency assistance.
- Ministry of Labor and Social Security created a transparency portal on the Bono Proteger program, including 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 data on public purchases include information on awarded vendors, including their legal ownership (if tenders required it).
- Comptroller’s Office continues specific audits on emergency cash transfers and publishes results in its Portal.

### Governance and transparency in state-owned enterprises (SOEs)
- SOEs are dominant in key sectors: electricity, telecommunications, transportation, banking and insurance services, and petroleum products.
- Some SOEs present data reporting weaknesses, constraining full assessments of balance sheets and potentially hiding risks to public finances and taxpayers.
- Commitment to accelerate full adoption of International Financial Reporting Standards (IFRS) by SOEs.
- Publication status for 2020 financial statements according to IFRS (end-December 2021 structural benchmark):
  - ICE (Instituto Costarricense de Electricidad) was fully compliant.
  - AyA (Instituto Costarricense de Acueductos y Alcantarillados) became compliant with a delay in June 2022.
  - CNP (Consejo Nacional de Producción) continues work on implementing a new accounting system for FANAL, a very small company under its purview.
  - The remaining SOEs already published their 2020 financial statements per IFRS standards.
- Updated 2021 aggregate report on SOE performance published in February 2022.
- With support from the OECD and WB, SOEs’ public procurement process is fully consistent with SICOP as required by the Public Procurement Law, limiting exceptions for direct public procurement and gradually eliminating regulations that grant them the right to withhold confidential information.

### Electricity sector efficiency, tariff modernization, and reforms
- Since 2021, ICE has implemented an efficiency strategy to reduce electricity prices via reducing operational costs, restructuring debt, and completing IFRS implementation.
- Estimated cumulative price reductions in ICE’s systems from December 2020 to December 2023:
  - generation: 10 percent
  - transmission: 13 percent
  - distribution: 5 percent
- ICE will continue execution of its Financial Sustainability Roadmap to reduce fixed costs and renegotiate debt conditions; reclassification of operating leases as finance leases concluded in March 2023 and will be reflected in tariff reductions as of 2024.
- ICE will assess cost structures across generation, transmission, distribution and launch a roadmap with detailed actions to increase efficiency by end-December 2023.
- In September 2023, ICE requested ARESEP to carry out an ordinary tariff study to reduce prices in:
  - generation by 14 percent
  - distribution by 3 percent
  - study expected to take effect in January 2024.
- Bill (No. 22.561) submitted June 2021 to authorize private energy generators, public companies, and cooperatives to sell surplus energy to the regional market; expected approval by end-June 2024.
- ARESEP expanding efforts to analyze tariff competitiveness and adopt a new efficient tariffs benchmark with IDB support.
- Under ARESEP’s leadership, three companies (ICE, ESPH and COOPELESCA) began the first part of tariff modernization in 2021; remaining five companies started implementation in 2022. From 2024, ARESEP will work with each distribution company to develop a roadmap for tariff structure modernization.
- Implementing regulation for Law No. 10086 (simplifying administrative procedures for private participation in renewable self-consumption) approved in October 2021 and officially established in February 2023 (¶42).
- ICE and Costa Rican Chamber of Distributed Generation to simplify interconnection procedures through an internal protocol.
- Bill (No. 23.414) submitted October 2022 to promote new technologies and business schemes for public electricity service, optimize infrastructure, ignite commercialization of electricity, integrate public policy for electricity and fuels, and accelerate decarbonization — bill under discussion in legislative committee.
- ICE renewing/renegotiating private generator contracts as they expire to leverage installed capacity, guarantee investment efficiency, and achieve end-user tariff benefits.
- ARESEP will monitor distribution companies’ financial costs to ensure financing terms fit assets’ useful lifespan.
- Ongoing efforts to promote harmonization of the energy sector.

### Comprehensive debt management reform agenda
- Debt Policy for the Public Sector (Executive Decree 41935-H) approved in 2019 establishes guidelines to put debt on a sustainable path.
- Debt management agenda components:
  - Eurobond issuance:
    - In November 2022, Legislative Assembly authorized MOF to issue up to US$ 5 billion in Eurobonds.
    - Secured US$ 1.5 billion in March 2023 and US$ 1.5 billion in November 2023 (at face value).
    - Authorization for up to US$ 1 billion in 2024, and up to US$ 1 billion in 2025, subject to prudent fiscal targets.
    - Pursue a constitutional reform in February 2024 to grant the executive greater flexibility in international borrowing.
  - Institutional debt management reforms:
    - Amendment to law 8131 submitted May 2023 to centralize debt-related functions and create a standalone Public Debt Management Office reporting to the Minister of Finance (end-June 2023 structural benchmark).
    - Assets and Liabilities Committee (Treasury, DCP, MOF macro-fiscal unit, BCCR) to provide strategic guidance and inter-agency coordination.
  - Medium-term debt strategy (MTDS):
    - Updated MTDS covering 2022-27 published April 2022 (met relevant structural benchmark).
    - Will publish and adhere to Annual Borrowing Plans and Quarterly Issuance calendars in line with MTDS; strengthen accounting and budget execution processes for public debt payments.
  - Domestic market development:
    - Focus issuance on standard fixed-rate bullet bonds of select maturities; phase out open bond windows and bilateral bond sales.
    - Executive committee of market makers discussed overall size of issuance in June 2023.
    - Reform auction mechanism for the Treasury to become a price-taker in bond auctions and form a technical pricing committee.
    - Promote 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 open Costa Rican public debt market to foreign participants by easing regulatory barriers and harmonizing tax treatment.
    - Consultations with international platforms for clearing and settlement in accordance with international standards.
    - December 2022 pilot market-making / primary dealer program rolled out with IDB support; expected ready in first half of 2024.
    - Produced a report for consultation with market participants and regulators; preparing workshops towards end of 2024 with Euroclear, local central securities depositories and regulators to meet Euroclear requirements.
  - Liquidity Management:
    - Government cash balances historically much less than 1 percent of GDP; in 2020 balances were insufficient for one month of obligations.
    - Steadily building cash buffers to reduce rollover risks and increase market confidence.
    - Accelerated build-up of cash balances in light of strong appetite for government securities and very high financing needs anticipated in first half of 2024.
    - Approach balances tradeoffs among:
      (i) comfortable coverage of needs in domestic and foreign currency,
      (ii) increased use of foreign financing consistent with MTDS, and
      (iii) goals to contain interest costs and the headline debt.
    - Increased use of liability management operations in line with MTDS, rescheduled some disbursements, and used opportunities to conduct FX sales/purchases to/from the BCCR (without unduly directly affecting the exchange rate).

### Sovereign Asset and Liability Management (SALM) readiness
- Agreed to publish the recent Technical Assistance report on SALM to facilitate broader discussion.
- Committee for Sovereign Assets and Liabilities established to coordinate public debt management, cash management, and financial programming of the budget.
- Drafted a decree to facilitate implementation of an investment strategy to reduce cost of carry; expect decree to be issued by December 2023.
- Plan to develop a roadmap to implement key recommendations from the report by June 2024.
- Roadmap to cover:
  - Broadening data collection on all sovereign assets and liabilities consistent with international accrual accounting standards.
  - Establishing framework to analyze system-wide liquidity risk, rollover risk, contingent liabilities, and other shocks to the budget.

### Improvements in fiscal data quality and transparency
- Commitment to improve timeliness, quality, and comprehensiveness of fiscal, financial and debt accounting for the public sector with IMF TA support.
- Resumed adoption efforts of GFSM 2014 accrual accounting standards after delays from hacking attacks.
- Finalized 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.
- Produced Budgetary Central Government (BCG) debt stocks, including loans and debt securities at nominal value (including accrued interest) according to GFSM 2014 for August 2023 and are producing monthly data before the end of the following month.
- Publish timetable and targets:
  - Publish a report detailing and explaining the CCG debt and accrued interest data in October 2024.
  - Publish monthly GG above the line data (excluding accrued interest) from 2019-2023 by end-March 2024.
  - Compile monthly debt data (including accrued interest) for the CCSS for December 2023 to February 2024 consistent with 2014 GFSM accrual accounting standards by end-April 2024.
  - Publish at least a year’s worth of monthly consolidated GG fiscal data consistent with GFSM 2014 standards in January 2025, and debt data (including accrued interest) in September 2025.
  - Expand institutional coverage to include nonfinancial public corporations’ GFS above-the-line and PSDS 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, and gradually for local governments, social security fund, and nonfinancial public corporations.
- Developed reporting of fiscal risks (in the context of the MTFF) to include contingent liabilities, guarantees, concession contracts, and indebtedness of municipal governments and nonfinancial public corporations by end-March 2025.
- Improvements include comprehensive collection and reconciliation of financing (below-the-line) data, harmonization of methodology and data coverage among national accounts, government finance and public sector debt statistics, and coordinated improvements on public sector accounting to guarantee stock-flow consistency and enable balance sheet enhanced analysis.

### Monetary and exchange rate policy stance and recent developments
- Monetary policy under an inflation targeting framework with a flexible exchange rate and BCCR mandate to maintain low inflation.
- BCCR began raising the policy rate in December 2021 amid rising inflationary pressures after the COVID-19 pandemic.
- Policy rate reached 9 percent by October 2022.
- Minimum legal reserve requirement rate for deposits and obligations in national currency raised from 12 percent to 15 percent in July 2022.
- Monetary tightening and decline in global fuel prices led to decline in inflation and inflation expectations starting in September 2022.
- Inflation bottomed out at -3.3 percent y-o-y in August (year not explicitly restated in source).
- Breach of the inner lower MPCC band by 0.8 percentage points in June 2023 and the outer lower MPCC band by 2.6 percentage points in September 2023.
- In light of accelerated decline in headline and core inflation and decline in inflation expectations, BCCR lowered the policy rate by 2.75 percent by October 2023, moving toward a less restrictive stance since March.

*Source: Excerpt from IMF Costa Rica report (content unit 1criea2023005 - section 16–23).*

### 24. Monetary policy will remain data dependent and forward-looking to meet the

### 24. Monetary policy will remain data dependent and forward-looking to meet the

### Monetary policy framework and inflation target
- Inflation target: 3 percent, with a tolerance band of ±1 percentage point.
- The BCCR will:
  - continue to monitor inflation developments closely;
  - communicate clearly and transparently the drivers of inflation, the inflation outlook, and the implications for monetary policy;
  - aim, barring new shocks and if conditions allow, to continue its gradual and prudent move towards a neutral monetary policy stance in the second half of 2024.
- Progress in meeting the inflation target under the program will be monitored through a MPCC around quarterly targets (Table 1), as described in the attached TMU.

### Exchange rate policy and international reserves
- Exchange rate regime: flexible; interventions only to avoid disorderly market conditions and to maintain adequate reserves levels.
- FX demand pressures and NIR target deviations in 2022:
  - end-June 2022 NIR target missed by US$612.2 million;
  - end-September 2022 NIR target missed by US$48.6 million.
- Subsequent reserve accumulation and target outcomes:
  - end-December 2022 and March 2023 NIR targets were exceeded (amounts not restated here in source excerpt);
  - June 2023 NIR target exceeded by US$3311 million;
  - end-September 2023 NIR target exceeded by US$4124 million.
- Policy commitment:
  - 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 in line with the definition in the TMU and reconcile with audited financial statements as of the end of the fiscal year, as needed.

### FX market deepening and operational reforms
- Objectives:
  - strengthen predictability and transparency of BCCR FX transactions;
  - create incentives for greater reliance on market-based transactions;
  - further accumulate reserves by purchasing FX when market conditions are favorable until reaching a more comfortable level of reserves;
  - pass NFPS demand for FX to the market quickly to facilitate price discovery and greater exchange rate flexibility;
  - target FX intervention to address excessive exchange rate volatility given a shallow FX market and currency mismatches from dollarization.
- Operational measures implemented or planned:
  - Since April 2022, NFPS entities must give advance notice of at least one month to the BCCR for FX requests.
  - Introduction of market makers to enhance liquidity:
    - potential candidates for a market makers scheme identified;
    - market makers would have an obligation to regularly quote prices based on minimum trading lots and maximum bid/ask spread;
    - process underway to define appropriate incentives for market maker entities.
  - Gradual re-extension of Monex’s trading hours once market functioning and liquidity improve, aiming to cover at least the hours of heavy trading at commercial banks’ windows.
  - December 2022: obligation introduced to adhere to the FX Global Code; implementation to be completed by January 2024.
  - Plan to revise FX intermediaries’ net open FX position requirements in line with international best practices, including loosening the daily NOP limit to enhance market-making ability.
  - Development of the FX derivative market to improve FX liquidity, hedging potential, and price formation:
    - a master agreement is being developed (in coordination with foreign exchange intermediaries) for negotiation of FX derivatives in the country by end-June 2024.
  - Reforms will be conducted consistent with Article VIII commitments and The IMF’s Institutional View on Liberalization and Management of Capital Flows.
- Complementarity:
  - these FX market deepening actions complement measures to reduce financial dollarization (¶30), aiming to reduce financial vulnerabilities and strengthen monetary policy transmission.

### Strengthening BCCR independence, transparency, and accountability
- Past legal changes (2019) improved personal autonomy by:
  - tightening dismissal rules for the BCCR Governor;
  - delinking the Governor’s term from the political cycle;
  - removing the Minister of Finance’s voting rights on the BCCR Board.
- Safeguards Assessment follow-up:
  - draft amendments to the BCCR law were submitted to the MOF by end-August 2021 (structural benchmark met);
  - final amendments were not submitted to the Legislative Assembly by end-December 2022 (structural benchmark missed);
  - in June (year in source not restated), a subset of previously foreseen changes was submitted to the Legislative Assembly and are now with the Commission of Economic Affairs.
- Commitment and next steps:
  - remain committed to addressing remaining Safeguards Assessment recommendations to strengthen autonomy, governance and operational structure;
  - believe the most viable way to achieve this is by awarding constitutional autonomy to the BCCR;
  - legislation for constitutional autonomy has been prepared and will be submitted to the Legislative Assembly as soon as political context allows;
  - constitutional autonomy would allow implementation of measures envisaged in the original structural benchmark.
- Implementation status:
  - BCCR has completed nine of the twelve recommendations from the Safeguards Assessment.
  - The Executive Branch will take necessary steps to fill the current vacancy in the BCCR Board, after the needed Constitutional Court decision.
  - A long-term roadmap will be developed to continue to strengthen the BCCR’s equity position.

### Financial sector policies — progress and vulnerabilities
- Overall progress:
  - Several important financial sector reforms approved and implemented building on the IMF’s 2018 FSSR, OECD recommendations and WB FSAP Development Module.
  - Sound prudential policies have left the banking system with strong capital and liquidity buffers, as evidenced by stress test results.
  - High levels of unhedged FX borrowing and household and corporate indebtedness remain important sources of vulnerabilities.
- Transparency enhancements:
  - Since March 2023, SUGEF began publishing:
    - names of domestic systemically important financial entities;
    - quarterly Capital Adequacy Ratio of each supervised financial entity;
    - information on bottom up stress test (BUST) results.
  - The first BUST publication covered aggregated results of systemically important financial entities; starting January 2024, publications will cover individual results of participating entities.

### Banking sector stability measures and provisioning
- Measures to help borrowers and preserve transparency:
  - January 1, 2023: CONASSIF and SUGEF created a transitional loan classification category to soften risk rating effects when financial entities modify credit operations (extensions, restructurings, refinancings).
  - All historical changes in classification will be recorded to maintain transparency.
  - January 2023: SUGEF reactivated counter cyclical provision (reduced in 2020) to prepare against adverse conditions.
  - CONASSIF approved new regulation and guidelines for credit provisioning effective January 1, 2024, using updated methodology, risk parameters, credit segmentation, and similar treatment for restructurings/extensions/refinancing.
- Monitoring and coordination:
  - Continued monitoring through the Financial Stability Committee’s (FSC) Monitoring and Coordination Group (MCG) comprising senior representatives of the BCCR, CONASSIF, the Superintendencies, and the MOF.
  - Technical group supporting the MCG will meet frequently to follow up on systemic developments and detect sources of stress, including interest rates and FX movements.
  - Ongoing updates to bottom-up and top-down stress tests and publication in the annual Financial Stability Report.
- Climate and resilience initiatives:
  - BCCR roadmap to integrate climate considerations into monetary and financial policies includes work on an integrated climate and economic model and stress testing methodologies (¶45).
  - SUGEF developed a roadmap to incorporate key recommendations from the 2022 World Bank Financial Sector Assessment report.
  - Regulations to tighten authorization requirements approved in November 2023.
  - Amendments to the law to underpin the legal power of superintendents expected to be submitted to the Legislative Assembly by December 2024.

### Actions to reduce risks from financial dollarization
- Measures and regulatory changes:
  - Since 2018, BCCR has allowed greater exchange rate flexibility to help agents internalize exchange rate risks (¶25–26).
  - The FSC is closely monitoring dollarization risks; SUGEF and CONASSIF have taken measures to reflect these risks in prudential parameters, including:
    - establishing a higher general provision requirement for loans to non-FX generators (replaced later by a new regulation);
    - 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.
  - Regulatory changes implemented:
    - revised definition of an unhedged borrower effective January 1, 2023;
    - new regulation imposing additional capital requirements on foreign currency loans to unhedged borrowers, replacing the earlier general provision.
- Key features of the unhedged borrower regulation:
  - 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, regardless of the number of hedges;
  - reduces room for discretion in assessing currency mismatches between income and loan currency.
  - gradual increase in the risk weight for credits to unhedged borrowers, starting on January 1, 2024, and ending on January 1, 2031.
  - risk weight applies gradually to both the loan balance by end-December 2023 and to marginal loans from the corresponding effective date.
- Transparency:
  - SUGEF began publishing quarterly data on unhedged FX borrowing since March 2023; end-September data uploaded to the website in October 2023.

### Strengthening prudential regulatory and supervisory regime
- Legal and regulatory milestones:
  - 2019 reforms (Law no. 9768) strengthened powers of supervisors, including sanctioning powers, aligning with international best practices.
- Implementing consolidated supervision:
  - May 2022: CONASSIF approved a 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 of financial groups, including guidelines for information sharing and updated solvency and capital requirements; phased implementation started January 1, 2023.
  - Ongoing IMF TA supports identification of further improvements; additional steps will be taken depending on financial groups’ size, risk and profile.
- Phasing in risk-based supervision and Basel III adoption:
  - SUGEF enhanced liquidity risk management supervision; net stable funding ratio expected to come into effect with transitional arrangements from September 1, 2024.
  - New regulation and guidelines for provisioning finalized in November 2021, to come into effect January 1, 2024.
  - Revised banks’ capital definition, conservation and systemic importance capital buffers, and definition of systemically important institutions in line with Basel III; regulation issued in August 2021 to come into effect January 1, 2025.
  - Reviewed regulations on capital requirements for market risk and credit risk and included measurement of interest rate risk in the banking sector balance sheet; expected approval end-2023 with effective date January 1, 2025.
  - During adjustment periods, financial entities required to assess operational and financial impacts and report results to SUGEF quarterly starting in last quarter of 2022.
  - June 2023: SUGEF launched a functional re-organization to reallocate supervisory resources for resolution and consolidated supervision and to modernize structure required by risk-based supervision; organizational change proposal sent to the BCCR and pending approval.
  - Capacity challenges include securing budget and agile processes to attract and retain qualified professionals or external experts, and strengthening analytical and statistical capabilities.
- Strengthening supervisors’ legal powers and protection (planned legislative reforms):
  - Grant supervisors legal powers to:
    - dismiss members of the Board and senior management of banks for unsafe and unsound practices;
    - ease legal conditions for exercise of supervisory powers (giving more discretion to supervisors);
    - establish a separate appeal procedure for at least the most serious supervisory measures;
    - establish that intervention agreements or effects of measures adopted prior to declaration of non-viability can never result in reversal of their legal effects.
  - Recalibrate the sanctioning framework to provide proper incentives.
  - Strengthen legal protection for supervisors with respect to coverage of legal costs and protection against good faith errors.
  - Regulatory roadmap for 2024 includes new regulations and development of supervisory capabilities to impose additional capital requirements under Basel Pillar II on individual banks.

### Cyber risk and operational resilience
- With IMF TA support, draft regulations prepared to address governance and risk management of cyber risk, covering:
  - information sharing;
  - immediate incident reporting and testing frameworks;
  - third-party risk management; and
  - response to and recovery from cyber incidents.
- Supervisory follow-up: authorities will follow up with implementation plans prepared by financial institutions.
- Status and timeline:
  - Draft reviewed by IMF TA mission in April (year in source not restated);
  - Regulations expected to be approved no later than January 2024.

*Source: Content unit 1criea2023005 (IMF staff text).*

### 32. We will continue to strengthen our financial safety net by enhancing our banking

### 1criea2023005 - 32. We will continue to strengthen our financial safety net by enhancing our banking

### Strengthening bank resolution and deposit guarantee framework
- 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).
- Implementation timeline:
  - Implementing regulations in effect since May 2021.
  - Quarterly payments into the DGF started in October 2021.
  - In 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 reforms with IMF TA:
  - Strengthen legal framework on bank resolution and deposit insurance, including adequate institutional arrangements for the DGF and the resolution authority, sufficient resolution powers, and clear resolution triggers.
  - Strengthen the legal regime for resolution and recovery plans.
  - Finalizing draft amendments to Law 9816 and other relevant laws, in coordination with CONASSIF and the BCCR; draft bill shared with the MOF.
  - Submission plan: submit final legal amendments, once approved by the MOF and the President of the Republic, to the Legislative Assembly by end-December 2023 (structural benchmark).
- Back-up resolution financing:
  - MoF to form a commission in coordination with SUGEF, CONASSIF and the BCCR to propose a plan for the back-up resolution financing, clarifying roles and contributions by various stakeholders.
- Crisis preparedness and liquidity support:
  - Continuous monitoring of macro-financial risks by the MCG, including an updated early warnings system and contingency plan with a communications protocol.
  - BCCR enhanced its Lender of Last Resort mechanism; assessing scope for further improvements to perform timely and effectively.
  - As a contingent measure in situations of stress, the BCCR increased the tenure of the emergency liquidity facility from 24 hours to 84 days.

### Level playing field between public and private banks; competition
- Identified distortions and regulatory asymmetries hamper private- and state-owned banks’ ability to support growth and job creation.
- Proposed legislative and policy measures to remove asymmetries (to be prepared as a proposal for the Legislative Assembly):
  - Conversion of parafiscal contributions by state-owned banks into a single commensurate transfer to the CG budget, adjusting the fiscal rule spending accordingly.
  - Removal of the requirement on state-owned financial institutions to comply with public procurement requirements.
  - Gradual phasing out of 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), while identifying alternative ways to channel resources to underserved sectors, limiting any fiscal contingent liabilities.
- Related measures:
  - Correcting asymmetry generated by the legal requirement for NFPS to do their banking with state-owned banks through approval of the Single Treasury Account legislation (¶15) under discussion by the Legislative Assembly.
  - 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.
  - Improve the BCCR and MEIC database that compares credit products across the financial system to enhance information for financial consumers and foster bank competition.

### Promoting financial inclusion and digitalization
- Pandemic-driven increases: sharp increase in electronic transactions and Bono Proteger allocation led to significant increases in bancarization and financial inclusion.
- Structural constraints: limited banking competition and partial coverage of the credit registry raise lending rates and hinder inclusion.
- Policy actions:
  - 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).
  - Simplified requirements for opening a bank account to broaden access to the payment system and promote digital banking.
  - Launched an electronic payment system for public transport nationwide.
  - Improve the design and scope of the public credit registry, Centro de Información Crediticia (CIC), with information from supervised financial entities and non-supervised credit providers; send draft bill to CONASSIF no later than December 2023.
  - CONASSIF and the four Superintendencies finalized draft legislation for financial consumer protection; Executive Branch decided to revise the draft so MEIC will handle future consumer protection for both regulated and non-regulated entities.
  - Financial Innovation Center inaugurated in April 2022 (with IDB support) to support fintech startups and advise on fintech regulations; aim to balance innovation and financial stability.

### AML/CFT reforms and beneficial ownership disclosure
- GAFILAT status: Costa Rica under enhanced follow-up by Grupo de Acción Financiera de Latinoamérica (GAFILAT); strengthening technical compliance with FATF standards.
- Re-rating submissions: Four FATF Recommendations submitted for re-rating — 8, 17, 22, and 28 — to be decided at the next GAFILAT Plenary in December 2023.
- Virtual assets regime:
  - Draft amendment law (Bill No. 22.837) to subject virtual assets (VAs) and virtual asset service providers (VASPs) to AML/CFT supervision by SUGEF presented to the Legislative Assembly on December 9, 2021; draft sent for consultation to SUGEF and the financial sector in October 2022 and currently under review in the Legislative Assembly.
- KYC and customer information:
  - Regulations adopted in July 2022 require financial institutions to upload to CICAC (Centro de Información Conozca a su Cliente) customer information that customers explicitly authorize.
  - As of August 31, 2023, CICAC holds over 70,299 active files with customer information from 49 financial institutions.
- Beneficial ownership transparency:
  - BCCR’s centralized beneficial ownership registry RTBF (Transparency and Beneficial Ownership Registry) began collecting shareholder and beneficial ownership information for all legal entities except third-party resource managers and non-profit organizations.
  - RTBF information is accessible to the Ministry of Finance and the Costa Rican Institute on Drugs.
  - A beneficial ownership declaration form for non-profit organizations has been available since August 2023; non-profit organizations will have to declare for the period of 2024 by April 2024.
  - Technology developed to enable financial institutions’ legal entity clients to share beneficial ownership information provided to the RTBF with the CICAC repository.

### Structural reforms to boost productivity and promote green and inclusive growth (overview)
- Strategic objectives (National Development and Investment Plan):
  - (i) protecting the most vulnerable and supporting inclusion, including by promoting greater female labor force participation;
  - (ii) boosting productivity growth, including by eliminating barriers to business formalization, investment, and job creation;
  - (iii) promoting a green recovery, anchored by the National Decarbonization Plan and the goal of becoming a zero net emission economy by 2050.
- Selected measures to foster productivity and formalization:
  - CCSS actions since 2017 to reduce social security contributions and target populations where informality is prevalent.
  - 2020 CCSS mechanism for coffee harvest workers shifted contributions to a two-party modality covered by the state and ICAFE.
  - October 2023: INS and ICAFE, with the Ministry of Agriculture, launched an occupational risk insurance scheme for coffee harvesters.
  - CCSS Board plan (June 2022) to adjust the minimum contribution base (MCB) of mandatory pension and health insurance for part-time workers; final plan approved September 2022.
  - Phased implementation of reduced MCB for health insurance: January 2023 for workers below age 35; January 2024 for workers below age 50; January 2025 for all workers.
  - Pension insurance: part-time workers earning less than the MCB can accumulate fractional quotas (0.25, 0.50, 0.75 and 1 quotas) toward the 180 quotas required for a minimum pension.
  - Since May 2022, independent workers may contribute voluntarily to health and pension schemes for 6 months if income below the MCB; after 6 months, contributions become mandatory.
  - MCB implementation reached more than 19,000 workers (health) and 27,000 workers (pension) in August 2023.
  - CCSS implementing law No. 10232 (approved December 2022) authorizing relief of social security debts to encourage formalization.
  - CCSS preparing regulation of law No. 10.363 (approved May 2023) to reduce cost of settling independent workers’ unpaid debts with the CCSS from 10 to 4 years.
  - Reduction in the number of minimum wages across private sector job categories from 26 to 16 over the last four years; intention to reduce further to 11 by end-December 2023.
- Education, skills, and infrastructure measures (selected):
  - Roadmap for Education (Ruta de la Educación 2022-2026) launched February 2023; report on progress to be available in May 2024.
  - Ministry of Public Education to develop internal reorganization and decentralization plan by end-December 2024 (with WB and IDB support).
  - Information system of indicators for results-based budgeting to be developed by end-May 2024 (with UN support).
  - Mandatory reading and writing for first grade entry as of February 2023; strategy La Aventura de Leer y Escribir implemented.
  - Teacher support and accelerators: ABC Mouse and My Math Academy available for teachers of 489 educational centers as of October 2023.
  - SEA (Agile Evaluation System) introduced to reduce administrative burden; assessed with high acceptance among 11,878 interviewed teachers.
  - Connectivity improvements: as of October 2023, internet and increased connectivity speed provided in 2,645 centers, including 587 centers from rural areas.
  - Investment in school infrastructure: maintenance for 400 centers during 2023 and 2024; build 26 educational centers under Adopte un Centro Educativo (including two in indigenous territories); include $125 millon in a broader infrastructure CABEI loan for construction and repair of 133 centers.
  - Food and transport support: universalized meals benefiting 526,826 preschool and primary students; nearly 300,000 secondary students also received food assistance; as of June 2023, nearly 28,621 new students received food provision in low-income areas compared to June 2022; 23,862 poor students living far from education centers started to receive school transportation during the 2023 school year.
  - Avancemos scholarship program: directive requiring principals to report scholarship students who drop out to enable early detection and re-enrolling; improve targeting of social spending.
  - Bilingualism Education Policy introduced February 2021 with Action Plan to improve second-language proficiency by 2040; English and French tests administered to 70,000 secondary students.
  - English lessons provided to 22,044 preschoolers; AI-piloted oral and written English skills tests applied to 8,333 primary and 7,954 secondary students.
  - Strengthen vocational curricula for Industry 4.0 to begin implementation in February 2024; launched 4 new study programs in 2023 and aim to launch 6 more under dual education in February 2024.
  - Inclusion of technological courses in national curriculum starting in 2024 from kindergarten to adult education; linking public universities’ funding to labor market needs via 2024 budget negotiation targets and commitments.
  - Reformed regulation to streamline approval and monitoring of private higher education.
- Investment climate and PPPs:
  - Identifying spending priorities and promoting PPPs with CABEI and IDB to reduce infrastructure gaps consistent with fiscal consolidation plans.
  - With IDB support, launched the Program of Road Infrastructure and Promotion of PPPs and will provide PPP training across central and local governments during 2022-.

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

### 24. In February 2023, we issued a methodological guide to evaluate the appropriateness of PPPs.

### 24. In February 2023, we issued a methodological guide to evaluate the appropriateness of PPPs.

### Public-private partnerships (PPPs) and infrastructure pipeline
- Issued a methodological guide in February 2023 to evaluate the appropriateness of PPPs.
- Identified a portfolio of infrastructure projects that could be developed through PPPs, including a new airport and highways.
- Parallel work with non-government sectors to address challenges and build confidence in the PPP model, alongside required structural reforms.

### Electricity, telecommunications, and digital infrastructure
- Ongoing effort to reduce electricity tariffs (¶19) to promote investment.
- Launched National Telecommunications Plan 2022-2027 in December 2022 to promote high quality, innovative, and affordable telecommunication services and develop digital skills.
  - Plan aims to generate conditions for timely deployment of robust, scalable, resilient, and sustainable telecommunications network infrastructure.
  - Regulatory framework: Law N° 10216 and derived regulations expected to be issued by end-December 2023.
  - Target to increase competition among mobile technology operators, including 5G networks; tender process planned by end-March 2024.
- Strengthened public sector cybersecurity:
  - Launched Cybersecurity Strategy for public consultation; final version published in November 2023.

### Deregulation, business environment, and single-window services
- Launched program Le Dejamos Trabajar in collaboration with private sector; eliminated 140 obstacles for businesses by end-September 2023.
- Implemented Costa Rica Fluye commitments with 11 public institutions to enact 21 regulatory enhancements.
- Implemented a single-window system (VUI) for business licenses and permits.
  - VUI implemented in 44 local governments.
  - Measures to simplify 163 procedures across the public sector to start a business, integrate environmental permits, and centralize procedures at the national level completed in September 2023.
- Issued 11 decrees in September 2022 to eliminate minimum fees in 10 professional associations.
  - Six of those decrees were not operational due to legal issues.
  - Submitted bill No. 23.357 to eliminate mandatory fees for all 10 professional associations to the Legislative Assembly in September 2022.

### Bankruptcy, financial regulations, and investment promotion
- Published regulations for implementation of new bankruptcy law (Ley 9957) in September 2023 to simplify bankruptcy process and promote restructuring.
- Approved a regulation to promote investment in the renewable energy sector (¶42).
- Amended Development Banking System Regulations in March 2023 to ease financing for entrepreneurs in rural areas, women, youth, vulnerable populations and SMEs; halved the time it takes to formalize guarantees.

### Foreign direct investment (FDI) and innovation clusters
- Plan to promote innovation clusters to remove information barriers and integrate domestic firms into global value chains to foster FDI attraction.
- Foresee expansion of multinational companies in Costa Rica as a result of partnership with the United States to explore semiconductor supply chain opportunities.

### Gender, labor force participation, and workplace protections
- Focus on increasing female labor force participation; women have better educational outcomes but considerably lower participation than men.
- Launched Gender Parity Initiative (IPG) in September 2020 with IDB, WB, and AFD support to reduce care burden and promote women’s labor market participation, particularly in leadership.
  - IPG to implement an action plan over a minimum period of three years with measures from regulatory changes to awareness-raising.
  - Decree to revamp the IPG to strengthen governance and coordination between public and private sector to be issued in November 2023.
  - Advancing gender budgeting agenda to support IPG and initiatives to reduce gender economic gap (¶15).

- Workplace discrimination and sexual harassment measures:
  - Program to certify gender equality in private companies and public sector continues.
  - Appointed Ministry of Labor and Social Security inspectors in each region to monitor and sanction gender discrimination, including pay gaps.
  - Gender focus inspections conducted in agriculture, commerce, industry, services and transportation during the first two months of the year; infractions issued for gender discrimination, wage differentials and lack of breastfeeding rooms.
  - Launched strategy to combat sexual harassment (Decree 43771-MSP-MTSS-MCM) dubbed Ruta de Género in October 2022; revamped in October 2023.
    - Revamped strategy includes emotional and legal support to victims, increased resources for first-response centers (Puntos Violeta) and secure spaces, development of an app to report violence cases, protocols to prevent harassment in public transport including a drivers' handbook, and a broad communication campaign.

### Childcare, long-term care, and family leave
- Childcare:
  - 2018 fiscal reform expanded public education definition to include early education centers to reallocate funds and increase public childcare supply.
  - In 2021 childcare services increased by covering 15,000 additional children (relative to 2017), focus on children up to 5 years old to improve access for low-income households.
  - Aim to increase coverage of children below 12 relative to pre-pandemic levels by end-2023.
  - Completed review of supply of existing childcare services, standardized costing framework and basic certification.
  - Reviewed governance of childcare network Red de Cuido; will submit a bill to Legislative Assembly in November 2023 to:
    i) define governance and centralize responsibility in one institution;
    ii) increase coverage by reducing average cost per child with IDB support;
    iii) unify several financing sources;
    iv) establish childcare services depending on demand and services offered by private entities;
    v) better target the population.
  - Public Employment Bill (¶13) introduced for public sector workers: one month of paternity leave, a two-month extension of maternity leave (in specific cases), and paid leave to take care of a family member.

- Long-term care:
  - Created SINCA (Law No. 10192) in March 2022 to improve long-term care quality and access.
  - Issued SINCA’s regulation in November 2023 to implement governance of long-term care system.
  - Implementation plan across five pillars: governance, data intelligence, strengthening of care supply and benefits, conditions for closing gender gaps in labor markets, and quality assurance.
  - Issued decree in November 2023, with IDB support, to make mandatory allocation of benefits through baremo (single dependency scale) to unify access.
  - Target: 4,000 vulnerable households (according to the baremo) to receive long-term care support by end-December 2026 (1,000 per year).
  - Effective February 2024: implement a benefit (care subsidy for people in a dependency situation) to 3,000 households with a female head living in impoverished conditions and headed by a severely dependent person.
  - Ministry of Health to design accreditation standards to strengthen quality of long-term care home services by end-March 2024.
  - By end-March 2024: integrate baremo into SINIRUBE to identify dependent population, levels of dependency and supply of national care system services.
  - INA updating training for long-term caregivers with IDB support; developing a pilot mobile application to connect care service providers with demand; working with IDB on home care services pilot (Cuidadores a domicilio) and methodology to quantify cost of a minimum set of care services (Canasta de dependencia) to be implemented by end-April 2024.

### Education, entrepreneurship, and employability
- Education and entrepreneurship:
  - Redesigned plan to boost FOMUJERES at regional level; started implementation in August 2023 to finance women-owned businesses and support formalization.
  - Pilot programs completed with public banks and private entities to strengthen financial inclusion and women’s empowerment, financed by CAF.
  - INAMU launched roadmap to guide 178 women from entrepreneurship to export stage by end-November 2023; broader gender roadmap to strengthen women’s economic autonomy by end-March 2024.
  - MEIC and INAMU amended regulations of Law 8262 in April 2023 to facilitate women’s access to comprehensive financial services and develop a special financing program for vulnerable women with Banco Popular and FODEMIPYME.
  - STEAM education strategy:
    - 2022: added 56 new educational public institutions to 166 already implementing STEAM (total 222).
    - 2023: incorporated 27 new public institutions to reach 249 public institutions implementing the STEAM strategy.
  - Developing new scholarship program and a new student grant approved in 2023 to support women in STEAM careers.
  - INA dual education program created new alliances with 60 companies in 2023.
  - INA transitioned to a competency-based curriculum model since 2022:
    - Discontinued 46 percent of services not aligned with new model.
    - Created 509 competency-based services aligned with National Qualifications Framework standards.
  - September 2023: Ministry of Education launched employability and entrepreneurship-focused program to enable 25,000 adults lagging behind to obtain secondary education diploma.

- Employability:
  - Launched National Employability Strategy (Estrategia Brete) in July 2023 targeting vulnerable groups: women, young population, and people with disabilities.
  - Published plan to improve working conditions of female migrant workers with ILO support.

### Climate change adaptation, decarbonization, and green growth
- Strategic commitments:
  - Ambitious strategy centers on: (i) adapting to climate change with emphasis on crisis preparedness and climate-resilient infrastructure and agriculture/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/regulatory tools; (iv) mobilizing official and private financing to meet short- to long-term climate costs within budget envelope.
  - Committed to implementing reform measures supported by the Resilience and Sustainability Facility (RSF).

- Institutional readiness and governance:
  - MINAE has overall responsibility for climate change issues.
  - Submitted bill No. 23.213 in June 2022 to integrate relevant decentralized bodies into MINAE; legislative committee approved it in February 2023; addressing 400 amendment requests; expect bill approval by Legislative Assembly in July 2024.
  - MINAE produced National Adaptation Plan with MIDEPLAN support and National Decarbonization Plan with other ministries’ support.
  - CNE coordinates disaster management framework.
  - MINAE’s National Directorate of Climate Change oversees Carbon Neutrality Country Program (PPCN 2.0) and is working to include more sectors.
  - Plan to establish a data-driven, highly inclusive process to update NDCs and long-term climate action plans including new National Development Plan for the environmental sector launched in October 2022.
  - BCCR is part of NGFS and established GAECC to coordinate greening monetary and financial sector (¶45).

- Adaptation and disaster risk management:
  - Launched National Adaptation Plan (NAP) in April 2022 setting milestones for 2022-2026 consistent with National Policy on Adaptation.
  - Strengthening National System for Disaster Risk Management with WB support; National Risk Management Plan in force for 2021–2025.
  - Costa Rica served as pilot for Global Risk Assessment Framework (GRAF):
    - Generated inventory of information sources to evaluate risk in critical infrastructure sectors, risk modeling system for various threats including climate, and methodological guides for disaster impact evaluation in critical sectors.
  - Hosted UN Office for Disaster Risk Reduction project “Principles for a resilient infrastructure” applying stress tests to critical service infrastructure; expected to conclude with sectoral strategies for continuity of services.
  - Target: business continuity policies in all providers of public services by November 2024.
  - Decentralize and increase access to early warning, preparedness and response services, including coastal areas.
  - Developed climate risk maps for extreme hydrometeorological events for 23 cantons; expect to cover all remaining cantons by end-June 2024.
  - 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 incorporate climate change considerations.
  - MIVAH in collaboration with MINAE to develop and publish guidelines for including climate change considerations in Regulatory Plans by end-February 2024 (RSF reform measure).
  - Plan to implement new guidelines into all new urban and coastal regulatory plans and gradually adjust existing ones.
  - National Commission for Risk Prevention and Emergency Care providing municipalities with climate-related risk information.
  - Introduced new insurance scheme in 2019 for agricultural producers to insure harvest against climate risks and offer lower premia for producers implementing adaptation measures; working to provide online tool for competitive insurance premiums and expect to submit relevant bill in April 2024.

- Climate-resilient infrastructure and public investment management
  - Developed roadmap to enhance infrastructure resilience to climate change in September 2022 (structural benchmark) including assessment of medium-term investment needs and costs and financing options.
  - Identified priority actions to reduce infrastructure loss, interruption of public goods provision, fiscal costs of rebuilding/retrofitting, and damage to transport and water sectors.
  - Exploring new green finance opportunities from official and private sources (¶46) while improving public investment efficiency.
  - Committed to strengthen institutional capacity to plan and manage green and resilient investment projects, building on PIMA recommendations and its climate change module with IMF TA support.
  - Issued Decree N°42465-MOPT-MINAE-MIVAH in 2020 on incorporation of resilience measures in infrastructure.
  - With WB support through PEFA Climate, continued integrating climate considerations into public investment management by updating methodological guidelines for preparing and appraising public investment projects.
  - Developed and published guidelines to expand project appraisal process to assess project's impact on climate change through the social cost of carbon by end-September 2023 (RSF reform measure).
    - Guidelines indicate an estimate of the social cost of carbon and provide a detailed application to the transport sector (produced with ECLAC support).
    - Next step: help institutions apply the guidelines.
  - Finalizing methodology to score and prioritize capital projects with IDB and a private company; on track to publish guidelines setting clear and transparent project selection criteria including climate change criteria for SNIP entities by end-December 2023 (RSF reform measure).
  - Strengthening capital maintenance approach and produced Methodology for the Evaluation of Climatic Risks in the Public Infrastructure of Costa Rica (MERCI) with GIZ support.
  - Issued guidelines to assess needs and allocate adequate resources to routine and capital repairs.
  - With CABEI and WB support, started strengthening infrastructure under imminent threat from disasters and identifying other infrastructure at risk.

*Source: 1criea2023005 - 24. In February 2023, we issued a methodological guide to evaluate the appropriateness of PPPs.*

### 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 and overall commitment
- Launched National Decarbonization Plan in 2019 with targets:
  - net absolute maximum of 9.11 million tons of carbon dioxide equivalent (CO2e) by 2030
  - zero net emissions by 2050
- Plan assessed as consistent with limiting global warming to 1.5°C (Paris Agreement).
- Electricity matrix: almost 100 percent currently sourced from renewables.

### Electrification of transport
- Legislative Assembly approved a bill to extend tax incentives for electric vehicles to 2034.
- Developing a feebate scheme to promote transition to low-emission vehicles:
  - sliding scale of fees to light-duty vehicles with above-average emission rates
  - sliding scale of rebates to light-duty private passenger vehicles with below-average emission rates
  - levied at time of purchase or import of new or used vehicles up to 5 years old
  - design aims to be revenue-neutral, with safeguards to reduce risks of revenue loss
  - technical design of the feebate scheme completed with IMF TA
  - bill on the introduction of the feebate scheme submitted to the Legislative Assembly in November 2023 (RSF reform measure)
- Systematic cost-benefit analysis of tax exemptions: appraise and publish a review of existing tax incentives with a negative effect on the environment by end-February 2024 (RSF reform measure).
- Public transport electrification:
  - developed new promotional electric tariffs for charging centers for electric buses; to be incorporated into current tariff schedules
  - with IDB support, installed 55 fast charging centers nationwide by end-December 2022
  - requirement that new buses follow National Decarbonization Plan, NDCs, and National Electric Transportation Plan; expected to take effect in March 2024
  - plan to launch self-sustainable financing options to electrify public transport buses by end-March 2024
  - target: 500 zero-emissions buses by end-2025
  - launch public transport sectorization plan by end-May 2024 (includes cost-efficient route redesign, electronic payment, integration of urban train)
- Objective: encourage use of public transport instead of private transport.

### Renewable energy
- Implementing regulation of Law No. 10086 published in February 2023 to simplify procedures for private participation in renewable self-consumption (RSF reform measure).
  - Regulation provisions: define responsibilities for safe interconnection; authorize sale of energy surpluses and use of time-varying price signals/tariffs; declare activities (energy storage, EV charging) as "services of general interest".
- Complementary actions completed:
  - Costa Rican Institute of Electricity (ICE): enact tariff reductions by reducing operational costs, restructuring debt, and implementing IFRS.
  - Autoridad Reguladora de Servicios Públicos (ARESEP): reduce electricity prices charged by other generators beyond ICE with IDB support, applying new tariff methodologies.
  - Introduce measures to remove barriers to foreign participation in the energy sector through legislation under consideration by the Legislative Assembly.
- Developing legal framework to allow private sector use of geothermal energy in industrial processes, agriculture, and tourism:
  - currently only ICE allowed to use low-enthalpy geothermal energy
  - bill to facilitate expanded use of this renewable energy to be submitted to the Legislative Assembly in January 2024.

### Agriculture and forestry
- Agriculture and forestry recognized as major carbon sequestration sectors critical for zero net emissions.
- With GIZ support: provide technical assistance, promote agricultural research on low-carbon and resilient solutions, and develop financing instruments.
- Scaling up adaptation and mitigation actions (NAMAs) for coffee, livestock, rice, sugarcane, and bananas with IDB, AFD, and GIZ-EU support and participation of CONARROZ, CORBANA, FEDECANA and private-sector actors.
  - Scaling up entails sectoral capacity stocktake, design of mitigation scenarios and targets, operationalization through financing and innovation, and monitoring.
  - Pilot advanced in rice sector; sugar pilot started.
  - assessment of costs and identification of suitable financing for scaling up completed by end-March 2023.
- Refine 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 December 2023.
- 2022 National Development and Investment Plan envisages additional training and land coverage.
- Initiatives to promote job creation through these schemes, including in the wood industry.

### Marine ecosystems and the 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 in the Eastern Tropical Pacific aims 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 application in March 2024.
- Piloting programs to strengthen wetlands and mangroves with donor support; issued 300 permits to community members to protect and sustainably use mangrove resources and expect to issue another 300.
- Exploring extension of payment for environmental services model to marine sectors, starting with fisheries, with WB support.

### Environmental trade and market positioning
- Negotiating Agreement on Climate Change, Trade and Sustainability (ACCTS) with Fiji, Iceland, New Zealand, Norway, Switzerland to align trade policy with National Decarbonization Plan goals.
  - ACCTS members agreed to work towards eliminating tariffs on environmental goods trade, barriers to environmental services trade, and environment-damaging subsidies and commitments.
- Roadmap agreed to publish sustainable agro-landscapes strategy by December 2023 with IDB support to position agricultural products as sustainable and carbon neutral under the brand "Essential Costa Rica".
- MINAE supporting Ministry of Foreign Trade in negotiations with trading partners.

### Transition mitigation strategy, just transition, and green/blue jobs
- Territorial Economic Strategy for an Inclusive and Decarbonized Economy 2020-2050 released in March 2021 with IDB support:
  - 12 development poles, six corridors, and 12,750 km2 of territorial management areas
  - covers economic growth, social inclusion, human capital, gender, infrastructure and connectivity, and natural capital
  - among fifty priority actions: expand early English education coverage and implement training programs on the green and blue economy
- Modeling work (IDB and UN support) estimated National Decarbonization Plan economic benefits:
  - US$41 billion in net present value terms
  - net positive effect on jobs by 2050
- ILO-supported pilot study on green and blue jobs (North East coast):
  - 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
  - anticipated growing gap between demand for jobs and graduates
  - policies underway to promote enrollment in relevant programs, 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 issued in May 2023 to promote gender equality in climate action (with UN support).
- With AFD and ILO support, additional analytical work on technical profiles for new green and blue jobs to be conducted by end-March 2023; expected incorporation into just transition strategy in 2024.
- Energy substitutes and green hydrogen:
  - promoting electricity and biomethane (produced from agricultural waste) as substitutes for bunker oil, LPG, and diesel fuel.
  - long-term green hydrogen strategy published in July 2023 with IDB support:
    - estimates annual reduction of 225 000 tons of CO2e by 2030
    - estimates creation of 18,000 jobs over the period 2022-2030
    - financing through NAMA facility and Green Climate Fund
    - strategy seeks to make Costa Rica a regional hub for green hydrogen innovation and explore export opportunities

### Integrating climate risks into fiscal planning and financial management
- May 2022: approved functional budget classification system in line with 2014 IMF Government Finance Statistics Manual and international concepts and definitions of climate change and disaster risk expenditure.
- Developed methodology for tagging climate-related expenditure in budget and financial reporting with IDB and AFD support; MOF published guidelines for climate budget tagging in January 2023 (RSF reform measure).
  - Enhance capacities of ministries and agencies on green budget tagging and modify financial management information systems to operationalize classification in time for the 2025 budget.
- September 2022: published National Strategy for Financial Management of Disaster Risks; quantifies financial losses and identifies possible ex ante and ex post instruments (examples given: budget provisions, National Emergency Fund, insurance; budget reallocations, new loans).
  - MOF and National Commission for Risk Prevention and Emergency Care to publish implementation plan to select optimal combination of instruments by end-July 2024.
  - National Development and Investment Plan target: increase emergency funds available for managing risks to 0.25 percent of GDP; seeking funding sources including external and conducting actuarial valuation of the fund with WB support.
- 2023: with WB support, started evaluation of contingent liability tied to disaster events and climate-related costs.
- March 2023: signed Disaster Risk Management Policy Loan with a Catastrophe Drawdown Option with the WB to access immediate resources after major disasters.
- Transition risk integration and fiscal risk analysis:
  - disaster risks well integrated into fiscal risks analysis
  - preliminary introduction for transition risks included in September 2023 Medium-Term Fiscal Framework with IMF assistance
  - quantitative analysis of climate transition fiscal risks associated with National Decarbonization Strategy published in November 2023 with IMF support (RSF reform measure)
  - findings to be integrated into risk analysis of April 2024 Medium-Term Fiscal Framework.

*Source: 1criea2023005 - 42. We are strongly committed to promoting environmentally sustainable growth by*

### 45. The BCCR and the supervisory authorities are pressing ahead with efforts to address

### 1criea2023005 - 45. The BCCR and the supervisory authorities are pressing ahead with efforts to address

### Institutional arrangements and coordination
- In 2019, the BCCR joined the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).
- The BCCR established the Group for Strategic Analysis of Climate Change (GAECC) within the central bank, comprising representatives of different departments, to address impacts and risks related to climate change on the central bank’s main objectives.
- The BAECC/GAECC developed a roadmap to integrate climate considerations into monetary, financial, and macro-prudential policies centered around four blocks:
  - (i) establishing reliable and comparable data with identification of 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.
- The CONASSIF and the Superintendencies aligned agendas with the National Strategic Plan 2050 and have raised awareness and trained industry actors; GAECC now coordinates regularly with CONASSIF and the Superintendencies.
- The BCCR decided to dedicate permanent staff resources to the GAECC to ensure continuity and strengthen coordination.
- On October 4, 2023, the Superintendencies signed a Statement of Commitment to promote a resilient financial sector against climate change risks.

### Data and modeling to assess financial-sector climate risks
- The BCCR is inventorying required data and identifying indicators to measure and monitor climate-related risks, documenting main climate risks faced by Costa Rica at granular levels and identifying systemic data gaps.
- Supervisory agencies will coordinate efforts to obtain firm-level disclosures of climate-related risks to inform regulatory and supervisory approaches, within respective mandates.
- SUGEF identified improvements needed in:
  - identification and location of real collateral guarantees, and
  - understanding of the destination of resources.
- Concerning real collateral, new variables based on the political-administrative division of the country will be included in reporting structures, including georeferencing.
- SUGEF will carry out specific actions on data mining, in-depth monitoring and data quality to make full use of valuable information currently reported by financial entities about destinations of resources.
- The BCCR compiled and made public two new environmental accounts:
  - Material Flow Accounts for 2014-2019;
  - Environmental Protection Expenditure Accounts—for the private sector for 2018-2020.
- An integrated database with more granular information is needed to systematically capture risks at the national level.
- RSF reform measure completed: created a data repository covering 35 percent of the credit portfolio, which includes 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 bankś credit portfolios to vulnerable industries and regions.
- With support from the IDB, the BCCR developed an integrated economic and environmental model to conduct impact analysis of climate and environmental policies and is advancing analysis of different climate scenarios combined with various mitigation and adaptation policies.

### Climate-change risk management and stress testing
- The BCCR is assessing interlinkages between climate-related and macro-financial variables and risks to the financial system from climate change.
- The BCCR is guided by NGFS recommendations in its “top-down” stress-testing methodologies.
- Objective: incorporate climate effects on the banking sector, focused on physical risks, in BCCR’s “top-down” stress test, based on aggregated data built upon granular data and capturing new risks on credit risk parameters.
- Legal constraint: an ongoing legal process to determine the BCCR’s right to access needed detailed credit-portfolio information has delayed expansion of the data repository.
  - Without detailed information, credits cannot be properly matched with geographic location of the economic activity financed because the loan dataset sometimes references the bank branch instead.
  - Given differences in banks’ business models and geographic concentration of financed activities, stress tests based only on the partial credit portfolio can be misleading.
- Interim actions and timeline:
  - While the legal process is ongoing, the BCCR will finalize the new stress test methodology by February 2024 (revised RSF reform measure).
  - The BCCR aims at including preliminary information on the methodology in the Financial Stability Report in May 2024.
  - Once full coverage of the data has been obtained, the BCCR will use the methodology to incorporate climate effects in its top-down stress tests as planned.
- Additional measures:
  - SUGEF, supported by GIZ, started early work to develop methodological guidelines and, as a pilot, identify risk exposure in one bank.
  - Technical assistance in several areas is in progress to support SUGEF in integrating climate-change related risks into supervision: supervision guidelines and practices, training for financial entities and supervisors, roadmap on next steps (including green taxonomy, data analysis capacities, and supervisory follow-up).

### Greening international reserves
- The BCCR aims to increase exposures to issuers with the best environmental performance while preserving capital preservation, liquidity and return.
- The BCCR published a final selection of indicators of the “greenness” of its reserve holdings together with its 2022 Annual Report published in April 2023 (RSF reform measure).
- The indicators are used to increase investment limits for issuers that perform well from an environmental perspective using a “best in class strategy”.

### Regulation of socioenvironmental and climate-change risks in credit portfolios
- CONASSIF approved a regulation on management of socioenvironmental risks and climate change risks in the credit portfolio in October, 2023 (RSF reform measure).
  - The regulation followed industry consultation in July 2023 and revisions based on comments received.
- Regulation objectives and requirements:
  - Strengthen risk management by requiring banks to set policies and processes to manage socioenvironmental risks and incorporate them into decision-making.
  - Promote actions to identify, assess and mitigate such risks.
  - Specify roles for the Board and senior management.
  - Cover main risk areas for credit risk management purposes (including physical and transition risks).
  - Require classification of credit operations according to socioenvironmental and climate change risk assessment.
  - Require disclosure requirements in the Annual Risk Report of financial entities.
- Scope: all supervised financial intermediaries except for some of the small and less complex cooperatives.
- Deadlines:
  - Environmental and social risk management frameworks must be implemented no later than December 31, 2026.
  - Financial institutions are required to report these environmental and social risk categories by January 31, 2027.
- As information collection and taxonomies improve, authorities expect to take further steps toward establishment of capital and liquidity requirements and requirements for market risk, operational risk, and other material climate-related risks.
- The financial sector will gain capacity to meet Task Force on Climate-related Financial Disclosures (TFCD) requirements concerning governance, strategy, risk management, metrics and targets.

### Developing green financing and markets
- The authorities’ reform agenda (fiscal consolidation; PFM reforms; enhanced financial sector risk management; deeper and more open capital markets) aims to create an enabling environment to attract green public and private financing.
- A GIZ-supported study identified activities with potential to attract foreign direct green investments, including components for green hydrogen, green data centers for digitization, and development of materials from waste recovery.
- Legislative and regulatory milestones:
  - Legislative Assembly approved in October 2021 Law 10.051 to Promote Financing and Investment for Sustainable Development, through Thematic Public Offering Securities.
  - CONASSIF approved updates to associated regulations in May 2022 requiring supervised entities to:
    - (i) incorporate the sustainable or responsible component in their investment policies;
    - (ii) incorporate ESG risk management into their risk management framework;
    - (iii) be allowed to issue ESG bonds;
    - (iv) be recommended to include voluntary disclosures on ESG actions in annual reports.
  - The first two measures were approved with a transitional period ending in December 2023 and were complemented by the October 2023 regulation on socioenvironmental and climate change risks in the credit portfolio.
- Green taxonomy:
  - CONASSIF and the Superintendencies are developing a single green taxonomy for the financial sector.
  - Following initial WB technical assistance, authorities including MINAE are starting a two year project supported by the Green Climate Fund, with UNEP as delivery partner, to create the taxonomy expected to be finalized by December 2024.
- Sovereign and quasi-sovereign bond initiatives:
  - Sovereign bonds are already included in indices recognizing Costa Rica’s green credentials.
  - Authorities, with advisers and UNDP, are exploring recognition as an Environmental Social Governance (ESG) sovereign and possible issuance of Use of Resources bonds or sustainability-linked Eurobonds (SLBs) referencing indicators related to forest coverage, ecological integrity, and biodiversity.
  - Internal coordination is being strengthened among MOF units (including the Debt Management Office), MINAE and others to meet monitoring and reporting requirements for such issuances.
  - The Costa Rican Institute for Electricity is exploring issuance of a second sustainable bond with WB assistance.
- Project preparation facility (PPF):
  - Preparatory work started to develop a PPF with IDB support to create a pipeline of sustainable projects to catalyze private financing.
  - Initial operational costs would be jointly covered with development partners; once fully operational the PPF would be self-financed.
  - The PPF would assist with screening, appraisal and structuring of projects, addressing current constraints to scaling up investment in Costa Rica.
  - Steps underway to strengthen institutional PPP framework, improve project selection and management of fiscal risks (including centralized analysis of contingent liabilities from PPPs), supported by IDB technical assistance.

### Risks, contingencies, and program monitoring (context linked to climate and broader risks)
- Major program risks include:
  - intensified regional conflicts and supply disruptions;
  - renewed global financial market turmoil and sustained tightening of global financial conditions;
  - weaker-than-expected global downturn;
  - potential slowdown in domestic activity, increased domestic financial vulnerabilities, and weaker-than-expected revenue performance affecting fiscal consolidation;
  - legislative pressures that could weaken fiscal consolidation;
  - exposure to natural disasters that are likely to increase over time and could renew concerns about debt sustainability.
- Government readiness: the government stands ready to promptly adjust policies in close consultation with IMF staff should risks materialize; conversely, it is prepared to accelerate adjustment and reform if developments support stronger economic performance.
- Program monitoring:
  - Progress is monitored through semi-annual reviews, performance criteria (PCs), indicative targets (ITs), and structural benchmarks (SBs).
  - Progress in meeting the inflation target will be monitored through a MPCC.
  - The sixth review is scheduled to take place on or after March 15, 2024.

*Source: IMF Costa Rica program documents (extract provided).*

### introduction of a single pay spine.

### 1criea2023005 - introduction of a single pay spine.

### Structural benchmarks, milestones, and status updates
- Introduction of a single pay spine:
  - End-March 2023 — Not met.
  - MIDEPLAN to incorporate 90 percent of the executive branch’s job positions in the single wage spine:
    - End-September 2023 — Met September 8, 2023.
- Revenue mobilization:
  - The Tax Commissioner to approve a new Tax Compliance Improvement Plan, in line with IMF staff recommendations:
    - End-December 2021 — Met.
- Fiscal governance and transparency:
  - Publication of financial statement under IFRS standards for fiscal year 2020 for three SOEs (ICE, AyA, CNP):
    - End-December 2021 — Not met. Pending for a small firm under CNP.
  - Cabinet to approve and publish a Medium-Term Fiscal Framework for the entire Non-Financial Public Sector for 2023-2026:
    - End-April 2022 — Met.
  - Cabinet to approve and publish a Medium-Term Debt Strategy (MTDS) for 2023-2026:
    - End-April 2022 — Met.
  - Government to submit law amendments to the Legislative Assembly to centralize all debt-related functions of the government within the purview of a standalone Public Debt Management Office, reporting to the Minister of Finance:
    - End-June 2023 — Met. Submitted in May, 2023.
- Social safety nets:
  - MOF’s National Treasury to centralize and digitalize the payment system for all the cash transfer social assistance programs, in coordination with social assistance units:
    - End-December 2021 — Met.
  - IMAS to launch a single window for social programs under its authority:
    - End-February 2024 — Ongoing.
- Monetary and financial sector reforms:
  - The BCCR to submit to the Ministry of Finance draft amendments to the BCCR Law, prepared in consultation with IMF staff, to strengthen the central bank’s operational autonomy and governance framework:
    - End-August 2021 — Met.
  - The government to submit amendments to the BCCR Law to the Legislative Assembly, prepared in consultation with IMF staff, to strengthen the central bank’s operational autonomy and governance framework:
    - End-December 2022 — Not met. Selected BCCR Law amendments submitted to the Legislative Assembly in June 2023.
  - Government to submit amendments to the bank resolution and deposit insurance law and related legislation, in line with program understandings, to the Legislative Assembly, to strengthen the crisis management framework:
    - End-December 2023 — Ongoing.
- Macro-structural reforms:
  - CCSS to formulate and approve a plan to adjust the minimum contribution base for part-time workers:
    - End-June 2022 — Not met. Approved on September 1, 2022.
  - Authorities to develop a roadmap to enhance infrastructure resilience to climate change, including cost assessment and financing options:
    - End-September 2022 — Met.

### Reform Measures under the Resilience and Sustainability Facility (selected RMs and status)
- Integrating Climate Risks into Fiscal Planning:
  - 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 Completed.
- Strengthening Public Investment and Infrastructure Resilience:
  - RM6. MIDEPLAN to develop and publish guidelines to expand the project appraisal process to assess the impact of the project on climate change through the social cost of carbon:
    - End-September 2023 — Fifth EFF Review Completed.
  - 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.
- Supporting Decarbonization:
  - RM2. Government to approve implementing regulation to simplify the administrative procedures for private participation in power generation from renewable sources for self-consumption:
    - End-December 2022 — Fourth EFF Review Completed.
  - RM7. Government to submit to the Legislative Assembly a bill to introduce feebate scheme to strengthen incentives for low-pollution private vehicles:
    - End-September 2023 — Fifth EFF Review Completed.
  - RM11. Government to appraise and publish a review of existing tax incentives with a negative effect on the environment to support decarbonization efforts:
    - End-February 2024 — Sixth EFF Review Ongoing.
- Greening Reserves and Strengthening Financial Sector Resilience:
  - RM3. BCCR to create a repository with data on climate hazards; industrial and geographical vulnerability to climate events; banks’ lending exposure to vulnerable industries and regions:
    - 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 Completed.
  - RM12. BCCR to develop a methodology to incorporate climate effects on the banking sector in its top-down stress testing, based on data aggregated from granular information, and capturing those new risks on credit risk parameters:
    - End-February 2024 — Sixth EFF Review Proposed revision. Currently “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.”

### Technical Memorandum of Understanding (TMU): scope and program monitoring
- TMU purpose:
  - Sets framework for monitoring performance under the Extended Arrangement under the Extended Fund Facility (EFF).
  - Specifies performance criteria and indicative targets, monitoring procedures, and reporting requirements.
- Quantitative performance criteria and indicative targets (as listed in Table 1 of the MEFP):
  - a) a quantitative performance criterion on central government primary balance (floor);
  - b) a quantitative performance criterion on net official international reserves (floor);
  - c) a continuous quantitative performance criterion on new external payment arrears by the nonfinancial public sector and the BCCR (ceiling);
  - d) a monetary policy consultation clause;
  - e) an indicative target on debt stock of the central government (ceiling).
- Standard continuous performance criteria monitored continuously:
  - no imposition or intensification of restrictions on the making of payments and transfers for current international transactions;
  - no imposition or intensification of import restrictions for balance of payments reasons;
  - no introduction or modification of multiple currency practices;
  - no conclusion of bilateral payments agreements that are inconsistent with Article VIII of the IMF Articles of Agreement.
- Valuation rules:
  - All foreign currency-related assets, liabilities, and flows evaluated at “program exchange rates” except for fiscal operations measured at current exchange rates.
  - Program rates are those that prevailed on September 13, 2022.
  - Monetary gold valued at US$1,703 per troy ounce (price prevailing on September 13, 2022).

### Program Exchange Rates (September 13, 2022)
- Colones to the U.S. dollar 635.725
- U.S. dollar to the SDR 1.3068
- U.S. dollar to the Yen 0.0070
- U.S. dollar to the Euro 1.0179
- U.S. dollar to the Canadian dollar 0.7620
- U.S. dollar to the Chinese RMB 0.1443
- U.S. dollar to the British Pound 1.1730
- Gold price per troy ounce (U.S. Dollar) 1,703

### Central government definition and consolidation
- Central government figures comprise all branches of the government (executive, legislative, and judiciary), including:
  - the Comptroller’s Office and the Ombudsman's Office; the Supreme Electoral Court; the budget lines “Servicio de la Deuda Pública”, “Regímenes de Pensiones con cargo al Presupuesto de la República” and “Obras Específicas”; and the public entities required to be consolidated under central government from 2021 by Law 9524.
- Exclusions:
  - The Central Bank of Costa Rica (BCCR), the state-owned enterprises and other public sector agencies are excluded from the definition of central government.
- Consolidation specifics:
  - Consolidation of entities required by Law 9524 is done entity by entity and never aggregated.
  - Figures until 2018 do not comprise the entities included in paragraph 5.
  - From 2020 onwards, data related to Unidad Ejecutora del Proyecto (UEP) is included in the budgetary central government.
- Law 9524 lists 51 entities required to be consolidated under CG (entities enumerated in the source).

### Performance criterion on central government primary balance
- Definitions and accounting basis:
  - Overall balance of the Central Government = budgetary revenue − total expenditure.
  - Cash primary balance = overall balance excluding net interest payment.
  - Revenue data registered on a cash basis; expenses are accruals except interest, which are recorded when disbursements are made.
  - Capital expenditure reflects accrued amounts recorded under investment projects, not fully reconciled with net acquisition of nonfinancial assets.
  - Proceeds from privatization or commercialization of public assets to residents or non-residents will not be recorded as part of central government revenues.
  - Consolidation considers funds granted as both current and capital transfers; residual consolidation adjustments affect capital transfers.
  - Cash primary balance monitored from above-the-line data under the modified cash approach.
- Adjustor for COVID-19 emergency spending:
  - 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 (transfers to health system, targeted support, social assistance).
  - Additional expenditure must be clearly identified and reflected in an appropriate document.
  - The adjustor is capped at CRC 95 billion for 2023 (about 0.2 percent of GDP) cumulatively.

### Program Net Official International Reserves (Program NIR) and adjustors
- Program NIR definition:
  - Program NIR = U.S. dollar value of (a) Gross international reserves of the BCCR − (b) Gross reserve-related liabilities of the BCCR.
  - Gross international reserves include monetary gold; foreign exchange balances; reserve position at the IMF; and SDR holdings.
  - Exclusions from gross foreign reserve assets: participation in international financial institutions; holdings of nonconvertible currencies; precious metals other than monetary gold; claims on residents; pledged/non-liquid/encumbered foreign assets; claims from derivative transactions.
  - Gross reserve-related liabilities include: all short-term liabilities to nonresidents denominated in convertible foreign currencies with original maturity of one year or less; all short-term liabilities to residents denominated in convertible foreign currencies; the stock of IMF credit outstanding; the nominal value of all short-term derivative positions implying a sale of foreign currency or other reserve assets.
  - Excluded from liabilities: foreign exchange liabilities to the general government or related to deposit guarantees.
- Baseline figure:
  - At end-2021, the Program NIR, evaluated at market exchange rates, stood at US$2,884 million.
- Adjustors:
  - If (i) foreign program financing by the central government and the BCCR net of IMF purchases and all debt service; (ii) external commercial borrowing by the central government net of debt service; (iii) project loans and grants disbursed to the central government net of debt service; (iv) foreign exchange-denominated domestic debt issued by the central government net of debt service; and (v) proceeds from commercialization of public assets to non-residents — are higher/lower in U.S. dollar terms than assumed under the program, the floor on the program NIR will be adjusted upward/downward by the cumulative differences on the test date.
  - If the sum of amortization of official external debt and interest payments on official external debt by the central government or the BCCR in U.S. dollar terms is higher/lower than assumed under the program, the floor on the program NIR will be adjusted downward/upward by the cumulative differences on the test date.
  - These adjustors apply from end-July 2021 and thereafter.

### Continuous performance criterion on external payment arrears
- A continuous performance criterion prohibits new external payments arrears on external debt contracted or guaranteed by the nonfinancial public sector and the BCCR.
- Definitions:
  - Nonfinancial public sector defined following the 1986 Government Finance Statistics Manual and the 2008 System of National Accounts; includes central government and nonfinancial public enterprises where government holds a controlling stake.
  - External payments arrears = debt-service obligations (principal and interest) to nonresidents falling due after Board approval of the arrangement that have not been paid when due, subject to any applicable grace period.
  - Overdue debt or debt service obligations in dispute regarding amount or validity are not considered external payments arrears for program monitoring.
  - Excludes arrears on external financial obligations subject to rescheduling and payments not considered debt under this definition.

*Source: 1criea2023005 - introduction of a single pay spine.*

### 12.      The inflation target bands are specified in Table 1 attached to the MEFP. For this purpose,

### 1criea2023005 - 12.      The inflation target bands are specified in Table 1 attached to the MEFP. For this purpose,

### Inflation target measurement and consultation triggers
- Year-on-year inflation is measured using the headline Consumers Price Index (CPI) published by the National Institute of Statistics and Census (INEC) for each test date as:
  - {CPI*(t) –   CPI*(t-12)} / CPI*(t-12)*100
  - where
    - t = the month within which the test date is included
    - CPI(t) = CPI index (all items) for month t
    - CPI(t-k) = CPI index (all items) as of k months before t
    - CPI*(t) = { CPI(t-2) + CPI(t-1) + CPI(t) } / 3
    - CPI*(t-12) = { CPI(t-14) + CPI(t-13) + CPI(t-12) } / 3
- Consultation procedures based on deviations from target bands (as specified in Table 1 attached to the MEFP):
  - If observed year-on-year inflation falls outside the outer band limits of +/- 3 percentage points around the targets for the relevant semi-annual test dates:
    - The authorities will complete a consultation with the IMF Executive Board focusing on:
      - (i) the stance of monetary policy and whether the Fund-supported program remains on track;
      - (ii) the reasons for deviations from the specified band, taking into account compensating factors; and
      - (iii) proposed remedial actions, as deemed necessary.
    - When this consultation with the IMF Executive Board 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 central government debt: definitions and conversions
- Debt definition:
  - The term “debt” follows the Guidelines on Public Debt Conditionality in IMF Arrangements, Decision No. 15688-(14/107), and is understood to mean a current, i.e., not contingent, liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, requiring the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time; these payments discharge the principal and/or interest liabilities incurred under the contract.
  - Primary forms of debt listed include loans, debt securities, bonds, commercial loans, buyers’ credits and off-budget project loans.
- Currency and instrument conversions for monitoring:
  - All foreign currency denominated debt will be converted into colones using the program exchange rates set out in Table 1.
  - All domestic debt denominated in inflation-indexed units (TUDES) will be converted into colones using the program rate set out in Table 1.

### Adjustor for COVID-19 emergency spending (2023)
- 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, including transfers to the health system, transfers for targeted support to families, workers, and firms heavily affected by the pandemic, or social assistance programs to the most vulnerable groups.
- Such additional expenditure should be clearly identified and reflected in an appropriate document (e.g., supplementary budget, government resolution, a circular of the Ministry of Finance (MOF)).
- The adjustor is capped at CRC 95 billion.

### Data reporting requirements and timelines
- General:
  - 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 the progress of Costa Rica in achieving the objectives and policies set forth in the Memorandum of Economic and Financial Policies and Letters of Intent.
  - All the program monitoring data will be provided by the MOF, IMAS, FODESAF, BCCR, and SUGEF.
  - Fiscal monitoring data will be provided in the format shown in Tables 2, 3, and 4.
  - External sector monitoring data will be provided in the format shown in Tables 5 and 6.
  - Priority social spending data will be provided in the format shown in Table 7.
  - Financial sector performance data will be provided as described below (paragraph 20).
- Timelines for fiscal targets (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 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.
- Timelines for external targets and monetary consultation band:
  - Data relating to the external targets (Table 5) and monetary consultation band: no more than three weeks after the end of each month.
  - Data on official reserve assets (Table 6): within one week after the end of each week.
- Timelines for social safety net spending (program spending only, not including wage and salaries and administrative costs of relevant agencies; see Table 7):
  - Quarterly, no later than four weeks after the end of the quarter.
- Timelines and confidentiality for financial sector data (paragraph 20):
  - Financial soundness indicators of banks and cooperatives, bank by bank, group (public and private), and system level: monthly, no later than four weeks after the end of each month.
  - Anonymized bank-by-bank asset quality indicators, disaggregated by asset classification and provisioning by currency and type of credit, currency and economic sector: monthly, no later than four weeks after the end of each month.
  - Such data on individual banks will be treated as strictly confidential and will not be published except in aggregate form.

### Monitoring templates and tables (formats referenced)
- Fiscal templates: Tables 2 (Central Government Operations), 3 (Central Government Financing), 4 (Central Government Debt) — formats specified for monitoring purposes; items include, but are not limited to:
  - Total Expenditure, Current expenses, Salaries, Wages and salaries, Interest Expenditure, Transfers, Capital Expenditure, Primary Balance, Overall Balance, Total Financing, Net Domestic Financing, Net Foreign Financing, Privatization.
  - Debt stock breakdowns: Domestic (Bonds, Tasa basica, Zero coupon colones, Fixed coupon colones, Floating coupon colones, Inflation-linked bond (TUDES), Other liabilities), External (Bilateral, Bonds, Multilateral), Domestic debt stock by maturities, External debt stock by maturities, Total borrowing requirement, Financial deficit of CG, CG debt amortization, Source of funds.
- External templates: Table 5 (Foreign Exchange Cashflows of the Central Bank and the Government) — (In millions of U.S. dollars) with line items such as Total Inflows, Total outflows, Net FX intervention, Other net flows, Net International Reserves (at market exchange rates), Net International Reserves (at program exchange rates), Gross International Reserves (at market exchange rates).
- Reserve templates: Table 6 (Gross Official Reserve Position) — (In millions of U.S. dollars).
- Social spending template: Table 7 (Priority Social Spending) — (In billions of Colons) with program-level line items (Non-contributory pensions and healthcare; Targeted social assistance programs including Conditional cash transfer Crecemos, Conditional cash transfer Avancemos, Poverty reduction and income support, Childcare, School programs, Housing subsidies, Food security and nutrition programs, Active labor market programs, Other targeted programs, Capital transfers to social assistance programs).
- Notes and cross-references:
  - Several table footnotes indicate “As agreed for the purpose of monitoring the program.”
  - Table 7 footnotes include: “Crecemos program will be merged under Avancemos program starting in 2022.” and program-specific reporting changes since 2020 and starting in 2022.

*Source: 1criea2023005 - Memorandum of Economic and Financial Policies (excerpts).*

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

### 1criea2023005 - 2020. Since the last assessment in 2009, the BCCR has enhanced safeguards in its external audit

### Safeguards, legal framework, and governance of the BCCR
- Since the 2009 assessment, the Banco Central de Costa Rica (BCCR) has enhanced safeguards in its external audit mechanism and financial reporting, but some areas for improvement remain in the legal framework and governance arrangements.
- The authorities have submitted a proposal for limited legal amendments to the Legislative Assembly that would:
  - address transparency and accountability of the BCCR;
  - make some progress on autonomy by removing the Minister of Finance from the Board of Directors.
- These legal amendments are still to be considered by the Legislative Assembly.
- Comprehensive legal reforms remain needed to:
  - strengthen the BCCR’s autonomy and decision-making structures;
  - clearly distinguish between executive and oversight functions;
  - fill a current vacancy on the BCCR Board.
- IMF staff action: Staff will continue monitoring the implementation of these recommendations per the safeguards policy for as long as Fund credit remains outstanding.

### Technical assistance (TA) and capacity development (CD)
- Costa Rica’s CD efforts since the 2021 Article IV Consultation are aligned with reform objectives under the EFF and RSF arrangements.
- CD priorities include:
  - improving fiscal institutions;
  - strengthening the central bank’s autonomy and governance;
  - financial sector supervision and crisis management;
  - advancing structural reforms to incentivize private investment and foster green and inclusive growth.
- Authorities’ engagement and ownership of these issues remain strong.
- Given the heavy use of CD from the Fund and other partners, integration and coordination are ongoing and facilitated through regular publications (for example, Annex 1 of IMF Country Report No. 23/231, published in June 2023).

### Relations with other financial institutions
- Listed partner institutions referenced:
  - World Bank
  - Inter-American Development Bank
  - Development Bank of Latin America (CAF)
  - Central American Bank for Economic Integration (CABEI)

### Statistical issues and macroeconomic data quality (As of October 2023)
- General:
  - Data provision is broadly adequate for surveillance; macroeconomic data quality has continued to improve.
  - Further improvements pursued across real, fiscal, monetary, and balance of payments sectors.
  - Central Bank, Ministry of Finance, and National Institute of Statistics and Census publish regular official data on their websites (www.bccr.fi.cr, www.hacienda.go.cr, https://inec.cr).
- National accounts:
  - Compiled generally in accordance with the System of National Accounts 2008 (2008 SNA).
  - Annual national accounts data disseminated for 1991-2022 and quarterly estimates up to 2023 Q3 (preliminary).
  - Quarterly estimates release lags: around a 90-day lag and a 30-day lag for the preliminary estimate.
  - Benchmark year revised to 2017 (from 2012) for chained volume measures in late 2020; revised national account data published in January 2021.
  - Estimation improvements: real estate activities including owner-occupied housing; improved deflation methods for annual value added in constant prices.
  - Changes in inventories largely follow 2008 SNA; TA recommended improvements for cattle and poultry estimates.
  - Informal household producer activity is included in GDP levels (but not separately estimated).
- Price statistics:
  - CPI compilation generally follows CPI Manual concepts and definitions.
  - Structure, scope, and coverage updated in January 2021.
  - Index reference period is December 2020.
  - CPI weights based on the 2018/2019 Income and Expenditure Survey.
  - Index covers resident urban households comprising approximately 71 percent of the total population and 80 percent of the total consumption expenditures of Costa Rica.
  - Producer Price Index (PPI) generally follows PPI Manual; base year for domestic manufacturing and selected services is 2012.
- Government Finance Statistics (GFS):
  - Current compilation generally follows Government Finance Statistics Manual 1986 for surveillance.
  - For Article IV and program purposes, cash balances of the budgetary central government are used.
  - CAPTAC-DR together with STA are supporting compilation and reporting following Government Finance Statistics Manual 2014 (GFSM 2014).
  - Implementation of GFSM 2014 was slowed by a cyberattack in April 2022, but significant milestones achieved.
  - Since March 2023, authorities have compiled and published monthly GFS for consolidated central government revenues and expenditures (above the line) aligned with GFSM 2014 but excluding accrued interest.
  - Costa Rica subscribes to the Special Data Dissemination Standards (SDDS); monthly central government finance statistics accessible through their National Summary Data Page (NSDP).
  - Authorities regularly report annual data for the GFS Yearbook to STA with partial general government coverage using GFSM 2014 standards, most recently for 2021.
  - Annual statistics compiled and disseminated for the entire public sector and subsectors but not using GFSM 2014 standards and sometimes with delay.
- Public Sector Debt Statistics (PSDS):
  - Authorities follow market of issuance (Costa Rica or abroad) to classify domestic and foreign debt instead of the internationally recommended holder residency criterion.
  - Authorities compile and disseminate quarterly PSDS for the general government to the joint World Bank/IMF database with latest data for 2023 Q1.
  - Authorities, with CAPTAC-DR, STA and WHD, are advancing improvements to GFS and PSDS beyond central government guided by GFSM 2014.
- Reconciliation and coverage issues:
  - Fiscal data discrepancies among national compilers on specific items are not regularly reconciled, though large fluctuations are investigated.
  - Fiscal statistics are not regularly reconciled with monetary or other macroeconomic statistics.
  - Fiscal outturns are queried by the Comptroller of the Republic, partly because the government does not record third-party claims that are not budgeted.
  - The Comptroller reports difficulties in assessing fiscal rule compliance beyond the central government.
  - Incorporation of 51 decentralized institutions into budgetary central government starting in 2021 was supported by CAPTAC-DR’s TA; IMF staff report data adjusted back to 2019 for comparability.
- Monetary and Financial Statistics:
  - BCCR reports Standardized Report Forms (SRFs) for central bank, other depository corporations, other financial corporations, and for monetary aggregates monthly with a one month lag to the IFS.
  - Reported monetary statistics broadly align with the Monetary and Financial Statistics Manual (MFSM).
  - BCCR expanded coverage to include money-market investment funds (MMF) in the 2SR, non-MMF investment funds, pension funds, and insurance companies in the 4SR.
  - BCCR reports data on some Financial Access Survey (FAS) indicators including commercial bank branches per 100,000 adults and ATMs per 100,000 adults.
- Financial sector surveillance:
  - Costa Rica reports 15 out of 18 core financial soundness indicators (FSIs), 11 additional FSIs for deposit takers, and 2 additional FSIs for real estate markets monthly with less than one quarter lag.
  - Costa Rica has implemented the new FSI templates in line with the 2019 FSIs Guide.
- External sector statistics:
  - BCCR compiles and disseminates quarterly balance of payments and international investment position (IIP) statistics on BPM6 basis.
  - Source data generally adequate; ongoing work to improve coverage of financial transactions of the nonfinancial private sector (e.g., trade credit and advances) and remuneration of employees.
  - BCCR compiles and disseminates monthly Data Template on International Reserves and Foreign Currency Liquidity, reports semi-annual CPIS data, annual CDIS data, and submits quarterly external debt statistics to QEDS.
- Data standards and quality:
  - Costa Rica is in observance with the Special Data Dissemination Standards (SDDS).
  - Data Module Report on the Observance of Standards and Codes (ROSC) published in February 2010.

### Table of Common Indicators Required for Surveillance (As of October 31, 2023) — selected entries (dates preserved exactly)
- Exchange Rates: Date of latest observation 10/30/2023; Date received 10/31/2023; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation Sep 23; Date received Oct 23; Frequency M M M.
- Reserve/Base Money: Sep 23; Oct 23; M M M.
- Broad Money: Aug 23; Oct 23; M M M.
- Central Bank Balance Sheet: Sep 23; Oct 23; M M M.
- Consolidated Balance Sheet of the Banking System: Aug 23; Oct 23; M M M.
- Interest Rates: Sep 23; Oct 23; M M M.
- Consumer Price Index: Sep 23; Oct 23; M M M.
- Revenue, Expenditure, Balance, and Composition of Financing – Central Government: Sep 23; Oct 23; M M M.
- Stocks of Central Government and Central Government-Guaranteed Debt: Sep 23; Oct 23; M M M.
- External Current Account Balance: 2023 Q2; Sep 23; Q Q Q.
- Exports and Imports of Goods and Services: 2023 Q2; Sep 23; Q Q Q.
- GDP/GNP: 2023 Q3; Oct 23; Q Q Q.
- Gross External Debt: 2023 Q2; Sep 23; Q Q Q.
- International Investment Position: 2023 Q2; Sep 23; Q Q Q.

### Climate change implications, risks, and decarbonization strategy
- Climate vulnerability and impacts:
  - Costa Rica ranked 61 out of 182 countries in the 2022 ND-GAIN Index.
  - Approximately 6.8 percent of its total area is exposed to three or more adverse natural events.
  - Around 80 percent of Costa Rica’s population reside in areas at high risk of multiple hazards.
  - In 1998-2018, infrastructure damage from rains and droughts averaged 0.7 percent of GDP.
  - In a high-risk scenario, damage could rise to 1.6 to 2.5 percent per year over the medium term.
  - Natural disasters affect tourism, agriculture (including coffee beans and bananas), and hydroelectric power generation with fiscal and financial implications.
- Emissions and mitigation achievements:
  - Emissions amounted to a low 11.5 megatons in 2020.
  - Emissions composition: transport 43 percent; agriculture 21 percent; industrial processes and production 9.6 percent.
  - Costa Rica reversed deforestation and increased forest cover from 26 percent in 1983 to 59 percent today; national parks and protected areas comprise 26 percent of land area.
  - Share of renewables in the energy sector is among the largest in the world; wind technologies significantly contributed to electricity generation reducing oil use.
- Disaster risk management and adaptation:
  - Costa Rica has strengthened disaster response, enforced building codes and land use planning, strengthened institutional/legal frameworks, and mainstreamed disaster risk management in national development.
  - National Adaptation Plan launched in April with key milestones for 2022-2026; aligned with National Risk Management policy (2016-2030).
  - An insurance scheme for agriculture exists to insure harvests against climate risks.
  - Authorities launched a disaster financing strategy and are increasing forest biomass against tropical storm impacts.
  - Rebuilding fiscal buffers is critical for efficient future climate event responses.
- National Decarbonization Plan (NDP):
  - NDP outlines paths to reach net-zero emissions by 2050 with short, medium, and long-term goals across transport, energy, and agriculture.
  - Transport measures include rebates and tariff schemes to promote electric transportation.
  - Agriculture measures include technical and financial programs to help rural communities and small enterprises manage land resources and access financing.
  - Energy measures aim to increase system flexibility and intelligence to integrate distributed generation and demand management, enabling high renewable share while meeting growing demand.
  - Initial estimates suggest the NDP could generate a net economic benefit somewhere in the range of US$50 billion derived from energy savings, reduced congestion, reduced accidents, improved air and water quality, increased productivity, and ecosystem service benefits for tourism, water, and soil health.

*Source: IMF staff report excerpts as contained in the provided content unit.*

### 6.      Going forward, continued progress towards decarbonization goals will require large

### 1criea2023005 - 6.      Going forward, continued progress towards decarbonization goals will require large

### Investment needs and fiscal constraints
- The cumulative investment (both private and public) needed to reach the set objective is estimated somewhere in the range of US$30 billion until 2050.
- Fiscal space to scale up public investment is currently limited.

### Economic and social implications
- Decarbonization would lead to economy-wide adjustments triggered by:
  - shifts in relative prices of inputs;
  - policies to encourage faster adoption of new (cleaner) technologies.
- These adjustments can shift economic activity and jobs across sectors and regions.
- The transition can produce winners and losers and require mitigation measures, such as:
  - investments in human capital and skills needed in emerging segments to facilitate the transition;
  - tailored social protection responses.

### Opportunities and policy readiness
- Costa Rica’s global leadership in decarbonization creates opportunities, including:
  - positioning the country as a low carbon exporter;
  - becoming a destination for sustainable investment.
- Actions to seize opportunities include improving the readiness of the financial sector, for which Costa Rica is implementing the Greening the Financial System (NGFS) initiative.
- Costa Rica has succeeded in attracting sustainable FDIs.

### Relevant policy and technical references (as cited)
- Enacted by Executive Decree No. 43663-H, La Gaceta No 182, San Jose, Monday, September 26th, 2022.
- Executive Decree no.41581- February, 2019.
- World Bank TA associated with Fiscal Management and Decarbonization DPL (2021).

*Source: 1criea2023005 - 6. Going forward, continued progress towards decarbonization goals will require large*

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

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

### World Bank engagement: instruments and focus areas
- Activities include lending, technical assistance, and knowledge instruments supporting Costa Rica’s decarbonization and climate adaptation strategy, with continued strategic engagement in the medium term.
- Climate adaptation:
  - Costa Rica received a Catastrophe Deferred Draw Down Option loan (CAT DDO) from the World Bank in 2008, the first country to ever receive such a loan.
  - Long-standing technical engagement on DRM and climate adaptation activities, including support to National Adaptation Plans, disaster financing strategy, and assessment of contingent liabilities associated with natural disasters.
  - Knowledge and technical assistance have built foundations for two lending operations:
    - Climate Change Resilience Recovery and Territorial Development (P178049), under preparation, supports resilient infrastructure across the territory.
    - Second Costa Rica CAT DDO (P179861), recognizes recent improvements in disaster risk management and complements Costa Rica disaster financing strategy.
- Decarbonization Strategy:
  - Fiscal and Decarbonization Management Development Financing series (2020-2023 – P171912, P174786, P177029) provided an umbrella for policy dialogue and technical assistance on decarbonization.
  - The operation was informed by a knowledge program for Costa Rica and Central America more broadly.
  - The third pillar supports implementation of reforms for a greener and more low-carbon post-COVID recovery, including:
    - Supporting information infrastructure for monitoring, reporting, verifying, and registering GHG emissions to inform policy and investment decisions and enable carbon-market mechanisms.
    - Initiatives to motivate greater investments in, and faster deployment of, green and low-carbon technologies and practices, including inclusion of climate considerations in the assessment of financial sector risks, policies to facilitate electric mobility, and climate friendly practices in agriculture.
    - Advancing dialogue on strengthening governance and transparency of institutions in the energy sector to enhance efficiency and help level the playing field for investments in renewable energy.
  - The lending series provided a platform for integrating climate consideration in public finances:
    - World Bank participated in a joint climate-Public Expenditure and Financial Accountability (PEFA).
    - Supported inclusion of climate considerations in public investment management and integrating climate into appraisal methodologies.
  - Costa Rica became the first Latin America country to meet the conditions to access the first tranche (16 million) of the World Bank’s Forest Carbon Partnership Facility (FCPF).
    - The country’s Emission Reductions Payment Agreement (ERPA -P160368) with the FCPF unlocks up to $60 million across three scheduled payments, for reducing a total of 12 million tons of carbon emissions through to 2025, in line with the country’s NDC commitment.

### Statement by Mr. Guerra and Ms. Lankester Campos (December 21, 2023): program outcomes and multilateral collaboration
- Authorities thanked staff for engagement to conclude the fifth review under the Extended Fund Facility (EFF) arrangement and the second review under the Resilience and Sustainability Arrangement (RSF).
- Programs supported by the EFF and RSF:
  - Key tools to safeguard macroeconomic stability, anchor fiscal consolidation efforts, and strengthen the climate agenda amid economic and geopolitical uncertainty.
  - Instrumental in catalyzing financial and technical support from other multilateral institutions.
- Program performance and policy stance:
  - For the fifth review, performance remains strong; fiscal consolidation has overperformed government’s and program’s targets.
  - Central Bank took decisive actions to counter inflation and rebuild reserve buffers; targets on primary balance, government debt, and net international reserves (NIR) were met with sizable margins.
  - All performance criteria (PC) and indicative targets (IT) were met.
  - Going forward, policy stance remains focused on debt sustainability and vigilance with inflation pressures to act in a timely manner.
- RSF outcomes:
  - All reform measures (RMs) of the RSF’s second review were implemented.
  - RSF built on Costa Rica’s efforts to promote a greener, more inclusive, and sustainable economy and was instrumental in continuity of the climate agenda.
  - IMF Climate Finance Task Force facilitated a roundtable with other IFIs and private sector stakeholders about scaling up climate financing.
  - During COP28, authorities announced engagement with multilateral partners to launch a sustainable project preparation facility to crowd in climate investments and prepare a pipeline of bankable projects.
- Authorities’ readiness:
  - Authorities stand ready to implement necessary policy actions in response to external shocks and to mitigate risks associated with climate change over the medium and long run.

### Macroeconomic performance: growth, labor market, inflation, and reserves
- Growth and activity:
  - In 2022, growth exceeded expectations with a 4.6 percent outturn.
  - BCCR projects 5.0 and 4.3 percent for 2023 and 2024, respectively.
  - In October 2023, the monthly index of economic activity was 6.6 percent y-o-y, 3.1 p.p. over last year’s result.
  - The economy has grown over 6.0 percent for the past six months.
  - Drivers: construction, higher external demand, recovery of gross fixed capital formation as multinational firms choose Costa Rica for relocation.
- Labor market:
  - Unemployment rate decreased from its peak of 24.4 percent to 7.7 percent (11.4 percent a year before) when considering the moving quarter of August, September, and October 2023.
  - Participation rate diminished to 53.7 percent from 60.3 percent a year before.
- Inflation and monetary policy:
  - From December 2021 until October 2022, the TPM was increased by 825 b.p.; annual inflation peaked at 12.13 percent in August 2022 and started a downward trend six months later.
  - In March 2023, the BCCR lowered its policy rate, and since then it has decreased by 275 b.p.
  - In November, there was a deflation rate of 1.64 percent y-o-y (1.77 accumulated deflation for 2023), while core inflation was 0.35 percent y-o-y.
  - Median inflation expectation for 12 and 24 months was 2.0 and 3.0 percent, respectively (6.0 and 4.0 a year before).
  - Inflation is expected to return to target, from below, by end-2024.
- Liquidity and reserves:
  - Liquidity has been ample due to expansive effect of foreign currency purchases by the BCCR.
  - Gross international reserves by end-November were US$12,877 million, well above the IMF’s Reserve Adequacy metric.
  - Increased supply translated into a 10.2 percent appreciation of the nominal exchange rate until end-November.
  - Factors: FX purchases by the BCCR, issuance of a US$1.5 billion Eurobond, and multilateral funding inflows.

### Fiscal performance and structural reforms
- Fiscal outcomes:
  - In 2022, primary balance was 2.1 percent of GDP (-0.3 percent in 2021), the lowest of the last thirteen years.
  - Financial deficit was 2.5 percent of GDP (5 percent in 2021).
  - Total income was 16.6 percent of GDP, 0.8 percent more than the same period last year.
  - Tax revenue was 14.3 percent of GDP, the highest in more than a decade.
  - Public debt reached 63.8 percent of GDP in 2022.
  - Cumulative primary surplus to September 2023 was 1.7 percent of GDP.
  - Preliminarily, in October 2023, the financial deficit was 2.4, and debt decreased further to 59.8 percent of GDP (from 67.6 percent by end 2021).
  - Expectation is for public debt to end the year at 61 percent of GDP.
  - Treasury’s objective: bring debt-to-GDP ratio below 60 percent by 2025 and 50 percent before 2035.
- 2024 fiscal projections and budgetary stance:
  - For 2024, public finances are expected to continue with a positive primary result of 1.85 percent of GDP and a financial deficit of 3.0 percent of GDP.
  - Minister of Finance's strategic proposal focuses on three main pillars: control and reduction of public expenditure, a more equal and effective tax system, and a long-term financial strategy.
- Tax and spending reforms:
  - Plans to remove tax expenditure provisions, reform the PIT to increase horizontal and vertical equity by taxing the income of employed, pensioners, and self-employed individuals under a single recalibrated schedule, and resume discussion to address current income tax structural shortcomings.
  - On spending, the 2023 budget represents an increase in social spending of more than 4 percent compared to the initial 2022 budget.
  - Treasury will channel under-executed resources to the main cash transfer, non-contributory pension, and childcare programs.
- Market recognition:
  - Moody’s, Fitch, and S&P improved Costa Rica’s sovereign rating and outlook twice this year.
  - Sovereign spreads have fallen abruptly since 2020; for 2023, they have been below the GLOBAL and the LATAM EMBI.
  - Government issued an external debt bond for USD1.5 billion, maturing in November 2054 with a yield of 7.75 percent, for which there was a 3.4 bid to offer.

### Structural and public management reforms supporting inclusive, green, and sustainable growth
- Main policy objectives: protect the most vulnerable, promote greater female labor force participation, and boost productivity growth by eliminating barriers to business formalization, investment, and job creation.
- Public employment and public financial management:
  - Public employment bill (PEB), a structural benchmark under the program, was approved in March 2022 and fully implemented for executive branch’s job positions in the single-wage spine in early September 2023.
  - Reforms envisaged in procurement, modernization of tax and customs administration, and public financial management (improving targeting accuracy and delivery of social protection programs).
- Medium-term frameworks and institutions:
  - In 2022, cabinet approved and published a Medium-Term Fiscal Framework (MTFF) and Medium-Term Debt Strategy for 2023-2026.
  - A macro fiscal unit is being formalized within the Ministry of Finance, and the Fiscal Council is being operationalized.
  - Capacity development focused on an action plan to operationalize gender budgeting; execution of gender-related spending will be monitored during 2024.
- Digitalization and social protection targeting:
  - Payment system for all cash transfer social assistance programs was centralized and digitalized.
  - SINIRUBE (Sistema Nacional de Información y Registro Único de Beneficiarios del Estado) enhanced to quantify specific individual needs to aid prioritization.
  - By end-February 2024 (SB), there will be a Social Assistance Single Window (“ventanilla única”) to consolidate social programs and move to prioritization based on urgency of need.

### Climate change agenda: achievements, remaining challenges, and reform implementation
- Environmental achievements:
  - Costa Rica (51,100 km2) hosts diverse ecosystems and about 6 percent of the world’s species.
  - Payments for Environmental Services (PES) promoted forest and biodiversity conservation; Costa Rica is the only tropical country to have reversed deforestation.
  - Forest cover extended to nearly 60 percent of land and on track to achieve most of the 100 targets of the National Biodiversity Strategy 2016-25.
  - Officially protected areas cover 25 percent of land and 30 percent of marine areas.
  - Produces all of its electricity from renewable sources.
- Ongoing challenges and strategy:
  - More is needed given challenges posed by climate change.
  - Authorities committed to enhancing crisis preparedness, climate-resilient infrastructure, greening the financial sector, reaching net zero emissions by 2050, and mobilizing official and private financing to meet significant short- to long-term costs within the budget envelope.
  - RSF fills a gap to unlock critical resources; authorities dedicated to implementing RSF-supported reform measures complementary to other development partners’ reforms.
- RSF reform measures and regulatory progress:
  - For the second review, all RMs were completed, aiming to improve integration of climate issues into fiscal and financial sector risk analysis (RM5 and RM8) and in project appraisal (RM6). Authorities submitted a bill to encourage use of low-pollution vehicles through feebates (RM7).
  - In October, authorities approved a regulation requiring supervised financial intermediaries to put in place policies to incorporate socioenvironmental and climate risks into banks’ decision-making processes, classify these risks in credit operations, and meet specific disclosure requirements by end-2026 (RM8).
  - First review RMs included publishing guidelines for budget tagging (with information systems under development), implementing regulations to facilitate private-sector participation in renewable energy for self-consumption, establishing a data repository on climate hazards and vulnerabilities, and publishing the “greenness” of reserve holdings of the BCCR.
- Financial sector and policy integration:
  - BCCR established the Group for Strategic Analysis of Climate Change (GAECC) to develop a roadmap integrating climate change into monetary, financial, and macro-prudential policies.
  - In October 2023, superintendencies signed a Statement of Commitment to promote a resilient financial sector against climate change risks.
  - From January 2024, supervised entities are required to incorporate sustainable/responsible component into investment policies and incorporate ESG risk management into risk management frameworks.
  - By December 2024, a single green taxonomy to support development of green financing is expected.
- Spatial planning, infrastructure resilience, and project selection:
  - Authorities recognize urgency to complete spatial planning and mainstream biodiversity into it.
  - Roadmap to enhance infrastructure resilience identifies priority actions to reduce infrastructure loss, fiscal costs of rebuilding, and damage to transport and water sectors.
  - Commitment to strengthen institutional capacity to plan and manage green and resilient investment projects, building on PIMA recommendations and its climate change module.
  - Working with IDB and a private company to develop methodology to score and prioritize capital projects; on track to publish guidelines including climate change criteria for SNIP entities by end-December 2023.
  - IDB will coordinate establishment of the Project Preparation Facility (PPF), a multi-donor facility to provide financial (on a contingent recovery basis) and technical support to build capacity and in-house technical expertise to achieve the Sustainable Development Goals (SDGs).
- Forward strategy and financing instruments:
  - Authorities aim to build on RSF’s catalyzing effect and consider issuing sovereign bonds recognized for climate and social credentials.
  - Acknowledge efforts to improve resilience and fully decarbonize are financially costly; authorities view RSF as critical to support efforts together with additional climate finance resources expected to be catalyzed.

*Source: 1criea2023005 - 7.      The World Bank has been actively supporting a broad range of policies and initiatives*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1criea2023005.pdf_