## 1criea2024001 - 554.1 million (about US$ 725 million or 150 percent of quota in the IMF at the time of approval)

## Source details

**Canonical URL:** [1criea2024001 - 554.1 million (about US$ 725 million or 150 percent of quota in the IMF at the time of approval)](https://www.imf.org/-/media/files/publications/cr/2024/english/1criea2024001.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2024/english/1criea2024001.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2024/english/1criea2024001.pdf.json)

---

### Overview and program conclusion
- Arrangement amount: 554.1 million (about US$ 725 million or 150 percent of quota in the IMF at the time of approval).
- Review marks the successful conclusion of a multi-year reform program supported by Fund resources, including an RFI, an EFF arrangement in 2021, and an RSF arrangement in 2022.
- Costa Rica completed all twelve targeted reform measures under the RSF and is the first country to complete an RSF arrangement.
- The sixth EFF and third RSF reviews mark the final reviews of both arrangements; RSF disbursements are contingent on the conclusion of relevant reviews under the EFF and implementation of scheduled reform measures.
- Staff supports completion of the Board consultation under the MPCC, the sixth review under the EFF, and the third review under the RSF, and supports disbursements amounting to SDR 206.23 million (EFF) and SDR 184.70 million (RSF).

### Recent developments and outlook
- Growth and inflation:
  - Real GDP growth: 5.1 percent in 2023; projected 4.0 percent in 2024 (text/table: Real GDP: 2023 = 5.1; 2024 = 4.0; 2025 = 3.5; 2026–2029 = 3.3 each year).
  - Central bank tolerance band for inflation: 2-4 percent.
  - Headline inflation: -0.5 percent (y-o-y) in April (text); inflation troughed at -3.3 percent (y-o-y) in August 2023 (LOI).
  - Core inflation: 0.05 percent (y-o-y) in April (text).
  - Staff expects annual inflation to reach 2 percent by the end of 2024; BCCR projects return to 3 percent target by Q2-2025 (projection).
- Labor market and poverty:
  - Unemployment: text reports a decline to a historically low 7.8 percent in March; table reports unemployment series: 2023 = 7.3, 2024 = 8.3, 2025 = 9.3, and thereafter 9.3 for 2026–2029.
  - Household real wage income increased by 5 percent in 2023 after a 3 percent contraction in 2022.
  - Total poverty rate fell by 1.2 percentage points in 2023.
- Credit and financial sector:
  - Private sector credit growth: 7.5 percent (y-o-y, FX adjusted) in 2024Q1 (text); table: Credit to the private sector (percent change): 2024 = 5.7; 2025 = 6.1; 2026–2029 ≈ 6.0–6.1.
  - Financial sector capital ratio: exceeded 18 percent in March.
  - Nonperforming loans (NPLs): 2 percent (text/table: NPL series around 2.1–2.5).
- External sector and reserves:
  - Current account balance: narrowed to -1.0 percent of GDP in 2023 (table).
  - Net International Reserves (NIR): almost US$5 billion above program target at end-December 2023 (text).
  - Gross reserves equivalent to 135 percent of the IMF’s ARA metric at end-April 2024 (text); table reports gross international reserves (millions of U.S. dollars): 2023 = 13,261; 2024 = 14,229; 2025 = 14,915; 2026 = 15,646; 2027 = 16,218; 2028 = 16,906; 2029 = 17,593.
- Fiscal:
  - Central government primary balance: 1.6 percent of GDP in 2023 (table).
  - Central government overall balance: -3.2 percent of GDP in 2023 (table).
  - Central government debt: 61.1 percent of GDP at end-2023 (table; series projecting to 54.2 in 2029).
  - Revenue fell by about 1 percentage point of GDP in 2023 relative to 2022 (text).
  - Primary spending fell by more than 0.5 percent of GDP in 2023 (text).
  - Debt fell to 61 percent of GDP at end-2023 even with a 0.6 percent of GDP build-up of cash balances (text).
  - Projected primary surplus: 1.9 percent of GDP in 2024 (text).
  - Gross financing needs projected around 8 percent of GDP in 2024-5 (text).
  - A gross claim by the social security fund amounts to approximately 8 percent of GDP (text).

### Performance under the EFF and RSF arrangements
- All performance criteria for this review were met; fiscal performance exceeded expectations; foreign exchange reserves remain at comfortable levels.
- Structural benchmarks:
  - Single window for social assistance applicants: met.
  - Submission of bill to improve the bank resolution and deposit insurance framework: not met on time but implemented with a delay (submitted April 2024).
- All RSF reform measures targeted for this review have been completed; the four RMs linked to this review were implemented (RM9, RM10, RM11, RM12).

### Monetary policy, exchange rate, and financial stability (program discussion and recommendations)
- Monetary policy stance and actions:
  - BCCR adopted a data-dependent, forward-looking approach; easing began in March 2023.
  - Peak policy rate: 9 percent; policy rate as of end-April 2024: 4.75 percent (policy reductions totalling 425 bps noted in LOI).
  - The MPCC lower outer band was breached in December 2023 by 1.6 percentage points and in March 2024 by 1.4 percentage points, triggering a Board consultation.
  - Staff recommends continued data-dependent, forward-looking easing to return inflation to target and to aim to return the monetary policy rate to neutral in the coming months; staff estimates ex-ante real neutral rate around 1 percent.
  - Projections: even with continued easing, inflation expected to reach the central bank’s target of 3 percent only by Q2-2025 (staff/BCCR projections).
- Exchange rate policy and FX reserves:
  - Since 2022H2 the colon appreciated by 27 percent in nominal terms versus the U.S. dollar by end-April (text).
  - BCCR used a strong BOP position to replenish reserves; FX reserves described as ample/comfortable.
  - Operational guidance: allow exchange rate to respond flexibly; limit BCCR FX interventions to disorderly market conditions; align timing of BCCR FX purchases for NFPS with FX sales to these entities.
  - Market reforms recommended: extend MONEX trading hours; introduce new market makers; develop FX derivative markets.
- Central bank governance and supervision:
  - Institutionalize central bank autonomy and clarify mandate and decision-making through comprehensive legal reforms when circumstances are propitious.
  - Draft amendments to BCCR Law prepared August 2021, revised December 2022; parts submitted to Legislative Assembly; plan to advance remaining amendments when political context allows.
- Financial supervision and crisis management:
  - Supervisory authorities to continue enhancing toolkits; regulations approved to tighten licensing standards for new banks; increased risk weights for unhedged FX borrowers; supervisors publishing bottom-up stress test results.
  - Bill to amend bank resolution and deposit insurance law submitted April 2024; prompt approval recommended to strengthen resolution authority, enhance autonomy of deposit guarantee fund, and provide a public resolution funding mechanism subject to safeguards.
  - Net stable funding ratio expected to come into effect from September 2024 with transitional arrangements.

### Fiscal institutions, consolidation strategy, and debt management
- Fiscal consolidation:
  - Authorities raised the primary balance by over 5 percent of GDP under the program through spending cuts and revenue increases from 2018 tax reform.
  - Staff expects tighter spending to drive further consolidation with the aim of reducing debt to below 60 percent of GDP in 2025; medium-term staff expectation of primary balance around 2 percent of GDP to bring debt below 50 percent within ten years.
  - Legislative changes that erode revenue should be avoided and coverage of the fiscal rule maintained.
- Tax policy and administration:
  - Government submitted bill 23.760 (May 2023) proposing PIT redesign, higher top marginal rates, taxing capital income at a single flat rate, taxing dividends from free zones, and strengthening simplified regime for SMEs; other bills under discussion could reduce equity and yields.
  - Revenue administration improvements: enhanced risk management, data analysis, inter-agency/international information exchange, Hacienda Digital, customs modernization.
- Public financial management (PFM) reforms:
  - MTFF covering NFPS published and updated; inclusion of climate transition risks and fan chart analysis in MTFF.
  - National Public Investment Law implementation starting in 2025; guidelines to incorporate social cost of carbon in project appraisal (RM6) published September 2023.
  - Treasury Single Account (TSA) extension bill under discussion; targeted approval by end-November 2024.
- Debt management reforms:
  - Adoption of a Medium-term Debt Strategy and more active liability management.
  - Bill to unify debt management functions submitted to create a Public Debt Management Office (end-June 2023 structural benchmark met/advancing).
  - Eurobond issuance: US$ 1.5 billion in March 2023; US$ 1.5 billion in November 2023; legislative authorization up to US$ 5 billion (Nov 2022); future authorizations up to US$ 1 billion in 2024 and up to US$ 1 billion in 2025 subject to targets.
  - Strategy to deepen domestic debt market, reform auctions, promote non-resident participation, market-making program, and explore Euroclear linkage.
  - Cash buffers being built to reduce rollover risks.

### Structural reforms, social policy, and climate agenda
- Structural reforms and inclusive growth:
  - Continued momentum on structural reforms critical to greener and more inclusive growth.
  - Public Employment Bill implemented for executive branch positions; aim for full public sector implementation by end-2024.
  - Single window for social programs implemented under IMAS (structural benchmark met); centralization/digitalization of cash transfer payments (SUPRES) completed and reaching 97 percent of budget-financed cash payments by July 2023.
  - Measures to incentivize formalization: reduced minimum social security contribution and targeted policies for part-time and independent workers (MCB phases).
  - Education and workforce reforms: Roadmap for Education, dual education revamp, STEAM expansion, childcare strengthening to support female labor force participation.
- Climate and RSF-supported reforms:
  - RSF reform measures completed include guidelines for climate budget tagging (RM1), social cost of carbon in project appraisal (RM6), project selection criteria with climate considerations (RM9), simplification of private participation in renewable self-consumption (RM2), feebate bill submission (RM7), review of tax incentives with negative environmental effect (RM11), greenness indicators for reserves (RM4), data repository for climate hazards (RM3), socioenvironmental risk regulation (RM8), and methodology to incorporate climate effects into top-down stress testing (RM12).
  - National Decarbonization Plan (NDP) assessed consistent with limiting warming to 1.5°C; electricity matrix almost 100 percent renewable; plans to scale up solar and electric public transport (target: 500 zero-emissions buses by end-2025).
  - Combined costs of meeting NDP intermediate emissions targets and scaling up environmentally conscious investment estimated at around US$ 4 billion (around 1 percent of GDP per year) for the next 5 years.
  - Vehicle feebates (RM7) designed revenue-neutral; fuel efficiency improvements could result in revenue losses of 0.1 percent of GDP per year.
- Climate financing commitments (2024-25):
  - IDB plans about US$400 million (mostly for mitigation); AFD about US$100 million; Central American Bank for Economic Integration about US$350 million; World Bank about US$250 million (mostly for adaptation).
  - Development partners coordinating technical support to complement financing; IDB support to strengthen PPP legal/regulatory framework and establish Project Preparation Facility.

### RSF/EFF financing, capacity to repay, and program risks
- Program financing and access:
  - Outstanding Fund credit (2024): outstanding IMF credit based on existing and prospective drawings = 1,930.1 millions of SDR (GRA 1,376.0; RSF 554.1) (Table 7).
  - RSF access and phasing: Total: 554.10 millions of SDR (150.00 percent of quota) (Table 9).
  - Outstanding Fund credit peaking at 2.6 percent of GDP or 6.8 percent of exports in 2024 (text).
  - Financing for 2024 fully financed with firm financing commitments over next 12 months and good prospects thereafter; gross financing needs around 8 percent of GDP in 2024–5.
  - RSF resources provide longer maturities, substituting shorter-term private financing and improving capacity to repay.
- Program financing table (selected, millions of U.S. dollars):
  - Financing need: 2022: 2,677; 2023: 855; 2024: 1,267.
  - Reserve accumulation (excl. RSF): 2022: 1,803; 2023: 4,537; 2024: 231.
  - Official multilateral financing: 2022: 2,675; 2023: 422; 2024: 1,267.
  - IMF (EFF): 2022: 554; 2023: 275; 2024: 548.
  - RSF disbursement: 2022: 0; 2023: 0; 2024: 736.
  - Capital market access: 2022: 0; 2023: 2,921; 2024: 1,000.
  - Gross international reserves (incl. RSF): 2022: 8,610; 2023: 13,261; 2024: 14,229.
- Risks and contingent liabilities:
  - Key risks: contingent liabilities including a gross claim by the social security fund of approximately 8 percent of GDP; natural disasters and climate events; legislative pressures that could weaken fiscal consolidation; downside risks from external environment and global financial tightening.
  - Staff states risk of sovereign debt distress as low.

### Staff appraisal and key policy recommendations
- Monetary policy:
  - BCCR appropriately lowered policy rate; should continue data-dependent, forward-looking easing to reach neutral stance in coming months.
  - With ample FX reserves, FX intervention should be limited to disorderly markets; align FX purchases for NFPS with FX sales to improve transparency.
  - Institutionalize BCCR autonomy and clarify mandate/decision-making via comprehensive legal reforms when feasible.
- Financial sector resilience:
  - Supervisory authorities to continue enhancing toolkits; approve amendments to bank resolution and deposit insurance law quickly to strengthen crisis management and the financial safety net.
  - Implement NSFR from September 2024 with transitional arrangements.
- Fiscal policy and structural reforms:
  - Further spending-driven consolidation appropriate after strong fiscal performance; avoid legislative reforms that erode revenue and maintain broad coverage of the fiscal rule.
  - Proposed structural income tax reform would improve equity and efficiency.
- Structural reform momentum:
  - Keep momentum to achieve greener and more inclusive growth; expand use of analytical tools for social assistance; implement public employment bill fully; attract private finance to support climate agenda.
- Program monitoring:
  - Progress monitored through semi-annual reviews, performance criteria (PCs), indicative targets (ITs), structural benchmarks (SBs), and the MPCC. Data reporting requirements and timelines specified in the TMU.

### Key numerical indicators (selected and preserved exactly)
- Arrangement amount: 554.1 million (about US$ 725 million or 150 percent of quota in the IMF at the time of approval).
- Real GDP (percent): 2023 = 5.1; 2024 = 4.0; 2025 = 3.5; 2026–2029 = 3.3 each year.
- GDP deflator: 2023 = -0.1; 2024 = 1.3; 2025–2029 = 3.2 each year.
- Consumer prices (period average): 2023 = 0.5; 2024 = 0.3; 2025 = 2.9; 2026–2029 = 3.0 each year.
- Current account balance (percent of GDP): 2023 = -1.0; 2024 = -2.0; 2025 = -2.1; 2026 = -1.9; 2027 = -1.7; 2028 = -1.5; 2029 = -1.4.
- Foreign direct investment, net (percent of GDP): 2023 = -4.4; 2024 = -4.5; 2025–2027 = -4.5 each year; 2028 = -4.4; 2029 = -4.3.
- Gross international reserves (millions of U.S. dollars): 2020 = 7,232; 2021 = 6,921; 2022 = 8,724; 2023 = 13,261; 2024 = 14,229; 2025 = 14,915; 2026 = 15,646; 2027 = 16,218; 2028 = 16,906; 2029 = 17,593.
- Gross international reserves - percent of ARA metric: 2020 = 107.3; 2021 = 99.8; 2022 = 106.2; 2023 = 145.1; 2024 = 141.7; 2025 = 142.5; 2026 = 141.3; 2027 = 139.5; 2028 = 138.7; 2029 = 138.3.
- External debt (percent of GDP): 2020 = 49.6; 2021 = 48.6; 2022 = 50.7; 2023 = 43.3; 2024 = 42.2; 2025 = 41.4; 2026 = 41.6; 2027 = 41.3; 2028 = 40.4; 2029 = 39.6.
- Credit to the private sector (percent change): 2020 = 3.4; 2021 = 3.7; 2022 = 3.3; 2023 = 1.9; 2024 = 5.7; 2025 = 6.1; 2026 = 6.1; 2027 = 6.1; 2028 = 6.0; 2029 = 6.1.
- Broad money (percent of GDP): 2020 = 54.8; 2021 = 53.8; 2022 = 47.3; 2023 = 47.3; 2024 = 46.7; 2025 = 46.4; 2026–2029 = 46.4 each year.
- Nominal GDP (billions of colones): 2020 = 36,495; 2021 = 40,327; 2022 = 44,810; 2023 = 47,059; 2024 = 49,553; 2025 = 52,923; 2026 = 56,416; 2027 = 60,139; 2028 = 64,109; 2029 = 68,340.
- Output gap (percent of potential GDP): 2020 = -3.6; 2021 = 0.1; 2022 = -0.3; 2023 = 1.0; 2024 = 0.7; 2025 = 0.2; 2026–2029 = 0.0 each year.
- GDP per capita (US$): 2020 = 12,164; 2021 = 12,539; 2022 = 13,240; 2023 = 16,390; 2024 = 18,306; 2025 = 19,440; 2026 = 20,334; 2027 = 21,317; 2028 = 22,350; 2029 = 23,409.
- Central government primary balance (percent of GDP, table series): 2020 = -3.7; 2021 = -0.3; 2022 = 2.1; 2023 = 1.6; 2024 = 1.9; 2025 = 2.0; 2026 = 2.0; 2027 = 2.0; 2028 = 2.0; 2029 = 2.0.
- Central government overall balance (percent of GDP, table series): 2020 = -8.4; 2021 = -5.1; 2022 = -2.8; 2023 = -3.2; 2024 = -3.0; 2025 = -2.7; 2026 = -2.4; 2027 = -2.2; 2028 = -2.0; 2029 = -1.8.
- Central government debt (percent of GDP, table series): 2020 = 66.9; 2021 = 67.6; 2022 = 63.0; 2023 = 61.1; 2024 = 60.3; 2025 = 59.3; 2026 = 58.3; 2027 = 57.0; 2028 = 55.7; 2029 = 54.2.
- Financial soundness indicators (selected): Risk-adjusted capital ratio around 16.5–18.6 across periods; Nonperforming loans to total loans around 2.0–2.5; Loan loss provisions to total loans around 3.8–4.3; ROA around 0.6–1.0 (Table 6 snapshots).
- IMF credit and quotas (Table 7/8/9): Outstanding IMF credit (millions of SDRs, 2024) = 1,930.1 (GRA 1,376.0; RSF 554.1); Fund obligations principal (2024) = 184.7 millions of SDR (GRA 184.7; RSF 0.0); EFF total access: 1,237.49 millions of SDR; RSF total access: 554.10 millions of SDR (150.00 percent of quota; quota = 369.40).

*Source: IMF staff report (May 23, 2024).*

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

### 1criea2024001 - 554.1 million (about US$ 725 million or 150 percent of quota in the IMF at the time of approval

### Overview
- The review marks the successful conclusion of a multi-year reform program supported by Fund resources, including an RFI, an EFF arrangement in 2021, and an RSF arrangement in 2022.
- Costa Rica completed all twelve targeted reform measures under the RSF and is the first country to complete an RSF arrangement.
- The arrangement amount noted is 554.1 million (about US$ 725 million or 150 percent of quota in the IMF at the time of approval).
- The sixth EFF and third RSF reviews mark the final reviews of both arrangements; RSF disbursements are contingent on the conclusion of relevant reviews under the EFF and implementation of scheduled reform measures.

### Recent developments and outlook
- Growth and inflation:
  - Real GDP growth: 5.1 percent in 2023; projected 4.0 percent in 2024.
  - Central bank tolerance band for inflation: 2-4 percent.
  - Headline inflation: negative at -0.5 percent (y-o-y) in April.
  - Core inflation: 0.05 percent (y-o-y) in April.
  - Staff expects annual inflation to reach 2 percent by the end of 2024.
- Labor market and poverty:
  - Unemployment rate: declined to a historically low 7.8 percent in March (text); table reports unemployment rate series: 2023 = 7.3, 2024 = 8.3, 2025 = 9.3, and thereafter 9.3 for 2026–2029.
  - Household real wage income increased by 5 percent in 2023 after a 3 percent contraction in 2022.
  - Total poverty rate fell by 1.2 percentage points in 2023.
- Credit and financial sector:
  - Private sector credit growth: 7.5 percent (y-o-y, FX adjusted) in 2024Q1 (text).
  - Financial sector capital ratio: exceeded 18 percent in March.
  - Nonperforming loans (NPLs): 2 percent.
- External sector and reserves:
  - Current account balance: narrowed to -1.0 percent of GDP in 2023 (table).
  - Net International Reserves (NIR): almost US$5 billion above program target at end-December 2023 (text).
  - Gross reserves equivalent to 135 percent of the IMF’s ARA metric at end-April 2024 (text); table reports gross international reserves (millions of U.S. dollars): 2023 = 13,261; 2024 = 14,229; 2025 = 14,915; 2026 = 15,646; 2027 = 16,218; 2028 = 16,906; 2029 = 17,593.
- Fiscal:
  - Central government primary balance: 1.6 percent of GDP in 2023 (table).
  - Central government overall balance: -3.2 percent of GDP in 2023 (table).
  - Central government debt: 61.1 percent of GDP at end-2023 (table).
  - Revenue fell by about 1 percentage point of GDP in 2023 relative to 2022 (text).
  - Primary spending fell by more than 0.5 percent of GDP in 2023 (text).
  - Debt fell to 61 percent of GDP at end-2023 even with a 0.6 percent of GDP build-up of cash balances (text).
  - Projected primary surplus: 1.9 percent of GDP in 2024 (text).
  - Gross financing needs projected around 8 percent of GDP in 2024-5 (text).
  - A gross claim by the social security fund amounts to approximately 8 percent of GDP (text).

### Performance under the EFF and RSF arrangements
- All performance criteria for this review were met (text).
- Fiscal performance exceeded expectations; foreign exchange reserves remain at comfortable levels.
- Structural benchmarks:
  - Single window for social assistance applicants: met.
  - Submission of bill to improve the bank resolution and deposit insurance framework: not met on time but implemented with a delay.
- All RSF reform measures targeted for this review have been completed.

### Monetary and financial stability (Program discussion and recommendations)
- Monetary policy:
  - The central bank appropriately lowered the policy rate; staff recommends a continued data-dependent, forward-looking approach to return inflation to target and to aim to return to a neutral monetary policy stance in the coming months (text).
  - The Board Consultation under the Monetary Policy Consultation Clause was triggered by inflation remaining negative since mid-2023 (text).
- Central bank governance:
  - It is critical to institutionalize central bank autonomy and clarify its mandate and decision-making processes through comprehensive legal reforms as soon as circumstances are propitious (text).
- Financial supervision and crisis management:
  - Supervisory authorities should continue enhancing toolkits to strengthen financial sector resilience (text).
  - A recently submitted bill to amend the bank resolution and deposit insurance law would help strengthen the crisis management framework and the financial safety net and should be approved quickly (text).

### Fiscal institutions and sustainability
- Fiscal consolidation:
  - Firm commitment to further spending-driven consolidation to reduce debt and interest burdens while creating space for capital and social investment (text).
  - Legislative changes that erode revenue should be avoided and the coverage of the fiscal rule should be maintained (text).
- Public finances (selected table values):
  - Gross domestic saving: 2023 = 14.4; 2024 = 14.4; 2025 = 14.9; 2026 = 15.4; 2027 = 15.7; 2028 = 16.4; 2029 = 18.5.
  - Gross domestic investment: 2023 = 15.4; 2024 = 16.4; 2025 = 16.9; 2026 = 17.3; 2027 = 17.4; 2028 = 17.9; 2029 = 18.5.
  - Central government primary balance series (table): 2020 = -3.7; 2021 = -0.3; 2022 = 2.1; 2023 = 1.6; 2024 = 1.9; 2025 = 2.0; 2026 = 2.0; 2027 = 2.0; 2028 = 2.0; 2029 = 2.0.
  - Central government overall balance series (table): 2020 = -8.4; 2021 = -5.1; 2022 = -2.8; 2023 = -3.2; 2024 = -3.0; 2025 = -2.7; 2026 = -2.4; 2027 = -2.2; 2028 = -2.0; 2029 = -1.8.
  - Central government debt series (table): 2020 = 66.9; 2021 = 67.6; 2022 = 63.0; 2023 = 61.1; 2024 = 60.3; 2025 = 59.3; 2026 = 58.3; 2027 = 57.0; 2028 = 55.7; 2029 = 54.2.
- Risks and contingent liabilities:
  - A key risk is contingent liabilities, including a growing disputed claim by the social security fund (gross claim approximately 8 percent of GDP) (text).
  - The risk of sovereign debt distress is stated as low (text).

### Structural reforms, social policy, and climate agenda
- Structural reforms:
  - Keeping momentum on structural reforms is critical to achieving greener and more inclusive growth (text).
  - The new social assistance single window is increasing the quality of social spending; the public employment bill should be fully implemented by all affected institutions (text).
- Climate and RSF-supported reforms:
  - The authorities have maintained a track record of decarbonization and climate adaptation, supported by the RSF arrangement, and are working to mobilize international sources of green finance (text).

### Key numerical indicators (selected from tables and text; preserved exactly)
- Arrangement amount: 554.1 million (about US$ 725 million or 150 percent of quota in the IMF at the time of approval).
- Real GDP: 2023 = 5.1; 2024 = 4.0; 2025 = 3.5; 2026–2029 = 3.3 each year (table).
- GDP deflator: 2023 = -0.1; 2024 = 1.3; 2025–2029 = 3.2 each year (table).
- Consumer prices (period average): 2023 = 0.5; 2024 = 0.3; 2025 = 2.9; 2026–2029 = 3.0 each year (table).
- Current account balance (percent of GDP): 2023 = -1.0; 2024 = -2.0; 2025 = -2.1; 2026 = -1.9; 2027 = -1.7; 2028 = -1.5; 2029 = -1.4 (table).
- Foreign direct investment, net (percent of GDP): 2023 = -4.4; 2024 = -4.5; 2025–2027 = -4.5 each year; 2028 = -4.4; 2029 = -4.3 (table).
- Gross international reserves (millions of U.S. dollars): 2020 = 7,232; 2021 = 6,921; 2022 = 8,724; 2023 = 13,261; 2024 = 14,229; 2025 = 14,915; 2026 = 15,646; 2027 = 16,218; 2028 = 16,906; 2029 = 17,593 (table).
- Gross international reserves - as percent of ARA metric: 2020 = 107.3; 2021 = 99.8; 2022 = 106.2; 2023 = 145.1; 2024 = 141.7; 2025 = 142.5; 2026 = 141.3; 2027 = 139.5; 2028 = 138.7; 2029 = 138.3 (table).
- External debt (percent of GDP): 2020 = 49.6; 2021 = 48.6; 2022 = 50.7; 2023 = 43.3; 2024 = 42.2; 2025 = 41.4; 2026 = 41.6; 2027 = 41.3; 2028 = 40.4; 2029 = 39.6 (table).
- Credit to the private sector (percent change): 2020 = 3.4; 2021 = 3.7; 2022 = 3.3; 2023 = 1.9; 2024 = 5.7; 2025 = 6.1; 2026 = 6.1; 2027 = 6.1; 2028 = 6.0; 2029 = 6.1 (table).
- Broad money (percent of GDP): 2020 = 54.8; 2021 = 53.8; 2022 = 47.3; 2023 = 47.3; 2024 = 46.7; 2025 = 46.4; 2026–2029 = 46.4 each year (table).
- Nominal GDP (billions of colones): 2020 = 36,495; 2021 = 40,327; 2022 = 44,810; 2023 = 47,059; 2024 = 49,553; 2025 = 52,923; 2026 = 56,416; 2027 = 60,139; 2028 = 64,109; 2029 = 68,340 (table).
- Output gap (as percent of potential GDP): 2020 = -3.6; 2021 = 0.1; 2022 = -0.3; 2023 = 1.0; 2024 = 0.7; 2025 = 0.2; 2026–2029 = 0.0 each year (table).
- GDP per capita (US$): 2020 = 12,164; 2021 = 12,539; 2022 = 13,240; 2023 = 16,390; 2024 = 18,306; 2025 = 19,440; 2026 = 20,334; 2027 = 21,317; 2028 = 22,350; 2029 = 23,409 (table).

*Source: IMF staff report (May 23, 2024).*

### 7.      Faced with large external shocks, the central bank has maintained a data-dependent,

### 7.      Faced with large external shocks, the central bank has maintained a data-dependent,

### Monetary policy: stance, actions, and outlook
- The BCCR adopted a data-dependent, forward-looking approach; once confirming that inflation was on a steady downward trend, it began easing in March 2023.
- Policy rate path:
  - Peak policy rate: 9 percent.
  - Policy rate as of end-April 2024: 4.75 percent.
- Program compliance:
  - The lower outer band of the program’s Monetary Policy Consultation Clause (MPCC) was breached in December by 1.6 percentage points, triggering a Board consultation.
- Inflation and neutral rate projections:
  - Even with continued easing, inflation is expected to reach the central bank’s target of 3 percent only by Q2-2025.
  - Staff estimation of the ex-ante real neutral rate is around 1 percent.
- Policy recommendation:
  - Continue returning the monetary policy rate to neutral in the coming months to avoid the risk of de-anchoring inflation expectations downward.

### Exchange rate policy and FX reserves
- Recent dynamics:
  - Since 2022H2, the colon appreciated by 27 percent in nominal terms versus the U.S. dollar by end-April.
  - The BCCR used a strong BOP position to replenish reserves; FX reserves are described as at comfortable/ample levels.
- Operational guidance:
  - With FX reserves ample, allow the exchange rate to respond flexibly to market conditions.
  - Limit BCCR participation in the FX market to responding to disorderly market conditions.
  - Align timing of BCCR FX purchases on behalf of the non-financial public sector (NFPS) with the sale of FX to these entities to improve price formation and market transparency.
- Market reforms recommended to support a fully flexible exchange rate regime:
  - Extend MONEX trading hours.
  - Introduce new market makers.
  - Develop FX derivative markets.

### Central bank governance, supervision, and financial sector resilience
- Governance:
  - Authorities committed to advancing central bank governance reforms in line with the 2020 Safeguards Assessment recommendations.
  - BCCR is de facto making monetary policy decisions independently; institutionalizing autonomy and clarifying the mandate/decision-making through comprehensive legal reforms is critical.
  - Following the Constitutional Court process, the executive branch is taking steps to fill a BCCR Board vacancy.
- Supervisory strengthening (implementations and planned measures):
  - Regulations approved to tighten licensing standards for new banks.
  - Increased risk weights for unhedged borrowers of FX.
  - Supervisors have started publishing bottom-up stress test results of individual entities.
  - A bill submitted to improve legal protection of supervisory staff and strengthen legal powers of supervisors, including corrective and sanctioning powers.
  - Steps to operationalize consolidated supervision and phase in risk-based supervision.
  - Net stable funding ratio expected to come into effect from September 2024, initially with transitional arrangements.
- Bank resolution and deposit insurance framework:
  - Amendments to bank resolution and deposit insurance law and related legislation were submitted to the Legislative Assembly in April 2024.
  - Expected outcomes of prompt approval:
    - Strengthen the power of the resolution authority.
    - Enhance the autonomy of the deposit guarantee fund.
    - Provide a public resolution funding mechanism, subject to robust safeguards, to finance resolution of bank failures with systemic implications.

### Fiscal institutions and sustainability
- Recent fiscal consolidation:
  - Under the program the authorities have raised the primary balance by over 5 percent of GDP through significant cuts in spending and increased revenues from the 2018 tax reform.
  - Staff expects tighter spending to drive further consolidation with the appropriate aim of reducing debt to below 60 percent of GDP in 2025.
  - In the medium term, staff expects a primary balance of around 2 percent of GDP, which would be sufficient to bring debt to below 50 percent of GDP within ten years while allowing gradual increases in social and capital spending as the fiscal rule subsides.
- Fiscal rule and risks:
  - Adherence to the fiscal rule put in place in 2018 has supported consolidation; spending coverage remains broad but is at risk of being diminished through legislative action.
  - Uncertainty arises from the net revenue effects of recently approved tax exemptions, possible future tax reforms, and compliance improvements.
- Tax policy and administration:
  - Government submitted bill 23.760 to the legislature to:
    - Equalize tax treatment between employees and self-employed.
    - Increase the top marginal rate for high earners.
    - Tax capital income at a single flat rate.
    - Tax corporate profits through a single flat rate.
    - Strengthen the simplified regime for small and medium taxpayers.
    - Reduce VAT exemptions.
    - Tax passive income earned abroad by Costa Rican residents and dividend distributions to Costa Rican residents by firms in free zones.
  - Some bills under discussion but not proposed by the government risk reducing equity, efficiency, and yields of the tax system.
- Revenue administration improvements:
  - Ongoing improvements to risk management and data analysis at tax and customs administration expected to strengthen compliance.
  - Measures include improving inter-agency and international information exchanges, expanding third-party data collection, enhancing data analysis via Hacienda Digital, adopting technologies for core customs processes, and implementing tailored measures by taxpayer type.
- Public financial management and public employment:
  - National Public Investment Law implementation starting in 2025 to improve project selection and alignment with strategic priorities.
  - Efforts to extend gender budgeting to full public sector; a macro-fiscal unit in the Ministry of Finance should begin operations later this year.
  - Public Employment Bill: global wage spine implemented by executive, legislative, Supreme Electoral Tribunal, and National University; other branches and municipalities to implement by end-2024.

### Debt management
- Improvements:
  - Adoption of a Medium-term Debt Strategy and more active liability management.
  - Passage of a bill to unify debt management functions and a proposed constitutional amendment to allow the sovereign to issue external debt for budget financing with more flexibility would improve debt profile and reduce financing costs.

### Inclusive growth and social protection
- Labor market and education:
  - Robust growth has supported wage increases and job creation in the formal sector; reduction in minimum social security contribution has helped increase labor formality.
  - Scope to further reduce taxation of labor income for lower income workers to incentivize formalization.
  - “Roadmap for Education” and revamp of dual education aim to improve outcomes and workforce skills.
  - Plans to strengthen childcare to encourage female labor force participation.
  - Scope to simplify work requirements for new migrants and speed residency processing for migrants and refugees.
- Social spending:
  - 2023: social spending preserved at 1.7 percent of GDP.
  - 2024: social spending budgeted to increase by 11 percent compared to the previous budget.
  - Reforms: single window for social programs complements SUPRES; data and analysis tools for social assistance are being improved; benefits for the elderly are being expanded and targeted better.

### Climate change resilience and decarbonization
- Exposure and adaptation:
  - Costa Rica exposed to higher temperatures, sea level rise, storms, floods, and droughts.
  - 2022 was one of the rainiest years on record; late 2023 and early 2024 El Niño reduced rainfall, lowering hydroelectric production, agriculture quality, and fishing yields.
  - Guided by the National Adaptation Plan (NAP), authorities are strengthening the System for Disaster Risk Management and prioritizing climate-resilient infrastructure.
- Decarbonization progress and initiatives:
  - National Decarbonization Plan (NDP) expected to yield net economic benefits.
  - An updated Climate Action Tracker affirmed Costa Rica’s policies as consistent with limiting warming to 1.5°C.
  - Notable actions: improved electric vehicle infrastructure, increased zero emission public vehicles, policies to reduce methane in livestock and waste treatment, Global Government Excellence award for reforestation.
- Fiscal costs and revenue implications:
  - Vehicle feebates (RM7) designed to be revenue neutral, but fuel efficiency improvements could result in additional revenue losses of 0.1 percent of GDP per year when implemented.
  - Combined costs of meeting NDP intermediate emissions targets and scaling up environmentally conscious investment (consistent with the NAP) are estimated at around US$ 4 billion (around 1 percent of GDP per year) for the next 5 years.
  - This increases the importance of safeguarding revenues and removing tax exemptions with negative environmental impact (RM11).

### RSF-supported reforms and priority reform measures (selected)
- Integrating climate change risks into fiscal planning:
  - RM1: Guidelines for climate budget tagging (January 2023) — Improved tracking of climate-related spending.
  - RM5: Publish quantitative analysis of climate transition fiscal risks (November 2023) — Integration into fiscal planning (e.g., MTFF).
- Strengthening public investment and infrastructure resilience:
  - RM6: Guidelines to assess social cost of carbon in project appraisal (September 2023).
  - RM9: Guidelines on project selection including climate criteria for SNIP entities (December 2023).
  - RM10: Guidelines for including climate change analysis in Regulatory Plans (March 2024).
- Supporting decarbonization:
  - RM2: Implementing regulation to simplify private participation in renewable power for self-consumption (February 2023).
  - RM7: Government to submit bill to introduce feebate scheme for low-pollution private vehicles (November 2023).
  - RM11: Appraise and publish review of tax incentives with negative environmental effect (April 2024).
- Greening reserves and strengthening financial sector resilience:
  - RM4: BCCR to publish indicators of the “greenness” of its reserve holdings in its 2022 Annual Report (March 2023).
  - RM3: BCCR to create a repository with climate hazard and vulnerability data (February 2023).
  - RM8: CONASSIF to approve regulation on management of socioenvironmental and climate change risks in credit portfolio (October 2023).
  - RM12: BCCR to develop methodology to incorporate climate effects into top-down banking stress testing (April 2024).

*Source: BCCR; Haver; International Financial Statistics database and IMF staff estimates.*

### 25.      The authorities are working to attract new climate financing to support these plans. In

### 1criea2024001 - 25. The authorities are working to attract new climate financing to support these plans. In

### Climate financing commitments (2024-25)
- IDB plans to lend about US$400 million (mostly for mitigation).
- AFD plans about US$100 million.
- Central American Bank for Economic Integration plans about US$350 million (to fortify vulnerable infrastructure).
- World Bank plans about US$250 million (mostly for adaptation).
- Development partners are coordinating to provide technical support to complement financial support.
- With IDB support, authorities are strengthening the legal and regulatory framework for public-private partnerships in Costa Rica, an important step toward establishment of a Project Preparation Facility.

### Coverage of climate-related reforms
- Fund-supported reforms span sectoral reforms, PFM, fiscal policy, and financial reforms.
- Electricity generation: New regulations to facilitate private participation in generation of electricity from renewable sources (RM2) — more than 50 operators have joined; reported benefits include cost efficiencies and increased resilience to El Niño and to oil price volatility.
- Urban planning and adaptation: New guidelines aim to aid adaptation by making urban planning more resilient to disasters and include broader conservation considerations (RM10).
- Payment for Ecosystems model is being extended beyond forestry into other areas of agriculture.
- Transport decarbonization: Improved public transport (including electric busses) and charging infrastructure; fiscal incentives to adopt low-emissions vehicles (RM7).
- Mitigating fiscal revenue losses: Potential fiscal revenue losses from low-emissions transport could be mitigated by removing tax exemptions, including those identified to have a negative environmental impact (RM11).
- Financial sector greening:
  - BCCR establishing indicators on the “greenness” of its reserves (RM4) and building a data repository (RM3) to identify climate risks.
  - Data repository is a critical intermediate step toward a top-down stress testing methodology (RM12); results expected to be published and used to support prudential policies.
  - Financial supervisory authorities are developing a green taxonomy to include climate considerations in supervisory functions and to promote green financing.
  - An approved regulation on socio-environmental risks (RM8) requires regulated financial entities to put in place policies and processes to manage socioenvironmental risks and to incorporate them into decision making processes.

### PFM, C-PIMA, and investment management reforms
- PFM reforms include strategic planning integration with national plans and fiscal framework developments such as the MTFF.
- Reforms include:
  - Development of a strategy for meeting financing needs in the event of natural disasters.
  - Publication of transition risks (RM5) for incorporation in the MTFF.
  - Development of a roadmap for resilient infrastructure (SB).
- Coordination improvements through consolidated governance and municipal support.
- Budget tagging: Guidelines published for tagging expenditures with positive/negative effects on climate change, natural disaster resilience, and biodiversity (RM1); preparations underway for inclusion in the 2025 budget.
- Subsequent reforms: Apply green budgeting to spending execution and monitoring.
- Project appraisal and selection weaknesses identified by IMF’s PIMA / C-PIMA; reforms (RM6 and RM9) are catalyzing improvements in investment management alongside climate adaptation and mitigation.
- Project Preparation Facility expected to improve project execution and catalyze climate finance.
- Vulnerable infrastructure: Identification and approved financing for maintenance exist; a key future reform is closer integration with the budget, including incorporation of foreign-financed capital projects into the standard budget process and inclusion of routine maintenance estimates.

### Program financing, capacity to repay, and risks
- All twelve RSF-targeted reform measures completed; authorities completed the four RMs targeted for this review.
- Costa Rica’s capacity to repay the Fund remains adequate; program fully financed with firm financing commitments over the next 12 months and good prospects thereafter.
- Outstanding Fund credit peaking at 2.6 percent of GDP or 6.8 percent of exports in 2024.
- Both the EFF and the RSF financing will continue to be used for direct budget support; RSF resources provide financing at longer maturities, substituting shorter-term private financing and improving capacity to repay.
- Financing for 2024 remains subject to downside risks from the external environment; reserves and government liquidity buffers are in place; additional financing could be mobilized from domestic financial institutions or regional partners if needed.
- Medium-term downside risks mitigated by Costa Rica’s access to international markets and good track record of repayment to the Fund.

### Program financing table (selected figures, in millions of U.S. dollars)
- Financing need: 2022: 2,677; 2023: 855; 2024: 1,267
- Reserve accumulation (excl. RSF): 2022: 1,803; 2023: 4,537; 2024: 231
- Underlying BOP need 1/: 2022: 875; 2023: -3,682; 2024: 1,036
- Official multilateral financing: 2022: 2,675; 2023: 422; 2024: 1,267
- IMF: 2022: 554; 2023: 275; 2024: 548
  - EFF: 554; 275; 548
- Other multilateral creditors: 2022: 2,121; 2023: 147; 2024: 719
- World Bank: 2022: 307; 2023: 48; 2024: 8
- Inter-American Development Bank: 2022: 385; 2023: 104; 2024: 395
- Central American Bank for Economic Integration: 2022: 329; 2023: 40; 2024: 237
- Latin American Reserve Fund: 2022: 1,100; 2023: 0; 2024: 0
- Unidentified financing: 2022: 243; 2023: 30; 2024: 0
- RSF disbursement: 2022: 0; 2023: 0; 2024: 736
- Total change in official reserves (incl. RSF): 2022: 1,803; 2023: 4,537; 2024: 968
- Capital market access: 2022: 0; 2023: 2,921; 2024: 1,000
- Gross international reserves (incl. RSF): 2022: 8,610; 2023: 13,261; 2024: 14,229
- In percent of the ARA metric (incl. RSF): 2022: 106; 2023: 145; 2024: 142
- In percent of the ARA metric (excl. RSF) 2/: 2022: 106; 2023: 146; 2024: 134

### Staff appraisal and policy recommendations
- Monetary policy:
  - BCCR has appropriately lowered the policy rate and should continue data-dependent, forward-looking easing to reach a neutral stance in coming months.
  - With ample FX reserves, foreign exchange intervention should be limited to responding to disorderly market conditions.
  - It is critical to institutionalize the BCCR’s autonomy and clarify its mandate and decision-making processes through comprehensive legal reforms as soon as circumstances are propitious.
- Financial sector resilience:
  - Supervisory authorities should continue to enhance toolkits.
  - Recently submitted bills to amend the bank resolution and deposit insurance law and related legislation (including to strengthen supervisory powers) are important and should be approved quickly to strengthen crisis management framework and the financial safety net.
- Fiscal policy and structural reforms:
  - Planned further fiscal consolidation is appropriate after strong fiscal performance; authorities met their 2023 primary balance targets by a large margin.
  - Further spending-driven consolidation will reduce debt and interest burdens and create space for capital and social investment.
  - Legislative reforms that erode revenue should be avoided and the coverage of the fiscal rule should be maintained.
  - Proposed structural reform of the income tax would make the system more equitable and efficient.
- Structural reform momentum:
  - Keeping momentum is critical to achieving greener and more inclusive growth.
  - Social assistance single window is increasing quality of social spending; wider use of analytical tools recommended.
  - Lower social security contributions for more part-time workers should promote formal employment.
  - Full implementation of the public employment bill by all affected institutions is critical.
  - Ongoing efforts to attract private-sector finance are essential to support the climate agenda.

### Program review and disbursements
- Staff supports completion of the Board consultation under the MPCC, the sixth review under the EFF arrangement and the third review under the RSF arrangement.
- Staff supports disbursements amounting to SDR 206.23 million under the EFF and SDR 184.70 million under the RSF based on macroeconomic performance, progress on structural reforms, and completion of RMs 9-12.

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

### 35.      Given that outstanding credit to the Fund exceeds 200 percent of quota, staff

### 35. Given that outstanding credit to the Fund exceeds 200 percent of quota, staff

### Recommendation
- Given that outstanding credit to the Fund exceeds 200 percent of quota, staff recommend initiation of a PFA.
- It is recommended that the next Article IV consultation revert to the standard 12-month cycle.

### Real sector developments (high-level signals from figures)
- Economic Agent Confidence Index (ICAE) and Consumer Confidence Index (CCI) are tracked across 2012Q1–2024Q1 (figures provided).
- Headline CPI and Underlying Inflation contributions shown by food, energy, and other components across Apr-19–Apr-24 (figures provided).
- Real GDP growth contributions by sector and by type of expenditure shown across 2020Q1–2024Q1 (figures provided).
- Economic Activity (IMAE Trend) indexed to Jan-19=100 tracked through Mar-24 (figures provided).
- Consumer Price Index: annualized monthly inflation (SA) and 12-month inflation shown Apr-19–Apr-24 (figures provided).

### External sector developments (high-level signals from figures)
- Goods exports and imports growth (year-on-year percent change) tracked Feb-19–Feb-24 (figures provided).
- International tourist and flight arrivals (thousands and RHS) tracked Mar-19–Mar-24 (figures provided).
- Exports by component (Billions of USD) tracked 2019Q2–2023Q4 (figures provided).
- Current account balance (cumulative last 4 quarters, percent of GDP) and financial account balance (cumulative last 4 quarters, percent of GDP) tracked 2020Q2–2023Q4 (figures provided).
- Real and nominal effective exchange rate indices (average of 2010=100) tracked Feb-19–Feb-24 (figures provided).

### Fiscal sector developments (key fiscal indicators from tables and figures)
- Central government overall balance (percent of GDP): -8.4, -5.1, -2.8, -3.3, -3.2, -3.0, -3.0, -2.6, -2.7, -2.4, -2.2, -2.0, -1.8 (years shown in Table 1).
- Central government primary balance (percent of GDP): -3.7, -0.3, 2.1, 1.5, 1.6, 1.9, 1.9, 2.0, 2.0, 2.0, 2.0, 2.0, 2.0 (years shown in Table 1).
- Central government debt (percent of GDP): 66.9, 67.6, 63.0, 60.8, 61.1, 60.2, 60.3, 59.2, 59.3, 58.3, 57.0, 55.7, 54.2 (years shown in Table 1).
- Gross Fiscal Financing Needs and Debt (figure): interest payments, primary deficit, external and domestic amortizations, total financing needs and debt trajectories shown for 2019–2029 (figures provided).
- Table 2 (Central Government Balance) provides levels (in billions of colones) and percent-of-GDP ratios for revenue, tax revenue, nontax revenue, expenditure (current noninterest, wages, goods and services, transfers, interest, capital), primary balance, overall balance, financing, and central government debt across 2020–2029 (figures provided).

### Monetary and financial sector developments (key signals)
- Credit to private sector by sector (year-on-year percent change) tracked Mar-19–Mar-24 (figures provided).
- Net domestic assets components (12-month cumulative flows, billions of colones) tracked Mar-19–Mar-24 (figures provided).
- Dollarization rate of banking sector (percent of total) tracked Jan-19–Mar-24 (figures provided).
- Asset quality: NPL to total loans and loan loss provisions to total loans tracked Mar-19–Mar-24 (figures provided).
- Capital adequacy ratio, return on equity, and return on assets (percent) tracked Mar-19–Mar-24 (figures provided).
- Table 6 (Financial Soundness Indicators, selected) — Dec 2021, Dec 2022, Dec 2023, Dec 2024/Mar:
  - Risk-adjusted capital ratio: 16.7, 17.5, 16.8, 16.5, 17.7, 18.6, 18.6 (periods shown).
  - Nonperforming loans to total loans: 2.1, 2.4, 2.5, 2.3, 2.1, 2.0, 2.2 (periods shown).
  - Loan loss provisions to total loans: 3.3, 3.5, 4.2, 4.3, 4.1, 3.8, 3.9 (periods shown).
  - Return on assets (ROA): 0.9, 1.0, 0.6, 0.9, 1.0, 0.7, 0.7 (periods shown).

### Selected macro-financial and external statistics (exact figures extracted from tables)
- Gross international reserves (millions of U.S. dollars) by period: 7,232; 6,921; 8,724; 11,944; 13,261; 11,693; 14,229; 12,015; 14,915; 15,646; 16,218; 16,906; 17,593 (Table 1 / Table 3).
- Gross international reserves as percent of ARA metric: 107.3; 99.8; 106.2; 122.9; 145.1; 115.8; 141.7; 114.3; 142.5; 141.3; 139.5; 138.7; 138.3 (Table 1).
- Current account balance (percent of GDP) series: -1.0; -3.2; -3.2; -2.3; -1.0; -2.1; -2.0; -1.9; -2.1; -1.9; -1.7; -1.5; -1.4 (Table 1 / Table 3).
- External debt (percent of GDP): 49.6; 48.6; 50.7; 47.3; 43.3; 45.4; 42.2; 45.0; 41.4; 41.6; 41.3; 40.4; 39.6 (Table 1 / Table 3).

### IMF financing, obligations, and program access (key figures)
- Table 7 (Indicators of Fund Credit):
  - Fund obligations based on existing credit — Principal (millions of SDRs, 2024): 184.7 (GRA 184.7; RSF 0.0).
  - Outstanding IMF credit based on existing and prospective drawings (millions of SDRs, 2024): 1,930.1 (GRA 1,376.0; RSF 554.1).
  - Net use of IMF credit (millions of SDRs, 2024): 1,930.1; projected net reductions over 2025–2046 as shown in the table.
  - Percent of quota (various entries): examples include percent of quota for Fund obligations and outstanding credit across projection years (detailed series in Table 7).
- Table 8 (Extended Fund Facility access and phasing):
  - Total: 1,237.49 millions of SDR; memorandum item: Quota 369.40 (table provides dates and disbursement tranches).
- Table 9 (Resilience and Sustainability Facility access):
  - Total: 554.10 millions of SDR (150.00 percent of quota); memorandum item: Quota 369.40 (table provides tranche dates and conditions).

### Gross external financing needs and sources (high-level)
- Table 4 shows gross external financing needs and composition across 2020–2029 (in millions of U.S. dollars) including:
  - Gross external financing needs (selected year examples): -9,978; -9,336; -11,986; -15,724; -9,074; -14,244; -14,177; -13,854; -13,980; -14,423; -14,613; -14,458; -15,356 (series across years).
  - Amortization (selected totals) and breakdown by public sector, private sector, and of which short-term (series provided).
  - Gross external financing sources: capital transfers, direct investment, borrowing, change in international reserves (increase -), use of IMF credit, other multilateral financing, and memorandum items (detailed series provided in Table 4).

### Key projection and memorandum items (selected)
- Table 1 projections include Real GDP (annual percentage change) sequence: -4.3; 7.9; 4.6; 5.1; 5.1; 3.5; 4.0; 3.3; 3.5; 3.3; 3.3; 3.3; 3.3 (years shown).
- Nominal GDP (billions of colones) sequence (Table 1): 36,495; 40,327; 44,810; 47,588; 47,059; 50,681; 49,553; 54,026; 52,923; 56,416; 60,139; 64,109; 68,340.
- Unemployment rate sequence (Table 1): 20.0; 13.7; 11.7; 8.1; 7.3; 8.7; 8.3; 9.3; 9.3; 9.3; 9.3; 9.3; 9.3.

*Source: Excerpts and tables from the IMF staff report and accompanying figures (Costa Rica).*

### Annex I. Capacity Development Integration: Updated Country

### Annex I. Capacity Development Integration: Updated Country Strategy Note

### Context
- COVID-19 exacerbated pre-existing fiscal and social challenges in Costa Rica despite the authorities’ timely response.
- IMF engagement timeline and arrangements:
  - Disbursement under the Rapid Financing Instrument in 2020.
  - Executive Board approved a three-year arrangement under the Extended Fund Facility (EFF) on March 1, 2021.
  - Resilience and Sustainability Facility (RSF) approved by the Executive Board on November 14, 2022.
  - The EFF and RSF expire on July 31, 2024.
- The EFF program is anchored by three key pillars:
  - (i) implementing equitable fiscal reforms to ensure debt sustainability, while protecting the poor and most vulnerable;
  - (ii) maintaining monetary and financial stability, while continuing to strengthen the central bank’s autonomy and governance and addressing structural financial vulnerabilities; and
  - (iii) advancing structural reforms to support inclusion, while boosting labor productivity, under the government’s strong commitment to fighting climate change.
- Under the administration that took office in May 2022, CD has continued to advance implementation of reforms under the EFF and RSF.
- Costa Rica is expected to remain a heavy user of CD as it institutionalizes progress made under the EFF and RSF.

### Engagement Strategy
- Historical CD uptake:
  - Costa Rican authorities have received extensive CD with generally good traction and implementation record.
  - Examples of CD impact include the punctual update of the base year of the national accounts (NA) and the publication of tax expenditure reports as part of the budget process.
- Integration of CD with surveillance and lending:
  - CD delivery has been closely integrated with Article IV surveillance priorities and follows recommendations of the 2018 Financial Sector Stability Review and a Basel Core Principles assessment in the 2022 WB FSAP Development Module.
  - Country team and CD providers coordinated closely under the EFF and RSF, including through mission participation, to integrate CD in reform priorities and support program design and implementation.
  - Examples where CD informed program design:
    - Public Investment Management Assessment (PIMA) and Climate PIMA provided basis for an EFF structural benchmark and RSF reform measures.
    - Timely CD intervention supported implementation of a public wage bill corrective action.
    - CD was critical in the design of a feebate scheme, improving deposit insurance quality, and establishing a new bank resolution framework with law proposals presented to the Legislative Assembly.
  - Appropriate sequencing of CD across reform streams is coordinated by the country team, in consultation with authorities and CD providers, including CAPTAC-DR as appropriate.
  - The Fund’s resident representative office plays a key coordination role.
- Collaboration with other partners:
  - Strong collaboration with IDB and WB on debt management, social spending targeting and delivery, and climate change.
  - Engagement with WB on climate change adaptation, business climate, and FSAP follow-up; IDB on public employment reform, climate change mitigation, and FinTech; OECD on reporting standards of state-owned enterprises; UN on gender and education.
  - Regular joint meetings/missions and donor debriefs to ensure consistency of policy advice and synergies.

### CD Priorities
- Overarching objective: consolidate achievements and further progress on macro-critical reform priorities to boost private investment, support inclusive and green growth, ensure debt sustainability, and strengthen BCCR autonomy, governance, supervisory, and crisis management frameworks.
- Main CD-supported reform areas and activities:

  - Implement fiscal reforms to support inclusive and green growth while ensuring debt sustainability:
    - 2018 comprehensive fiscal reform included tax reforms, spending measures, and a new fiscal rule with spending ceilings.
    - Authorities are strengthening price incentives for the National Decarbonization Plan through revenue instruments based on past FAD CD and upgrading analysis of transition risks.
    - Fund-supported program improvements: more efficient revenue administration, public financial management, strengthened social safety net, improved data reporting and analytical and forecasting capacity.

  - Public Employment Reform:
    - Corrective actions, including the prior action and adherence to revised timeline, drew heavily on TA provided in February 2023.

  - Revenue administration and tax policy (FAD/CAPTAC-DR):
    - Support revenue mobilization through Tax Compliance Improvement Plans (SB), a Customs Law, and implementation of the Hacienda Digital information technology project.
    - FAD proposed legislative reforms including redesigning personal income tax to increase horizontal and vertical equity (consistent with Article IV recommendations) and feebates to support emissions reduction (RSF reform measure).

  - Public financial management (FAD/CAPTAC-DR):
    - Support development of a comprehensive Medium-Term Fiscal Framework covering the entire NFPS (SB) and improvement of the Treasury’s cash management.
    - Entrenching gender budgeting and centralization/digitalization of the payment system for all cash transfer social assistance programs (SB) to complement WB work on targeting accuracy.
    - 2022 PIMA identified actions to improve public investment efficiency and resilience to climate change in support of the authorities’ climate infrastructure agenda (SB) and related RSF reform measures.
    - FAD fiscal rule TA assisted in improving rule operation while preserving its role in reducing debt.
    - FAD TA facilitated incorporation of climate-related transition risks in fiscal planning, complementing IDB work on risks to fuel revenues from transport decarbonization.

  - Debt management (MCM, in coordination with the WB):
    - CD aims to deepen the domestic debt market and enhance debt management in line with international best practices, including updating the Medium-Term Debt Strategy (SB) and unifying existing debt functions within the same agency (SB).

  - Government finance statistics (GFS) (STA/CAPTAC-DR/ICD):
    - Continued support to improve quality and timeliness of fiscal reporting, expand coverage beyond the central government, and transition from GFSM 1986 to GFSM 2014.

  - Macroeconomic frameworks (ICD):
    - Enhancing analytical and forecasting capacity of the MoF with development of a comprehensive macro-fiscal framework and delivery of customized training to support policy decisions and align the MTFF with best practice.

*Source: Annex I. Capacity Development Integration: Updated Country Strategy Note*

### 4.      Further strengthen the autonomy and governance of the BCCR and the supervisory

### 4.      Further strengthen the autonomy and governance of the BCCR and the supervisory and crisis management framework

### Progress and overarching objectives
- Authorities advancing implementation of recommendations in the 2018 FSSR and 2022 WB FSAP Development Module, including by approving new laws on consolidated supervision and banking resolution, strengthening the macroprudential framework and monitoring of systemic risk, and implementing the national financial education strategy.  
- Progress continues in several critical areas to maintain monetary and financial stability and address remaining structural financial vulnerabilities.

### Central bank operations
- Objective: Further strengthen the BCCR’s operational autonomy and governance, and deepen FX and local currency intermediation consistent with recent Article IV recommendations.  
- Capacity development (CD) providers and activities:
  - LEG/MCM/CAPTAC-DR: LEG-supported workstream with draft amendments to the BCCR Law prepared in August 2021 (SB) and further revised in December 2022 for partial submission to the Legislative Assembly (SB); additional legal amendments to be submitted when the political context allows.  
  - MCM/CAPTAC-DR (CD by MCM/CAPTAC-DR): supporting deepening the FX market to facilitate effective risk management and increased intermediation in local currency.  
- Achieved outcomes and steps:
  - Draft amendments to BCCR Law prepared August 2021 and revised December 2022; parts submitted to the Legislative Assembly, others to be advanced when political context allows.  
  - Deepen FX market, increase daily variation in net open FX position limits, introduce BCCR FX swaps, develop interbank markets to increase liquidity, and promote legal reform to allow greater NFPS’ FX activity with FX intermediaries.  
  - Regulation on emergency liquidity assistance facility approved by the BCCR Board in July 2018.

### Financial Crisis Management
- Objective: Improve alignment of legal framework on bank resolution and deposit insurance with best international practices and operationalize enhanced crisis management framework.  
- CD providers and activities:
  - LEG/MCM: CD supports efforts based on a gap analysis guiding reforms on institutional arrangements for the deposit insurance fund and the resolution authority, safeguards for resolution, proper public backstop schemes, and clear resolution triggers (SB).  
- Achieved outcomes and next steps:
  - Legal amendments to strengthen the financial safety net have been prepared.  
  - Amendments to the bank resolution and deposit insurance law and related legislation, submitted for Legislative Assembly’s approval.  
  - Policy objective: Pass bank resolution and deposit insurance law and operationalize the enhanced crisis management framework.

### Financial Supervision and Regulation
- Objective: Strengthen supervision and regulation, enhance consolidated supervision and gradual adoption of Basel III, address dollarization risks, and advance FinTech, cybersecurity, and derivatives markets development.  
- CD providers and activities:
  - CAPTAC-DR/MCM: ongoing CD to strengthen supervision and regulation, enhance consolidated supervision, and gradual Basel III adoption. CAPTAC-DR/MCM engaging on climate change issues, FinTech regulation, cybersecurity, and derivatives markets development.  
- Achieved outcomes:
  - Greater exchange rate flexibility, and prudential policies implemented to discourage dollarization.  
  - Liquidity risk monitoring improved with introduction of liquidity coverage ratio (LCR) and the expected introduction of a net stable funding ratio (NSFR).  
  - Further discouraged financial dollarization: (i) revised the definition of “unhedged borrowers”; (ii) issued regulation imposing additional capital requirements on unhedged FX borrowing; and (iii) published data on unhedged FX borrowing.  
  - Supervisory framework for consolidated supervision of financial conglomerates strengthened and adapted to size, risk and profile.  
  - Credit-risk regulation revamped.  
  - Strengthened supervisory stress test models/tools of credit, market, liquidity and contagion risks.  
  - Approval of regulation ensuring that regulated financial sector entities adequately take into account socioenvironmental risks, including climate change risks (RSF RM).  
  - Drafted regulations to address governance and risk management of cyber risks in the financial sector for approval.  
  - Introduced regulations for consolidated supervision of financial groups.  
- Planned/future CD and policy actions:
  - Implement recommendations from the Basel Core Principles detailed assessment report.  
  - Develop regulations of climate risks to further enhance the risk management of the financial sector.  
  - Enhance FinTech and cybersecurity regulation.  
  - Develop derivatives markets.

### Macroprudential policy framework and systemic risk analysis
- Objective: Enhance macroprudential frameworks and systemic risk monitoring and strengthen macro-financial stress testing tools including methodologies to assess climate risks.  
- Achieved outcomes:
  - Financial Stability Committee established to coordinate MAP policy.  
  - A NSFR to take effect from 2024.  
  - Crisis management protocols in place.  
  - Creation of a data repository and methodology for incorporating climate effects on the banking sector in top-down stress testing (RSF RMs).  
- Future actions:
  - Strengthen macro-financial stress testing tools, including further developing the methodology to assess climate risks.

### Macroeconomic frameworks and BCCR analytical capacity
- Objective: Enhance analytical, forecasting, and policy analysis capacity of the BCCR through development of macroeconomic frameworks and tailored training.  
- CD providers and activities:
  - ICD: CD enhancing analytical, forecasting, and policy analysis capacity through further development of macroeconomic frameworks and delivery of tailored training; provided TA and training on semi-structural gap and DSGE models and helped align the BCCR forecasting and policy analysis system with best international practices.  
- Outcome and next steps:
  - Help develop further the BCCR model-based frameworks and align the BCCR forecasting and policy analysis system with best international practices.

*Source: 1criea2024001 - 4.      Further strengthen the autonomy and governance of the BCCR and the supervisory (PDF).*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Overview and requests to the IMF
- The government requests completion of the sixth review of the Extended Arrangement under the Extended Fund Facility (EFF) and the purchase of SDR 206.23 million.
- In view of completion of four RSF reform measures under the third RSF review, the government requests disbursement of SDR 184.70 million.
- The Letter of Intent (LOI) accompanies an updated Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU) dated May 20, 2024.

### Program performance and compliance
- All September, December and March indicative targets (IT) were met except for the December debt IT, which was breached by 0.4 percent of GDP due to liquidity buildup ahead of repayment obligations.
- End-December fiscal and international reserves targets for the sixth review were met "by large margins".
- Continuous performance criteria (PCs) remain in compliance, including:
  - non-accumulation of new external arrears;
  - non-imposition/intensification of restrictions on the making of payments and transfers for current international transactions;
  - non-imposition/modification of multiple currency practices (MCPs);
  - non-introduction/intensification of import restrictions for BOP reasons;
  - no conclusion of bilateral payments agreements inconsistent with Article VIII obligations.
- The Monetary Policy Consultation Clause (MPCC) lower outer band for inflation was breached:
  - breached in December 2023 by 1.6 percentage points;
  - breached in March 2024 by 1.4 percentage points;
  - Triggered a Board Consultation as part of this review cycle.

### RSF reforms and climate-related measures completed
- Four RSF reform measures (RMs) implemented linked to this review:
  - Published guidelines on project selection criteria including a range of climate change criteria.
  - Published guidelines for including climate change analysis in Regulatory Plans.
  - Appraised and published a review of existing tax incentives with a negative effect on the environment to support decarbonization efforts.
  - Developed a methodology to incorporate climate effects on the banking sector in the BCCR’s top-down stress testing.

### Macroeconomic developments and outlook
- Real GDP:
  - 2023 growth: 5.1 percent (y-o-y).
  - 2024 forecast: 3.8 percent.
  - 2025 potential growth: 3½-4 percent.
- Inflation:
  - Rapid decline in inflation troughed at -3.3 percent (y-o-y) in August 2023.
  - Disinflation moderated to -0.5 percent y-o-y in April 2024.
  - Monetary policy has reduced the policy rate by 425 bps so far (as of the LOI).
- External sector:
  - Current account deficit narrowed from 3.2 percent of GDP in 2022 to 1.0 percent of GDP in 2023.
  - Balance of payments strengthened due to strong exports (including tourism), favorable terms of trade, and FDI inflows, enabling the BCCR to rebuild international reserve buffers.
- Risks to the outlook include weaker-than-expected global demand, geopolitical tensions, commodity price volatility, tightening global financial conditions, and climate events such as El Niño.

### Fiscal policy stance, progress, and objectives
- 2023 outturns and near-term objectives:
  - Primary surplus in 2023: 1.6 percent of GDP.
  - Target primary surplus in 2024: 1.85 percent of GDP (on track).
  - Achieved end-2023 primary balance exceeded target of 1.3 percent of GDP by 0.3 percentage points of GDP.
- Debt targets:
  - Aim to achieve a debt-to-GDP ratio of 60 percent of GDP by end-2025.
  - Aim to achieve a debt-to-GDP ratio of 50 percent of GDP by end-2035.
  - Expectation: reach a debt-to -GDP ratio below 60 percent by end-2025 and 50 percent by 2035.
- Fiscal consolidation approach:
  - Continue progressive income and expenditure measures to further decline debt and secure macroeconomic stability while protecting the vulnerable and supporting a sustainable recovery.
  - Commitment to additional progressive income and expenditure measures to foster inclusive and sustainable growth.

### Fiscal rule and tax reform history and changes
- Fiscal rule:
  - Introduced nominal spending growth limits and tight restraints on public sector remunerations as part of the December 2018 reform.
  - June 2022 implementing regulation change: spending ceilings for execution are based exclusively on the previous year’s original budget rather than previous year’s execution.
  - 2023 amendment: regulatory perimeter modified to exclude public institutions operating under market conditions or without government control, and excluded other non-IMF advised institutions (national security sector, donations to the non-financial public sector, royalties paid to ARESEP and SUTEL among other transitory arrangements), complicating verification of compliance with the fiscal rule.
  - Legislative Assembly passed further modifications to the fiscal rule despite government opposition (¶15 referenced).
- Tax reform (2018):
  - Replaced the General Sales Tax with VAT.
  - Strengthened income taxation via:
    - globalization and phased harmonization of capital income and gains tax at a 15 percent rate;
    - phasing-in of new rules for corporate income taxation (CIT);
    - increase in progressivity of personal income taxation (PIT) with additional brackets of 20 and 25 percent for employment and pension income.

### 2022–2023 fiscal measures and execution details
- 2022 revenue performance and measures:
  - Strong revenue performance despite a cyberattack in late April 2022 that forced shutdown of main tax collection systems.
  - Revenue strengths: corporate profits, VAT, and import-related taxes.
  - Implemented contingency plans to ensure continuity of basic services to large taxpayers.
  - Phased-in VAT increases on construction-related services and tourism as well as on capital income generated durable yields.
  - Delayed scheduled inflation adjustment to the fuel tax for six months until December 2022 to mitigate commodity price shocks.
  - Used one-off revenues from transferring surpluses accumulated by decentralized entities to accelerate debt reduction.
- 2022 spending measures:
  - Fiscal rule envisaged tighter spending constraints for 2022-2025 due to GDP contraction in 2020 and debt ratio exceeding 60 percent of GDP.
  - Total spending grew by 1.4 percent in 2022.
  - Primary spending fell in nominal terms and by 1.6 percent of GDP in 2022.
  - Spending restraint measures included freeze in base salaries, annuities, new hiring, elimination of vacancies, annual nominal reductions of temporary wage components by 8.5 percent (until September 2022), freezes in pensions of public sector retirees and current transfers to the public sector excluding transfers to the Social Security Fund (CCSS), cuts in non-pension private transfers, and reductions in spending on goods and services.
  - The regulation related to some constraints was abrogated in September 2022 to provide more budget flexibility; MOF circular of November 2021 continued to ensure tight spending controls.
  - Monitored spending execution and adjusted appropriations monthly; under-execution of capital spending due to delays and reprioritization of capital projects and unused guarantee fund resources.
  - Issued supplementary budgets, excluded Fondo de Desarrollo Social y Asignaciones Familiares (FODESAF) resources from the fiscal rule, identified operational efficiencies, and deployed higher-than-anticipated revenues from the Joint Institute for Social Welfare’s (IMAS) commercial activities to reallocate resources for poverty reduction.
  - Compared to the budget, an additional 0.2 percent of GDP was provided including additional cash transfers for poverty reduction and additional support for childcare.
  - A temporary scheme to limit the increase in gasoline prices was considered in 2022 but did not advance; if reconsidered, commitments include duration not exceeding 9 months, fiscal cost capped at CRC 3 billion (or less than 0.01 percent of GDP), and coverage by the fiscal rule spending ceiling.

### Structural and institutional reforms progress
- Bank resolution and deposit insurance law amendments were submitted to the Legislative Assembly (with only a slight delay to ensure ownership).
- Progress continued on full implementation of the Public Employment Bill, including a final single wage spine applied to the whole public sector.
- A single window for social programs has been implemented to strengthen the social safety net.
- Commitment remains to complete outstanding measures to align the Central Bank of Costa Rica (BCCR)’s governance and operational frameworks with the end-December 2022 structural benchmark; current political environment prevents submission of the proposal to provide constitutional autonomy to the central bank, but the government will resume efforts when the situation improves.

*Source: Appendix I. Letter of Intent, Memorandum of Economic and Financial Policies, Technical Memorandum of Understanding (as attached to the LOI), May 20, 2024.*

### 8.  We sustained our fiscal consolidation efforts in 2023. A primary balance of CRC 730

### 8.  We sustained our fiscal consolidation efforts in 2023. A primary balance of CRC 730

### Fiscal outcomes and near-term targets
- Primary balance up to end-December 2023: CRC 730 billion, exceeding the QPC of CRC 609 billion.
- Primary surplus target met by end-March 2024: CRC 230 billion (or about 0.5 percent of GDP).
- Agreement reached to pay CCSS claims: total CRC 51 billion; paid CRC 23 billion in 2023; remaining CRC 28 billion to be paid this year.

### Revenue measures and tax policy actions
- 2018 tax reform: delayed enforcement of thin capitalization rules between related parties forecast to generate a yield of 0.1 percent of GDP in 2024.
- VAT on imports staged through production to final consumer implemented in 2023: yields 0.06 percent of GDP.
- Tax expenditure appraisal framework adopted in September 2022; first appraisal published in May 2023:
  - Expected additional revenue from removing lenient VAT treatment of airfares, medical equipment, and wood (after accounting for environmental impact), and taxing car rentals, mobilize at least 0.07 percent of GDP (legislation submitted May 2023, bill 23.763).
- Personal income tax (PIT) reform submitted May 2023 (bill 23.760):
  - Tax wages, pensions, and self-employed profit under a single recalibrated schedule to increase horizontal and vertical equity.
  - Harmonize PIT rate on capital income and gains; broaden base to include dividends from free trade zones to Costa Rican residents; include passive capital income earned abroad by residents; simplify taxation of non-residents.
  - Remove progressive schedule within CIT while retaining and updating simplified tax regime for SMEs.
- Law 10.381 passed to align permanent establishment definition with international standards, tax non-resident firms without economic substance, and reinforce territoriality principle; President partially vetoed (concerns: narrows tax base, revenue losses, distorts investment, erodes horizontal equity); Legislative Assembly overrode the partial veto.
- Bill 23.088 approved April 2024 to ensure financial institutions comply with due diligence for automatic exchange of financial information.
- Legislative Assembly actions that reduced revenue mobilization or efficiency:
  - September 2023: extension and expansion of tax exemption on SMEs (setback to efficiency efforts).
  - September 2023: reduction of tax yield of recurrent property tax on vehicles through approved bill.
- Revenue-neutral feebates scheme submitted November 2023 to incentivize replacement of high-polluting private vehicles and support decarbonization (¶42).
- Going forward: strive to simplify excise tax, continue assessing exemptions, and resume discussions on structural provisions in bill 23.760 to build consensus for a more progressive and efficient income tax.

### Spending measures and budget execution
- Monthly adjustments to appropriations to line ministries to meet program primary surplus target.
- 2023 reallocations via extraordinary budgets: underexecuted resources moved to main cash transfer, non-contributory pension, and childcare programs; efforts to verify eligibility stepped up.
- Net of one-off programs, social spending increased by 5 percent in 2023 amid flat primary spending.
- Under 2018 fiscal reform, reallocating spending away from legally mandated uses when debt-to-GDP ratio is above 50 percent (constitutional mandates exempted).
- Commitment to avoid accumulation of spending arrears and remain current on payment obligations.
- Multilateral partner external loans approval (November 2022) and multi-year Eurobond issuance, plus improved market conditions and debt management, expected to help contain interest expenditure and reduce headline deficit.

### 2024 budget targets and contingencies
- 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 2.5 percent; current and overall spending comply with the 3.5 percent limit of the fiscal rule.
- Priority social spending increased by 11 percent relative to the ordinary 2024 budget; expectation to further increase allocations through extraordinary budgets in second half of year as clarity on budgetary space improves.
- Ongoing improvements in tax- and customs-administration expected to support revenue yields.
- If revenues underperform: government will propose compensating tax measures and reprioritize non-critical spending to ensure primary targets required for Eurobond issuance are met.
- Commitment to save any revenue over-performance or windfalls to accelerate debt reduction.

### Medium-term consolidation and debt objectives
- Aim to reduce debt to below 60 percent of GDP as soon as possible; target to reach the 60 percent threshold in 2025 and continue reducing debt thereafter.
- Additional measures underpinned by planned income tax reform and further rationalization of tax expenditure (¶11).
- Freeze in the basic wage extended until 2027, consistent with fiscal rule and current debt forecasts.
- Expect fiscal savings from public-sector employment reform (¶13) to begin materializing around 2027.
- Other upside supports: consolidation of ministries and institutions, planned asset sale program, greater revenue mobilization from modernization of tax and customs administration (¶12) and PFM reforms (¶15).
- Commitment to verify and settle additional CCSS claims systematically to reduce contingent liability risks and bolster CCSS finances.

### Structural fiscal and debt-management reforms — revenue strategy
- Medium-term revenue strategy objectives:
  - Redesign PIT for a unified progressive schedule taxing wages, self-employed profits, and pensions (¶8).
  - Broaden base: tax dividends from free trade zones and passive capital income earned abroad by residents.
  - Rationalize and simplify income taxation of non-residents.
  - Further broaden the base by removing services taxed with reduced VAT rates and systematically reviewing tax exemptions, including environmental impacts.
  - Remove progressive schedule within CIT while protecting small firms via revamped special tax regime.
  - Revise free trade zone incentives to protect domestic base in line with Pillar 2 (WB support).
  - Introduce and recalibrate feebates to support transition to low-emission vehicles while safeguarding revenues per IMF advice.
- Goal: comprehensive package to compensate for revenue losses of the CIT and vehicle property tax (¶8).

### Revenue administration and customs modernization
- Tax Compliance Improvement Plan (approved December 2021; updated December 2022 and December 2023) with IMF TA support:
  - 2023 recouped CRC 51 million through intensified recovery of delinquent tax arrears.
  - From September 2022 to November 2023, risk assessments recouped approximately US$ 38.5 million in owed taxes, including interest and penalties.
  - Methodology designed for risk assessments of large net-wealth taxpayers; pilot deployment scheduled May 2024.
  - Bill 23.759 submitted May 2023 to update tax code: fiduciary responsibility, simplified enforcement procedures, updates on penalties, coercive collection, and precautionary administrative measures.
  - Requirement for large taxpayers declaring zero taxable profits to present externally-audited financial statements; subset under analysis.
  - International taxation risk assessment guideline (ficha) developed; CRS non-compliance pilot began August 2023.
  - Use of administrative and third-party information: automatic exchange of information (CRS), Country-by-Country reports, corporation shareholders and beneficial owners’ registers.
  - Use of electronic invoice samples to detect unusual sector activity and taxpayer behavior.
  - Large cross-border service providers required to register for VAT to enhance compliance on cross-border services consumed in Costa Rica.
  - Updated framework to estimate non-compliance for VAT and CIT in March 2024.
  - Working on approval of a new bi-annual tax compliance plan to entrench compliance risk management strategic priorities.
- Customs modernization:
  - New Customs Law approved May 2022 with IMF TA; implementing regulation approved and published June 2023.
  - Directorate of Customs prioritized operational and procedural changes; organizational changes delayed until new operational guidelines in place.
  - Executive decree mid-May 2024 to curb abuses and improve oversight of service logistics firms in free trade zones (inventory sharing and activity limits).
  - 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.
  - Non-intrusive scanners applied with risk-selection criteria at Moin Port.
  - 2024: implementing an Annual Audit Plan fully based on risk management with focus on sensitive sectors.
- MOF digital transformation plan, Hacienda Digital (WB support):
  - Upgrade tax and customs procedures and information systems.
  - Replace National Integrated Risk Management Systems (abandoned due to technical issues).
  - Ongoing discussions with firms for Commercial-Off-The-Shelf modules for tax and customs to be fully interoperable, improving risk-management and enforcement.
- Cybersecurity and integrity measures:
  - Aggressive strategy to minimize cyber risks: communication strategy, training programs for MOF staff, updated security measures to reduce vulnerabilities.

*Source: 1criea2024001 - Section 8 (PDF).*

### 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 and single wage spine: implementation and results
- The Public Employment Bill (PEB) was approved in March 2022 (the related structural benchmark was not met by end-May 2021 as initially envisaged due to legislative delays).
- Reform objectives:
  - Replace the composite salary system with a single pay spine to enhance fairness and productivity and remove perverse incentives tied to seniority and civil service exclusivity.
  - Bring the public wage bill on a sustainable path, in line with OECD recommendations and beyond the fiscal consolidation envisaged by the 2018 fiscal reform.
  - Freeze salaries that fall above the spine until the single pay spine reaches them; gradually transition existing workers whose salaries fall below the reference wage (Transitory Disposition XI).
  - Introduce new rules for recruitment and selection, professional development, and performance evaluation (including for top-ranked officials).
  - Introduce 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.
- Implementation timeline and methodological actions:
  - MIDEPLAN, through a Public Employment Unit and in coordination with the Civil Service General Directorate (DGSC) and with support from the Inter-American Development Bank (IDB), finalized the methodology to create a single wage spine with all seven job families, consolidating within the single salary other wage supplements such as annuities, bonuses, incentives and others in June 2023.
  - Oversight over design was shared between MIDEPLAN and autonomous institutions (Judiciary and Legislative Branches, Supreme Electoral Tribunal, public universities, municipalities, and CCSS) following criteria and ceilings approved by the Bill.
  - Public consultation held in January 2023; implementing regulation approval envisaged by March 2023.
  - National Dialogue set up in March 2023 and held for 10 days to communicate implementation and resolve technicalities.
  - MIDEPLAN issued general methodological guidelines in May 2023 for job data collection, job family analysis, and formulation of the single wage spine; these guidelines are non-binding references for institutions not under MIDEPLAN’s tutelage.
- Fiscal and technical milestones:
  - 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 (methodology document detailing mapping of factors into points, assignment of points to job positions, monetary values to points, and fiscal scenarios).
  - MIDEPLAN exceeded the envisaged structural benchmark by incorporating 100 percent of the executive branch’s job positions in the single wage spine in early-September 2023 (structural benchmark), covering all institutions under MIDEPLAN’s legal purview.
  - MIDEPLAN published the wage spine and its directives; updated payroll system Integra and began administering payments in line with transitional provisions in November 2023.
  - In February 2024, MIDEPLAN, with IDB support, ran simulations on a small but representative sample of jobs and confirmed the published wage spine is robust across different simulations and assumptions.
  - Drafting and approval of other HR management guidelines and regulations envisioned in the law and its regulation were completed in March-2024.
  - MIDEPLAN will develop a compensation policy in the medium-term to preserve fiscal savings while attracting qualified human capital.
- Coverage across autonomous institutions and remaining steps:
  - Commitment to implement the PEB for the whole public sector by end-2024.
  - Institutions that have implemented definitive wage spines: Supreme Electoral Tribunal, the Legislative branch, the BCCR and the National University.
  - Judicial branch has undertaken technical work and is expected to publish its definitive wage spine by September 2024.
  - Municipalities and the CCSS face greater technical complexity and require longer time to design definitive global wage spines.
  - MIDEPLAN will offer technical assistance to remaining autonomous institutions despite staff constraints; institutions without definitive spines have adopted the transitory global wage spine for all new hires.
  - The CGR is undertaking audits of institutions to foster adoption of the PEB.

### Social protection: targeting, delivery, and digitalization
- Policy intent:
  - Enhance targeting accuracy and delivery of social protection programs by leveraging digitalization.
  - Consolidate the social protection system, facilitate access to services, allow complementary programs to provide holistic care, and provide more flexibility in social spending (bill 23.436 presented in October 2022 to integrate functions within IMAS; bill advancing through legislative process).
- Centralization and digitalization of payments:
  - The payment system for all cash transfer social assistance programs at the MOF’s National Treasury (SUPRES), in coordination with social assistance units, 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.
  - Four (out of five) main institutions that provide benefits in the form of cash (IMAS, CONAPDIS, PRONAE, and PANI) became fully compliant with the new system by end-December 2023.
  - System benefits and next steps:
    - Estimated reduction in payment processing time from 3-5 days to less than 24 hours (often in real time).
    - Improved service delivery to beneficiaries, fiscal operations efficiency, savings on transaction costs such as bank transfer fees, and increased financial inclusion of the low-income population (especially women) through adoption of digital payment tools.
    - Development underway for round-the-clock real-time payments and the ability to compensate third parties for in-kind services to achieve 100 percent payment of budget-financed resources through the budget.
    - Support will be provided to remaining institutions and programs by tailoring data interfaces and helping overcome capacity constraints.
- Targeting and coverage improvements via SINIRUBE:
  - Strengthen SINIRUBE (Sistema Nacional de Información y Registro Único de Beneficiarios del Estado) as the main instrument to target social protection benefits and services and to harmonize inter-institutional coordination.
  - Increase interoperability between SINIRUBE and SUPRES.
  - A study by Programa Estado de la Nación confirmed the robustness of the SINIRUBE algorithm for targeting beneficiaries.
  - Major social assistance programs have adopted SINIRUBE; SINIRUBE’s administering office has plans to support adoption by two institutions outside the social sector: the judiciary and higher education.
  - Government efforts to persuade municipalities to adopt SINIRUBE as their targeting instrument.
  - SINIRUBE will incorporate the Baremo tool to quantify intensity of needs and aid prioritization.
  - IMAS progressing to remove ineligible duplicate benefits (outside municipalities); possible duplicates identified by SINIRUBE and relayed to institutions for review.
  - Measures to prevent duplication have been included via regulations and directives; bill 23.436 will safeguard powers to do so.
  - As targeting improves and resources become available, coverage of priority programs (including those targeting children and the elderly in poverty) will be increased over the medium term.
  - With UN support, government is assessing legal options to increase or decrease conditionality of cash transfers.
- Social Assistance Single Window (ventanilla única):
  - With World Bank technical support, IMAS is designing and developing a Social Assistance Single Window to consolidate social programs and move from first-come-first-serve to prioritization based on urgency.
  - Initial steps:
    - Launched an online form to allow changes in contact details and strengthened back-office systems.
    - IMAS launched a single window for social programs under its authority in February 2024 (structural benchmark) (exclusions: emergency care, group programs of the Area of Productive and Community Development, and Area of Social Action and Administration of Institutions).
    - The window automates the process from request to appointment assignment; user online self-service module integrated with appointment management (including through a chatbot).
    - Integration with SINIRUBE to validate data and assess eligibility; SINIRUBE’s validation capacity being strengthened.
    - Interoperability improvements, automated prioritization of beneficiaries, and extended access rights beyond registered social workers completed in December 2023.
  - Tangible results to date:
    - Time savings allowing social workers more appointments.
    - Telecommunication cost savings redirected to increase coverage.
    - Better prioritization improving targeting.
  - Subsequent phases and governance:
    - In April 2024, completed an inventory of programs from other institutions that could be linked to the single window services.
    - Agreed to start a pilot exercise with the three executing units of the REDCUDI as a first step.
    - Drafted a directive to clarify the single window’s governance structure; directive expected to be published in December 2024.
    - Working to secure financing to make the single window as effective as possible.
  - Expected final functionalities of the single window:
    - (i) Serve as a one-stop-shop for potential beneficiaries to access information on social programs.
    - (ii) Consolidate information on benefits and programs that individuals and families are receiving.
    - (iii) Provide information on potential eligibility for new benefits to beneficiaries and social workers.
    - (iv) Facilitate preparation of legal documents for beneficiaries such as certificates for appeals.
    - (v) Provide an online interface where individuals and families can more easily and regularly update personal and contact information.
    - (vi) Facilitate coordination among public institutions that manage benefits and programs.

*Source: 13. We are rationalizing and improving the efficiency and quality of government spending (content unit 1criea2024001).*

### 15. We are taking further actions to improve public financial management (PFM) and the

### 1criea2024001 - 15. We are taking further actions to improve public financial management (PFM) and the

### Fiscal rule amendments and coverage
- Amendments preserve broad coverage of spending categories (e.g., capital when debt is above 60 percent, interest, and court rulings).
- Institutional coverage and amount of spending covered by the rule was reduced by 5.8 percent of non-financial public sector spending.
- Rule retains spending ceilings and central government role in containing spending and reducing debt, but influence on non-financial public sector expenditure has been considerably weakened and compliance verification made more complex.
- MOF assessment (September 2023) concluded including extrabudgetary entities in an aggregate limit would require constitutional and other supporting reforms.
- Legislative Assembly approved temporary exclusion (March 2024) of central government redistributions to municipalities funded by the tax on bananas exports.
- Policy stance: continue to strongly oppose ad hoc requests for additional institutional exclusions.

### Medium-Term Fiscal Framework (MTFF)
- MTFF covering the NFPS for the period 2022-2027 published in April 2022 (met structural benchmark) with IMF TA support.
- MTFF updates:
  - Revised MTFF includes analysis of fiscal risks, contingent liabilities, debt guarantees, explicit fiscal contingency reserve schemes, and a medium-term public investment plan/framework.
  - Updated as part of the 2024 budget submission in September 2023 and further updated in March 2024.
  - September 2023 MTFF strengthened by aligning fiscal policy with long-term national plans and explicitly stating the goal to reduce debt to 50 percent of GDP by 2035.
  - March 2024 MTFF includes climate transition risks (¶44) and fan chart analysis produced with IMF CD.

### Public Investment Management Assessment (PIMA) and related reforms
- MOF and MIDEPLAN undertook IMF PIMA with a new Climate Change Module in November-December 2021 (WB and IDB support).
- Outcomes and actions:
  - Plan defined to strengthen public investment efficiency and create fiscal space for climate and critical infrastructure needs (¶41).
  - Law No. 10.441 (bill No. 22.470) submitted and approved to extend SNIP processes to decentralized entities, Legislative Branch, Judicial Branch, Supreme Electoral Tribunal, dependencies, auxiliary entities, decentralized administration, state-owned enterprises, and municipalities.
  - Bill signed by the President in March 2024; law enters into force in March 2025.
  - Incorporation of social cost of carbon into project appraisal; guidelines published in September 2023 with transport sector illustrations (¶41).
  - Published end-December 2023: set of clear and transparent project selection criteria including climate change criteria (¶41).
  - Quarterly and half-year reports issued on physical and financial progress of externally funded projects.
  - Plans to extend portfolio monitoring to domestically funded projects and to develop a comprehensive asset register.

### Gender budgeting
- Gender budgeting introduced in the 2024 national budget proposal.
- With IMF capacity development support:
  - Published a gender budget statement as an annex to 2024 budgets (completed in October 2023) identifying gender-related spending for specified ministries and institutions.
  - Intermediate steps: pilot to identify gender-related expenditures (completed by end-December 2022); adjusted budget call circulars for 2024 (completed by end-April 2023); coordination established among MOF, STAP, and Comptroller’s Office for adoption of technical budgeting standards.
- Execution of gender-related spending will be monitored during 2024.

### Fiscal Council and macro-fiscal capacity
- Commitment to resource and fully operationalize the Fiscal Council to enable publication of its first public assessment of fiscal strategy, fiscal rule compliance, debt sustainability, and macro-fiscal projections through a law creating the council and enabling stipends.
- Support planned for the Fiscal Council to develop communication tools and a memorandum of collaboration with the MOF to clarify separation of functions and information sharing.
- Macro-fiscal Unit: process initiated to formalize a permanent MOF unit in charge of macro-fiscal issues by end-June 2024 (in line with IMF TA), without amending legally mandated functions of other MOF directorates.

### Other key PFM institutional reforms and liquidity management
- Continued MOF–Comptroller collaboration across the budget cycle to ensure fiscal rule compliance despite increased complexity.
- Efforts to reduce budget fragmentation and consolidate public services within fewer institutions as part of public sector reform (examples: consolidation within MOPT, creation of a new Ministry of Housing, a new Social Ministry, restructuring ministries, elimination of the Ministry of Governance).
- Treasury Single Account (TSA) extension: revised bill No. 22.661 submitted in September 2022 to phase transfer of cash held by decentralized and autonomous entities in commercial bank accounts to the TSA; expected approval by end-November 2024.
  - Expected effects: reduce idle cash in financial system and reduce central government borrowing costs.
- Hacienda Digital digital transformation plan (WB support) to modernize and integrate PFM information systems and better align expenditure policies.

### Public procurement modernization
- Enforced use of electronic platform SICOP by all procuring entities to lower transaction costs and improve capacity and expertise.
- Public Procurement Law (No. 9986) approved May 2021; regulatory framework entered into force December 2022; regulation published November 2022.
  - Requires bidders’ registration in the ‘Electronic Registry of Official Suppliers and Subcontractors of the Unified Digital System’ to be incorporated into SICOP.
  - Since December 2022, all public procurement centralized in SICOP except institutions with no operational budget.
  - Regulation requires competing bidders to submit beneficial ownership affidavits identifying beneficial owners and official identification documents for legal persons.
  - Beneficial ownership information accessible to Comptroller General, Office of the Attorney General, or other judicial authority upon request; cross-checks possible with Transparency and Final Beneficiary Registry administered by BCCR (¶35).
- Law enforcement updates streamline procurement, enable bulk purchases, differentiate procurement by category, and reduce complexity.
- Continued effort to upskill procurement offices and improve procurement planning in line with the National Procurement Plan for 2024.

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

### SOE governance, reporting, and IFRS adoption
- Commitment to accelerate full adoption of International Financial Reporting Standards (IFRS) by SOEs to improve transparency and enable full assessments of balance sheets and fiscal risks.
- 2020 financial statements publication status:
  - ICE: fully compliant (end-December 2021 structural benchmark).
  - AyA: became compliant with a delay in June 2022.
  - CNP: working on implementing a new accounting system for FANAL (very small company); full IFRS implementation expected by end of 2024.
  - Remaining SOEs published 2020 financial statements per IFRS standards.
- Updated 2021 aggregate SOE performance report published February 2022.
- With OECD and WB support, SOEs’ public procurement fully consistent with SICOP, limiting exceptions and eliminating regulations that allow withholding confidential information.

### Electricity sector efficiency, tariffs modernization, and market measures
- ICE efficiency strategy since 2021 aims to reduce electricity prices via operational cost reductions, debt restructuring, and IFRS compliance (¶18).
- Cumulative price reductions from December 2020 to December 2023 in ICE systems:
  - Generation: 10 percent
  - Transmission: 14 percent
  - Distribution: 5 percent
- ICE actions:
  - Execution of Financial Sustainability Roadmap to reduce fixed costs and renegotiate debt; reclassification of operating leases as finance leases concluded March 2023 and reflected in tariff reductions as of 2024.
  - Ordinary tariff study (September 2023) requested ARESEP to reduce generation and distribution prices by 9 and 2 percent, respectively; took effect January 2024.
  - Renewing/renegotiating private generator contracts as they expire to leverage capacity and guarantee investment efficiency.
- Market and regulatory reforms:
  - Bill No. 22.561 submitted June 2021 authorizing surplus energy sales to regional market; expected approval by end-June 2024.
  - ARESEP to expand analysis of tariff competitiveness and adopt a new efficient tariffs benchmark based on IDB-supported study.
  - Tariff modernization program (2022 study): three companies (ICE, ESPH and COOPELESCA) began implementing time-of-use (hourly) tariffs; in 2023 five remaining distribution companies presented modernization proposals which are under ARESEP task force review expected to be finalized by end-December 2024.
  - Implementing regulation for Law No. 10086 to simplify private participation procedures in renewable self-consumption established February 2023 (approved October 2021).
  - ICE and the Costa Rican Chamber of Distributed Generation simplified interconnection procedures via an internal protocol.
  - Bill No. 23.414 submitted October 2022 to promote development of new technologies and business schemes for public electricity service, optimize infrastructure, and promote commercialization of electricity; also seeks to integrate public planning for electricity and fuels (under legislative committee discussion).

*International Monetary Fund — Costa Rica (excerpts from content unit 1criea2024001)*

### 20.  We have launched a comprehensive reform of debt management. To contain the risk of

### 1criea2024001 - 20.  We have launched a comprehensive reform of debt management. To contain the risk of

### Debt management reform objectives and context
- Objective: Put public debt on a sustainable path in the long term through diversified fiscal financing and better management of outstanding debt stock and liquidity.
- Context: Rising public debt and financing risks amid the COVID-19 crisis and more recent rises in global interest rates prompted urgent reform.

### Eurobond issuance (policy and recent operations)
- Legislative authorization: up to US$ 5 billion in Eurobonds (authorized November 2022).
- Issuances completed:
  - US$ 1.5 billion in March 2023 (central government; first since 2019).
  - US$ 1.5 billion in November 2023 (face value).
- Future authorizations:
  - up to US$ 1 billion in 2024.
  - subject to prudent fiscal targets in 2024, up to US$ 1 billion in 2025.
- Planned constitutional reform (April 2024): would grant the executive greater flexibility in international borrowing; if approved, would allow the MOF to optimize internal vs external issuance timing and integrate financing discussions into budget debates.

### Institutional debt management reforms
- Amendment to law 8131 submitted May 2023 to centralize all debt-related functions and create a standalone Public Debt Management Office reporting to the Minister of Finance (end-June 2023 structural benchmark).
- Status: bill advancing through legislative processes.
- Governance arrangements:
  - Assets and Liabilities Committee composition: Treasurer, the Minister or the Vice-Minister of spending, economic advisor in the Minister’s office, and the Director of the Public Credit Department (DCP).
  - BCCR role: provide strategic guidance and inter-agency coordination of high-level policy decisions related to government debt, including implications for monetary policy.

### Medium-term debt strategy (MTDS) and issuance planning
- MTDS updated and published: covering 2022-27 (published April 2022), meeting the relevant structural benchmark.
- MTDS covered contingent liabilities, especially guarantees to state-owned companies.
- Going forward:
  - Publish and adhere to Annual Borrowing Plans and Quarterly Issuance calendars aligned with the MTDS.
  - Strengthen accounting and budget execution processes for public debt payments.

### Domestic market development (actions and programs)
- Issuance focus: standard fixed-rate bullet bonds of select maturities; phase out open bond windows and bilateral bond sales.
- Auction reforms: reform auction mechanism for the Treasury to become a price-taker to improve price discovery.
- Non-resident participation: promote by easing regulatory barriers and harmonizing tax regime for non-resident investors, subject to macroprudential considerations.
- Legislative action: law approved December 2022 to open Costa Rican public debt market to foreign participants by easing regulatory barriers and harmonizing tax treatment.
- Clearing and settlement: consultations with international platforms to align clearing and settlement with international standards.
- Market-making / primary dealer program:
  - Pilot rolled out December 2022 with IDB support for a small group of participants with defined rights and responsibilities.
  - Market Makers Program Executive Committee created; Business Rules Proposals sent to SUGEVAL and for public consultation.
  - Expected launch: second half of 2024, subject to approval of instruments necessary for risk management.
- Euroclear linkage: plan to prepare workshops towards end of 2024 with Euroclear, local central securities depositories and regulators to fulfill legal and other requirements to link domestic debt instruments to international securities depositories.

### Liquidity management and cash buffers
- Historical cash balances: much less than 1 percent of GDP over the last decade; example: in 2020, balances insufficient for one month of obligations.
- Current strategy: steadily building cash buffers to reduce rollover risks and increase market confidence.
- Actions taken to improve tradeoffs among objectives:
  - Increased use of liability management operations in line with MTDS.
  - Rescheduled some disbursements.
  - Conducted coordinated FX sales/purchases directly to/from the BCCR.
- Policy tradeoffs considered explicitly:
  - (i) comfortable coverage of needs in domestic and foreign currency,
  - (ii) increased use of foreign financing consistent with MTDS,
  - (iii) goals to contain interest costs and the headline debt.
- Recent drivers: accelerated build-up of cash balances due to appetite for government securities and high financing needs anticipated in the first half of 2024; expectation that cash balances will stabilize.

### Sovereign asset and liability management (SALM)
- Readiness to adopt SALM at an operational level to analyze and manage overall risk exposures.
- Action: 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.
- Implementation planning:
  - Evaluate mechanism to implement an investment strategy to reduce cost of carry.
  - Develop a roadmap to implement key recommendations from the SALM report by September 2024.
  - Roadmap scope: broaden data collection on all sovereign assets and liabilities (consistent with international accrual accounting standards), and establish framework to analyze system-wide liquidity risk, rollover risk, contingent liabilities, and other shocks to the budget.

### Fiscal and debt data quality, accounting, and transparency improvements
- Commitment: improve timeliness, quality, and comprehensiveness of fiscal, financial and debt accounting for the public sector, with IMF TA support.
- Status and milestones:
  - Resumed adoption efforts of GFSM 2014 accrual accounting standards after delays due to hacking attacks.
  - Finalized and published compilation of monthly revenue and expenditure (above-the-line) data excluding accrued interest for 2019-2023 for the Consolidated Central Government (CCG), including extrabudgetary units, in March 2024.
  - 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 producing monthly data before the end of the following month.
  - Plan to publish a report detailing and explaining the BCG debt and accrued interest data in October 2024 (to allow a year’s worth of observations and facilitate inter-year comparison).
  - Progressive extension to general government (GG) and subsectors (CCG, CCSS, and local governments) planned.
  - Published monthly GG above-the-line data (excluding accrued interest) from 2019-2023 in March 2024.
  - Compile monthly debt data (including accrued interest) for the CCSS for December 2023 to February 2024 consistent with GFSM 2014 by end-May 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, the social security fund, and nonfinancial public corporations.
  - Develop 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.
- Technical focus: comprehensive collection and reconciliation of financing (below-the-line) data; harmonization of methodology and data coverage among national accounts, government finance and public sector debt statistics; coordinated improvements on public sector accounting to guarantee stock-flow consistency and enable enhanced balance sheet analysis.

### Monetary policy and exchange rate policy (summarized links to debt management)
- Monetary policy framework: inflation targeting with a 3 percent target and tolerance band of ±1 percentage point.
- Policy reactions and recent rates:
  - BCCR began raising policy rate in December 2021.
  - Policy rate reached 9 percent by October 2022.
  - BCCR lowered the policy rate by 4.25 percent by April 2024 in response to disinflation and lower inflation expectations since March 2023.
  - Minimum legal reserve requirement rate for deposits and obligations in national currency raised from 12 percent to 15 percent in July 2022.
- Inflation developments:
  - Inflation bottomed at -3.3 percent y-o-y in August 2023.
  - Disinflation moderated to -0.5 percent y-o-y in April (year not specified in excerpt).
  - Breach of the outer lower MPCC band in December 2023 and March 2024 by 1.6 and 1.4 percentage points, respectively.
- Foreign reserves (Net International Reserves, NIR) management:
  - End-June 2022 and end-September 2022 NIR targets missed by US$612.2 million and US$48.6 million, respectively.
  - BCCR exceeded NIR targets from end-December 2022 to end-March 2024.
  - End-December 2023 and end-March 2024 NIR targets exceeded by US$4982 million and US$4832 million, respectively.
  - Commitment: maintain reserves in line with IMF’s Assessing Reserve Adequacy (ARA) metric.
- FX market operational reforms to deepen market and enhance flexibility:
  - NFPS FX requests: since April 2022, NFPS entities must give at least one month advance notice to BCCR for FX requests.
  - Pass NFPS demand to market quickly to facilitate price discovery.
  - Consider measures to improve spot FX market functioning: introduction of market makers with obligations to regularly quote prices based on minimum trading lots and maximum bid/ask spread; defining incentives for market maker roles.
  - Re-extension of Monex trading hours planned gradually once market functioning improves.
  - Introduced obligation to adhere to the FX Global Code starting January 2024.
  - Plan to revise FX intermediaries’ net open FX position requirements, including loosening the daily NOP limit to enhance market-making ability.
  - Develop FX derivative market and a master agreement for negotiation of FX derivatives by end-2024.
  - Reforms to be consistent with Article VIII commitments and IMF’s Institutional View on Liberalization and Management of Capital Flows.
- Linkage to debt management: deeper FX markets, greater exchange rate flexibility, and reduced financial dollarization complement measures to reduce financial vulnerabilities and strengthen monetary policy transmission.

### Governance and central bank autonomy
- BCCR independence improvements since 2019:
  - Amendments tightened dismissal rules for the BCCR Governor, delinked Governor’s term from political cycle, and removed Minister of Finance’s voting rights on the BCCR Board.
- Safeguards and further reforms:
  - Draft amendments to BCCR law prepared in consultation with IMF staff and submitted to MOF by end-August 2021 (structural benchmark met).
  - Final amendments were not submitted to Legislative Assembly by end-December 2022 (missed structural benchmark); implementation process adjusted given political context.
  - June (year not specified) submission to Legislative Assembly of a subset of previously foreseen changes; currently with the Commission of Economic Affairs.
  - Executive branch prepared legislation to award constitutional autonomy to the BCCR; intend to submit when political context allows.
  - BCCR completed nine of the twelve recommendations from the Safeguards Assessment.
  - Following Constitutional Court decision, Executive Branch taking steps to fill current vacancy in BCCR Board.
  - Plan to develop a long-term roadmap to continue strengthening BCCR’s equity position.

*Source: Excerpt from the provided IMF content unit.*

### 28. We have made significant progress in financial sector reforms. Over the last years, we

### 1criea2024001 - 28. We have made significant progress in financial sector reforms. Over the last years, we

### Progress in financial sector reforms and transparency
- Approved and implemented several important financial sector reforms, building on the IMF’s 2018 Financial Sector Stability Review (FSSR), OECD recommendations, and the WB’s 2022 FSAP Development Module.
- As a result of sound prudential policies, the banking system has strong capital and liquidity buffers, as evidenced by the stress test results.
- To increase transparency:
  - Since March 2023, SUGEF began to publish the names of the domestic systemically important financial entities, the quarterly Capital Adequacy Ratio of each supervised financial entity, and information on the bottom up stress test (BUST) results.
  - The first publication of the BUST results covered aggregated results of systemically important financial entities; from January 2024 stress test results for each participating entity have been published, together with a press conference explaining objectives, methodology and scenarios.

### Banking sector stability, provisioning, and stress testing
- The banking sector remains stable; the BCCR lowered the policy rate significantly, but lending rates remain high.
- Measures to help borrowers and maintain transparency:
  - CONASSIF and SUGEF created a transitional loan classification category effective January 1, 2023, to soften effects on risk ratings when financial entities modify credit operations (extensions, restructurings, refinancings), and to incentivize borrowers to report true conditions. Historical changes in classification are being recorded.
  - SUGEF reactivated counter cyclical provision from January 2023 (previously reduced in 2020).
  - CONASSIF approved a new regulation and guidelines for credit provisioning effective January 1, 2024, using an updated methodology, risk parameters, credit segmentation, and similar treatment to credit restructurings, extensions or refinancing.
- Monitoring and coordination:
  - Continue monitoring closely through the Financial Stability Committee’s (FSC) Monitoring and Coordination Group (MCG) comprising senior representatives of the BCCR, CONASSIF, the Superintendencies, and the MOF.
  - A technical group supporting the MCG will continue to meet frequently to follow up on key systemic developments and financial risks, including interest rates and FX movements.
- Stress testing and climate risk:
  - Progress in systemic risk assessment by strengthening credit, market and liquidity risk stress test models and contagion risk tools.
  - Commitment to continue updating bottom-up and top-down stress test results and publishing them in the annual Financial Stability Report.
  - In line with the BCCR’s roadmap to integrate climate considerations into monetary and financial policies, work is underway to enhance capabilities in climate risk management, including an integrated climate and economic model and developing stress testing methodologies.

### Actions to reduce risks from financial dollarization
- Since 2018 the BCCR allowed greater exchange rate flexibility; however, strong appreciation of the exchange rate since mid-2022 may incentivize renewed foreign currency risk-taking.
- Prudential measures taken by SUGEF and CONASSIF:
  - Establishing a higher general provision requirement for loans to non-FX generators.
  - Calculating liquidity coverage requirements by currency.
  - Requiring additional capital requirements for foreign currency mortgages to unhedged borrowers, based on LTV thresholds.
  - Requiring banks to assess sensitivity of debtors’ payment capacity to exchange rate changes.
- Specific regulatory changes and transparency:
  - Revised the definition of an unhedged borrower effective January 1, 2023.
  - Issued a new regulation imposing additional capital requirements on foreign currency loans to unhedged borrowers, replacing the previous general provision.
  - New definition of unhedged borrowers requires natural or financial hedges to cover at least 100 percent of the loan instalment, regardless of the number of hedges.
  - Regulation establishes a gradual increase in the risk weight for credits to unhedged borrowers, starting on January 1, 2024, and ending on January 1, 2031; the risk weight applies to both the loan balance by end-December 2023 and to marginal loans from the corresponding effective date, with standards stricter than Basel ones.
  - SUGEF began publishing quarterly data on unhedged FX borrowing since March 2023; end-March data was uploaded in April 2024.

### Strengthening prudential regulatory and supervisory regime
- Legal reforms and consolidated supervision:
  - Reforms to laws on consolidated banking supervision and securities market regulation passed in 2019 (Law no. 9768).
  - May 2022: CONASSIF approved a regulation to strengthen governance of supervised financial entities, holding companies, and affiliated companies, effective January 1, 2023, with transition arrangements.
  - September 2022: CONASSIF introduced regulations to implement consolidated supervision of financial groups, with phased implementation starting January 1, 2023.
  - IMF TA identified further improvements; additional steps are being taken, including fine-tuning regulation and supervisory guidelines for domestic financial conglomerates.
- Phasing in risk-based supervision and Basel III adoption (phased):
  - (i) SUGEF enhanced liquidity risk management supervision; net stable funding ratio is expected to come into effect with transitional arrangements from September 1, 2024.
  - (ii) SUGEF revamped credit risk management by introducing forward-looking assessment of losses and provisioning requirements; new regulation and guidelines finalized November 2021, effective January 1, 2024.
  - (iii) Revised banks’ capital definition, established conservation and systemic importance capital buffers, and definition of systemically important institutions in line with Basel III; regulation issued August 2021, to come into effect January 1, 2025.
  - (iv) Reviewed regulation on capital requirements for market risk and credit risk, included measurement of interest rate risk in the banking book; expected to be approved in July 2024 with effective date January 1, 2025, to be implemented gradually.
  - Financial entities required to assess operational and financial impacts and send results to SUGEF on a quarterly basis starting in the last quarter of 2022.
  - June 2023: SUGEF launched functional re-organization to reallocate supervisory resources for resolution and consolidated supervision and to modernize structure; organizational change proposal sent to BCCR and to be discussed by the BCCR Board by May 2024.
  - Ongoing challenges include budget and agile processes to attract and maintain qualified professionals, strengthen analytical and statistical capabilities, and develop supervisory skills on emerging risks.
- Strengthening supervisors’ legal powers and protection:
  - Intend to pursue critical legislative reforms to grant supervisors legal powers to (i) dismiss members of the Board and senior management of banks for unsafe and unsound practices; (ii) ease legal conditions for exercising supervisory powers; and (iii) establish a separate appeal procedure for the most serious supervisory measures, and ensure that intervention agreements or effects of measures adopted prior to declaration of non-viability cannot be reversed.
  - Aim to recalibrate the sanctioning framework and strengthen legal protection for supervisors with respect to coverage of legal costs and protection against good faith errors.
  - Amendments to underpin legal power of superintendents were submitted to the Legislative Assembly in April 2024.
  - With IMF TA support, developing regulations and supervisory process to impose additional capital requirements under Basel Pillar II on individual banks; draft regulations for interest rate risk in the banking book are expected to be approved in July 2024.
- Cyber risk regulation:
  - With IMF TA support, prepared draft regulations addressing governance and risk management of cyber risks including information sharing, immediate incident reporting, testing frameworks, third-party risks, and response and recovery from cyber incidents.
  - Draft regulations reviewed by IMF TA mission in April 2023; expected to be approved in July 2024. Supervisory authorities will follow up with implementation plans by financial institutions.

### Financial safety net, resolution, and contingency arrangements
- Strengthening banking resolution and deposit guarantee framework:
  - February 2020: Legislative Assembly approved law on banking resolution and creation of a deposit guarantee fund (DGF) (law no. 9816).
  - Implementing regulations in effect since May 2021; quarterly payments into the DGF started in October 2021.
  - May 2023: CONASSIF approved regulation on recovery and resolution plans, establishing a period of 12 months, at SUGEF’s request, to present the recovery plan and report supporting the resolution plan.
  - With IMF TA support, further strengthening legal framework on bank resolution and deposit insurance, including institutional arrangements for the DGF and the resolution authority, sufficient resolution powers, and clear resolution triggers; enhancements to legal regime for resolution and recovery plans.
  - MOF created a commission with SUGEF, CONASSIF and the BCCR to prepare a plan for back-up resolution financing with IMF technical support.
  - Final draft amendments to Law 9816 and other relevant laws were submitted to the Legislative Assembly in April 2024 (structural benchmark).
- Crisis preparedness and contingency measures:
  - Continuous monitoring of macro-financial risks by the MCG, including updated early warnings system and updated contingency plan for episodes of financial stress with communications protocol.
  - BCCR enhanced its Lender of Last Resort mechanism; assessing scope for further improvements.
  - As a contingent measure in stress situations, BCCR increased the tenure of the emergency liquidity facility from 24 hours to 84 days.

### Level playing field between public and private banks and competition
- Executive Branch committed to levelling the playing field between public and private banks to foster competition.
- Proposed future Legislative Assembly proposal elements include:
  - (i) conversion of parafiscal contributions by state-owned banks into a single commensurate transfer to the CG budget, adjusting the fiscal rule spending accordingly;
  - (ii) removal of the requirement on state-owned financial institutions to comply with public procurement requirements;
  - (iii) 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 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 and limiting fiscal contingent liabilities.
- Correction of asymmetry generated by the legal requirement for NFPS to do their banking with state-owned banks is expected with approval of legislation on the Single Treasury Account (see ¶15).
- Legal amendments to banking resolution and deposit guarantee framework submitted to the Legislative Assembly (¶32) include gradual phasing out of existing blanket guarantee for state-owned banks.
- Commitment to improve BCCR and MEIC database comparing credit products across the financial system to enhance information for financial consumers and foster bank competition.

### Financial inclusion and fintech
- Pandemic effects and inclusion:
  - Sharp increase in electronic transactions and allocation of Bono Proteger led to significant increase in bancarization and financial inclusion.
- Structural constraints:
  - Limited banking competition and partial coverage of the credit registry push up lending rates and hinder financial inclusion.
- Policy actions:
  - MEIC developed and started implementing a national strategy for financial education with participation of BCCR, CONASSIF and the Superintendencies.
  - Simplified requirements for opening a bank account.
  - Launched an electronic payment system for public transport nationwide.
  - Commitments to improve design and scope of public credit registry, Centro de Información Crediticia (CIC), broadening coverage by incorporating non-supervised credit providers with data collected by private bureaus.
  - Draft bill for CIC approved by CONASSIF in December 2023 and expected to be sent to the Legislative Assembly by May 2024.
  - CONASSIF and the four Superintendencies finalized draft legislation for financial consumer protection; Executive Branch decided to revise so MEIC will assume responsibility for both regulated and non-regulated entities in the future.
  - April 2022: With IDB support, CONASSIF, BCCR and the Superintendencies inaugurated a Financial Innovation Center to support fintech startups and advise on fintech regulations, aiming to balance innovation and financial stability.

### AML/CFT regime strengthening and beneficial ownership disclosure
- GAFILAT follow-up and compliance:
  - Costa Rica concluded enhanced follow-up by GAFILAT and continues to address technical compliance issues from its mutual evaluation report.
  - At the GAFILAT Plenary in December 2023, three FATF Recommendations (17, 22, and 28) were upgraded to compliant or mostly compliant.
  - Draft amendment law (Bill No. 22.837) to subject virtual assets (VAs) and virtual asset service providers (VASPs) to AML/CFT supervision by SUGEF was presented to the Legislative Assembly on December 9, 2021; sent for consultation to SUGEF and the financial sector in October 2022 and currently under review in the Legislative Assembly.
  - Aim to achieve full compliance in the next mutual evaluation beginning February 2026; TA is identifying areas for improvement.
- KYC and CICAC:
  - Financial institutions are required to upload to CICAC (Centro de Información Conozca a su Cliente) customer information when customers explicitly authorize the financial entity, to create a unique client profile and facilitate cross-checking of AML/CFT related activities.
  - As of March 31, 2024, CICAC holds over 114,941 active files with customer information from 48 financial institutions.
- Beneficial ownership disclosure:
  - BCCR’s centralized beneficial ownership registry RTBF (Transparency and Beneficial Ownership Registry) has commenced collecting shareholder and beneficial ownership information for all legal entities except third-party resource managers and non-profit organizations.
  - 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; they will declare for the period of 2024 in due course.
  - Completed technology development to allow financial institutions’ legal entity clients to share beneficial ownership information provided to the RTBF with the CICAC repository.

*Source: 1criea2024001 - 28. We have made significant progress in financial sector reforms. Over the last years,*

### 36. We are resolved to further advance our growth-enhancing reform agenda, to help

### 1criea2024001 - 36. We are resolved to further advance our growth-enhancing reform agenda, to help

### Overview
- Costa Rica became an OECD member in May 2021 following an accession process that introduced 14 landmark legal and administrative reforms.
- National strategy hinges on three objectives: (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; and (iii) promoting a green recovery anchored by the National Decarbonization Plan and the goal of becoming a zero net emission economy by 2050.

### Protecting the Most Vulnerable and Boosting Productivity Growth — Key measures and progress
- Formalization
  - Since 2017, the CCSS adopted plans to reduce social security contributions targeting populations where informality is prevalent.
  - 2020: CCSS created a specific mechanism to provide coverage for coffee harvest workers, changing a tripartite contribution mechanism to a two-party modality where contributions are covered by the state and ICAFE, eliminating employees’ contributions.
  - October 2023: INS and ICAFE, with the Ministry of Agriculture, launched an occupational risk insurance scheme to further protect coffee harvesters.
  - June 2022: CCSS Board of Directors formulated a plan to adjust the minimum contribution base (MCB) for part-time workers; final plan approved in September 2022.
  - MCB implementation phases for health insurance: starting January 2023 for workers below the age of 35; January 2024 for workers below the age of 50; January 2025 for all workers.
  - Pension insurance: part-time workers earning less than the MCB can accumulate fractional quotas. Contribution brackets: less than 25 percent, 25-50 percent, 50-75 percent, to over 75 percent of the MCB; quotas credited: 0.25, 0.50, 0.75 and 1 respectively; total of 180 quotas required to receive a minimum pension.
  - Since May 2022: CCSS allows independent workers to contribute voluntarily to health- and pension schemes for 6 months if income is below the MCB; after 6 months contributions become automatically mandatory.
  - MCB reach as of February 2024: more than 34,800 workers (health) and 28,900 workers (pension).
  - CCSS implementing law No. 10232 (approved December 2022) to authorize relief of social security debts to encourage formalization of more than 18,750 independent workers and employers.
  - CCSS issued 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.
  - Minimum wage categories for private sector reduced from 26 to 16 over the last four years; intend to reduce to 11 by end-June 2024 (in line with OECD recommendations).
- Education
  - February 2023: Roadmap for Education (Ruta de la Educación 2022-2026) launched; progress reported regularly; summary report expected in May 2024.
  - Ministerio de Educación (MEP) developing an internal reorganization and decentralization plan with WB and IDB support by end-December 2025.
  - With UN support, transforming budget structure to results-based; information system of indicators to be developed by end-September 2024; 2024 Annual Operations Plan adjusted accordingly.
  - Developed 13 guidelines for teachers to strengthen student competences in: i) citizenship; ii) life; iii) employability and entrepreneurship.
  - Since February 2023, mandatory that all children in first grade know how to read and write to enter next school year; strategy La Aventura de Leer y Escribir implemented.
  - Teacher support: ABC Mouse and My Math Academy accelerators available for teachers of 489 educational centers as of October 2023.
  - Preliminary teacher performance-based evaluation model timeline: define desired profile by end-December 2024; support teachers to identify profile by end-March 2025; provide courses and support during 2025; evaluate teachers in 2025.
  - Standardized digital test (Prueba Nacional Estandarizada) administered to 163,000 students from grades 6 and grades 11 and 12 starting in 2023; for 2024 school year tests scheduled in April and November.
  - Comprehensive test: 766,000 students completed the test at initial and mid-year terms to prepare recovery plans; results shared with teachers and principals.
  - Agile Evaluation System (SEA) introduced to reallocate teacher time; assessed with high acceptance among 11,878 interviewed teachers in 2023.
  - Connectivity and infrastructure: 92 percent of educational centers have internet connection; expect to connect remaining centers during 2024. High-speed internet provided in 2,886 centers, including 910 centers from rural areas with satellite internet.
  - Sanitary orders identified in 849 schools; infrastructure actions include: i) executing resources to provide maintenance, design and construction of 1054 centers using funds from the 2022 and 2024 budgets; ii) constructing 103 new centers during the 2022-24 period; iii) investing in school infrastructure via PPPs and building 26 educational centers under Adopte un Centro Educativo, including two in indigenous territories; iv) including $151 million in a broader infrastructure CABEI loan for construction and repair of 133 centers; iv) building 3 new mega-centers in 2025.
  - School meals and transport: increasing food support toward universalization benefiting 523,874 preschool and primary students; food assistance provided to nearly 300,000 secondary students. As of December 2023 (compared to December 2022), food provision offered to nearly 77,875 new students in low-income areas. 23,862 poor students started receiving school transportation during the 2023 school year.
  - Avancemos scholarship monitoring: directive requiring monthly reporting when a scholarship student drops out to ensure early detection and re-enrolling.
  - Bilingualism Education Policy (February 2021) with Action Plan to improve second-language proficiency by 2040. Administered English and French tests to 75,000 secondary students; processing results to place according to CEFR. 62 and 49 percent achieved A2 and B1 in French and English, respectively.
  - English lessons to 24,236 preschoolers; piloted AI-based tests of oral and written English skills for primary and secondary students (8,333 and 7,954, respectively).
  - Vocational and technical education: strengthening Industry 4.0 curricula with 5 technical education careers starting in February 2024 and 6 new careers under dual education also beginning in February 2024; February 2023 launch of 5 new technical education programs and 4 more under dual education.
  - Technology education inclusion: starting 2024, 1,857 schools began teaching the technology program benefiting 691,000 students; other 2,500 schools began using technology in other subjects benefiting 289,000 students. In total, program reaching 4,357 schools benefiting 980,000 students from kindergarten to adult education.
  - Public universities: linked funding to labor market needs via targets in 2024 university budget negotiation agreement.
  - Dual education review and regulatory streamlining for private higher education improved approval rate of new and revised careers by 275 percent.
  - New program for persons without completed secondary degree: March 2024, 5,000 students graduated from high school; second phase approved for almost 600,000 persons who finished 9th grade but did not complete secondary school, planned to start in May 2024.
- Investment climate and business environment
  - Identified spending priorities and promoted PPPs with CABEI and IDB to reduce physical and digital infrastructure gaps consistent with fiscal consolidation plans.
  - IDB-supported Program of Road Infrastructure and Promotion of PPPs provides PPP training across central and local governments during 2022-24; assessment of legislation including bill No. 24009 and associated regulations by June 2024.
  - February 2023: issued methodological guide to evaluate appropriateness of PPPs; identified portfolio of infrastructure projects for PPPs including a new airport and highways.
  - Ongoing effort to reduce electricity tariffs (¶19).
  - December 2022: launched National Telecommunications Plan 2022-2027; Law N° 10216 and derived regulations issued in January 2024. Target to increase competition among mobile technology operators, including 5G networks, with a tender process by end-June 2024.
  - Cybersecurity: Cybersecurity Strategy launched for public consultation; final version published in November 2023.
  - Deregulation and single-window
    - Le Dejamos Trabajar program eliminated 140 obstacles for businesses by end-September 2023.
    - Directive No. 032-MEIC issued to continue deregulation during 2024-2026; consultation with public sector completed.
    - Costa Rica Fluye commitments with 10 public institutions to enact 16 regulatory and administrative improvements: 9 completed and 7 ongoing.
    - Single-window system (VUI) implemented in 51 local governments.
    - Measures to simplify 163 procedures across the public sector completed in September 2023.
    - September 2022: issued 11 decrees to eliminate minimum fees in professional associations; currently in 7 services there are no minimum fees. Bill No. 23.357 submitted to Legislative Assembly in September 2022 to eliminate mandatory fees for all professional associations.
  - Bankruptcy and financing
    - Regulations for implementation of new bankruptcy law (Ley 9957) published in September 2023 to simplify bankruptcy process.
    - March 2023: amended Development Banking System Regulations to ease financing for entrepreneurs in rural areas, women, youth, vulnerable populations and SMEs, and halved the time to formalize guarantees.
    - Approved regulation to promote investment in the renewable energy sector (¶42).

### Promoting Inclusive Growth — Gender and social inclusion measures
- Female labor force participation
  - Gender Parity Initiative (IPG) launched in September 2020 with support from IDB, WB, and AFD to reduce women’s care burden and promote labor market participation, particularly in leadership positions.
  - Plan to issue a decree by end-June 2024 to revamp IPG to strengthen governance and coordination between public and private sector.
  - Advancing gender budgeting agenda to support IPG and other initiatives to reduce the gender economic gap (¶15).
- Workplace discrimination and sexual harassment
  - Program to certify gender equality in the workplace in private companies and public sector underway.
  - Appointed Ministry of Labor and Social Security inspectors in each region to monitor and sanction gender discrimination, including pay gaps; inspections in agriculture, commerce, industry, services and transportation sectors have benefited more than 10,380 women.
  - Infractions on gender discrimination, wage differentials and lack of breastfeeding rooms have been issued; labor judges receiving courses on the matter.
  - October 2022: launched Ruta de Género (Decree 43771-MSP-MTSS-MCM) strategy to combat sexual harassment; revamped in October 2023 to include emotional and legal support, increased resources for first-response centers Puntos Violeta, secure spaces, development of an app to report violence cases, protocols to prevent harassment in public transport, and a drivers' handbook. A broad communication campaign is being developed.
- Childcare and early education
  - 2018 fiscal reform expanded public education definition to include early education centers to increase public childcare supply.
  - 2021: childcare services increased by covering 15,000 additional children relative to 2017, focusing on children up to 5 years old.
  - Increased coverage of children below 12 relative to pre-pandemic levels during 2023.
  - Completed review of existing childcare supply; standardized costing framework and basic certification; reviewed governance of Red de Cuido.
  - Bill to be submitted to the Legislative Assembly by end-July 2024 to: i) define governance; ii) increase coverage by reducing average cost per child with IDB support; iii) define financing sources; iv) establish childcare services depending on demand and private provision; v) better target the population.
  - PPP alliance to launch CRECCE project to pilot a tripartite co-payment scheme (government, private sector and beneficiaries) to certify companies providing childcare services and promoting female participation in the labor market by end-December.

*Italic line: Content summarized from the provided IMF chapter text.*

### 2024. Stronger childcare facilities can in turn support educational outcomes and female labor

### 2024. Stronger childcare facilities can in turn support educational outcomes and female labor force participation.

### Childcare and long-term care: policy framework and targets
- Public Employment Bill (¶13) introduced for public sector workers:
  - one month of paternity leave,
  - a two-month extension of maternity leave (in specific cases),
  - paid leave to take care of a family member.
- Long-term care institutionalization:
  - SINCA (Sistema Nacional de Cuidados y Apoyos para personas adultas y personas adultas mayores en situación de dependencia) created in March 2022 (Law No. 10192).
  - SINCA regulation issued in November 2023 to implement governance of the long-term care system.
  - Plan to be progressively implemented along five pillars: governance, data intelligence, strengthening of care supply and benefits, generation of conditions for closing gender gaps in labor markets, and quality assurance.
  - Decree issued in November 2023 to make mandatory the allocation of benefits through the tool Baremo (single dependency scale).
  - Target: 6,000 vulnerable households (according to the Baremo) to receive long-term care support by end-December 2026.
  - Benefit (care subsidy for people in a dependency situation) implemented in 2023 to 3,500 households with a female head living in impoverished conditions and caring of a severely dependent person.
  - Ministry of Health expects to design accreditation standards to strengthen the quality of long-term care home services by end-May 2024.
  - By end-July 2024, the Baremo will be integrated into SINIRUBE to identify the dependent population, level of dependency and supply of services of the national care system for dependent adults and senior adults.
  - INA updated training and provided training in long-term caregivers’ services with IDB support.
  - Pilot of home care services (Cuidadores a domicilio) being developed with the IDB; methodology to quantify the cost of a minimum set of care services (Canasta de dependencia) finalized in May 2024.

### Education, entrepreneurship, and financial inclusion for women
- Education and vocational training reforms and financial inclusion measures to support women’s economic empowerment:
  - Re-designed regional boost plan for the program FOMUJERES; implementation started in August 2023. Plan provides technical assistance during formulation phase and financing in planning and development phases for women-owned businesses.
  - Pilot programs completed (state institutions, public banks, private entities) to strengthen financial inclusion and women’s empowerment financed by CAF, focusing on financial products tailored to women’s specific needs.
  - National Strategy for Financial Education with a gender focus being developed between MEIC and INAMU, with CAF support.
  - INAMU launched a roadmap to guide 178 women from entrepreneurship to the export stage in November 2023, and a broader gender roadmap to strengthen women’s economic autonomy in March 2024.
  - MEIC and INAMU amended in April 2023 the regulations of Law 8262 to facilitate women’s access to comprehensive financial services; objective to provide institutional support and develop a special financing program for vulnerable women through INAMU, Banco Popular and FODEMIPYME.
  - STEAM education expansion:
    - In 2022, 56 new educational public institutions added to the 166 institutions already implementing STEAM, reaching 222 in 2022.
    - In 2023, 27 new public institutions were incorporated to reach 249 public institutions implementing the STEAM strategy.
    - National action plan for gender equality in scientific and technological fields will be continued.
    - New scholarship program developed to promote STEAM careers via INA’s program Rompiendo moldes, and a new student grant approved in 2023 to financially support 231 women in STEAM careers.
    - More than 10,000 women have trained with the conditional cash transfer program Empleate; of these, 2,000 studied STEAM fields.
  - INA dual education program alliances: new alliances with 60 companies in 2023 impacting regional employability and options for the young workforce.
  - INA’s curriculum transition since 2022 from objective-based to competency-based model:
    - discontinuation of 61 percent of services not aligned with the current model,
    - creation of 685 competency-based services aligned with the National Qualifications Framework’s standards.
  - Ministry of Education launched an employability and entrepreneurship-focused program enabling adults who are lagging behind to obtain their secondary education diploma (¶37).

### Employability initiatives and protections for vulnerable workers
- National Employability Strategy (Estrategia Brete) launched in July 2023 to promote employability of vulnerable groups, targeting 25,700 women, the young population and people with disabilities.
- Pilot to implement a result-based trained to grant employment transfers aligned to labor market demand (pilot launch planned).
- Published an employment and health coverage strategy for regular migrant workers in December 2023.
- Published a plan to improve working conditions of female migrant workers in September 2023, with ILO support.

### Adapting to climate change, decarbonization, and green growth: strategy pillars
- Core strategy objectives:
  - (i) adapting to climate change with emphasis on crisis preparedness, climate-resilient infrastructure, and agriculture/agroindustry;
  - (ii) reaching net-zero emissions by 2050 while ensuring a just transition in terms of jobs and growth;
  - (iii) greening the financial sector, monitoring climate risks and updating modeling and regulatory tools;
  - (iv) mobilizing official and private financing to meet short- to long-term costs within the budget envelope.
- Resilience and Sustainability Facility (RSF) has been critical to implementing reform measures and catalyzing additional climate finance.

### Institutional readiness and governance for climate action
- MINAE (Ministry for Energy and the Environment) has overall responsibility for climate change issues.
- Bill (23.213) submitted in June 2022 to integrate relevant decentralized bodies into MINAE; legislative committee approved it in February 2023; addressing 400 amendment requests; expectation for bill approval by the Legislative Assembly by end-2024.
- MINAE produced the National Adaptation Plan with MIDEPLAN support and the National Decarbonization Plan with other ministries’ support.
- National Commission of Risk Prevention and Emergencies (CNE) coordinates disaster management framework.
- MINAE’s National Directorate of Climate Change oversees the Carbon Neutrality Country Program (PPCN 2.0) and is working to include more sectors in the program’s management.
- Plan to establish a data-driven, highly inclusive process to update NDCs and long-term climate action plans, including the new National Development Plan for the environmental sector launched in October 2022.
- BCCR is part of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and established the Group for Strategic Analysis of Climate Change (GAECC).

### Adaptation and disaster risk management actions
- National Adaptation Plan (NAP) launched in April 2022 to set milestones for 2022-2026 consistent with the National Policy on Adaptation.
- Disaster Risk Management:
  - Strengthening National System for Disaster Risk Management with WB support; system in force since 2006.
  - National Risk Management Plan currently in force for 2021–2025.
  - Costa Rica served as a pilot for the Global Risk Assessment Framework (GRAF); outputs include an inventory of information sources to evaluate risk, a risk modeling system for various threats, and methodological guides for evaluating disaster impact in critical sectors.
  - Execution of project “Principles for a resilient infrastructure” by UNDRR, applying a stress test of critical service infrastructure and leading to sectoral strategies for service continuity.
  - Business continuity policies to be in all providers of public services by November 2024.
  - Decentralize and increase access to early warning, preparedness, and response services, including in coastal areas.
  - Climate risk maps for extreme hydrometeorological events developed for 23 country cantons; expect to cover all remaining cantons by end-June 2024.
  - Currently only about 50 percent of Costa Rica’s cantons are regulated by land-use/spatial plans.
  - Guidelines for including climate change considerations in Regulatory Plans developed and published in March 2024 (RSF reform measure); MIVAH and INVU in collaboration with MINAE with AFD support.
  - National Commission for Risk Prevention and Emergency Care providing municipalities information on climate-related risks.
  - New insurance scheme developed to enable agricultural producers to protect harvests against climate change risks using parametric climate criteria; bill introduced in May 2024.

### Climate-resilient infrastructure and public investment management
- Roadmap to enhance infrastructure resilience developed in September 2022 (structural benchmark) to guide technical planning and implementation and assess medium-term investment needs and costs.
- Identified priority actions to reduce infrastructure loss, interruption of public goods provision, fiscal rebuilding/retrofitting costs, and damage to transport and water sectors.
- Exploring green finance opportunities from official and private sources (¶46) and seeking to improve public investment efficiency to meet fiscal costs.
- Commitment to strengthen institutional capacity to plan and manage green and resilient investment projects, building on PIMA recommendations (¶15) and its climate change module, with IMF TA support.
- 2020 Decree N°42465- MOPT-MINAE-MIVAH on incorporation of resilience measures in infrastructure.
- With WB support through PEFA Climate, continued building climate change considerations into public investment management by updating methodological guidelines for preparing and appraising public investment projects to incorporate exposure and resilience principles.
- Guidelines developed and published to expand the project appraisal process to assess the impact on climate change through the social cost of carbon by end-September 2023 (RSF reform measure); guidelines include an estimate of the social cost of carbon and detailed application to the transport sector.
- Methodology to score and prioritize capital projects finalized with IDB and a private company; guidelines setting clear and transparent project selection criteria including climate change criteria for SNIP entities published in December 2023 (RSF reform measure).
- Methodology for the Evaluation of Climatic Risks in the Public Infrastructure of Costa Rica (MERCI) produced with GIZ support; guidelines issued to assess needs and allocate adequate resources to routine and capital repairs.
- With CABEI and WB support, started to strengthen infrastructure under imminent threat from disasters and identify other at-risk infrastructure.

*Source: COSTA RICA, INTERNATIONAL MONETARY FUND*

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

### 1criea2024001 - 42. We are strongly committed to promoting environmentally sustainable growth by

### National Decarbonization Plan and overall commitments
- Launched National Decarbonization Plan in 2019.
- Pledged to reduce greenhouse gas emissions to a net absolute maximum of 9.11 million tons of carbon dioxide equivalent (CO2e) by 2030 and achieve zero net emissions by 2050.
- Plan assessed to be consistent with limiting global warming to 1.5°C, in line with the Paris Agreement.
- Electricity matrix: almost 100 percent currently sourced from renewables.
- ICE announced plans in March 2024 to scale up solar sources.

### Renewable energy
- Implementing regulation of Law No. 10086 (approved October 2021) published in February 2023 to simplify administrative procedures for private participation in power generation from renewable sources for self-consumption (RSF reform measure).
- Regulation objectives and measures:
  - Define responsibilities for owners to promote safe and reliable interconnection of the electricity grid.
  - Authorize sale of energy surpluses and encourage use of price signals or different tariffs depending on the time to secure economic sustainability of generation projects.
  - Declare certain activities (energy storage and electric vehicle charging) as "services of general interest", allowing private provision.
- Outcomes since regulation issuance:
  - More than 50 new operators have participated in electricity production, in addition to existing operators switching to the new framework.
  - Operators report facilitated cost efficiency and reduced vulnerability to climate change and external shocks (i.e., El Niño and oil prices).
- Complementary measures:
  - Costa Rican Institute of Electricity enacted tariff reductions by reducing operational costs, restructuring debt, and implementing IFRS.
  - Autoridad Reguladora de Servicios Públicos (ARESEP), with IDB support, applied new tariff methodologies to reduce electricity prices charged by other generators beyond ICE.
  - Legislation under consideration by the Legislative Assembly to remove barriers to foreign participation in the energy sector (¶19).
- Legal and regulatory developments:
  - Draft bill finalized to allow private sector use of low-enthalpy geothermal energy; submission to the Legislative Assembly planned for August 2024.

### Electrification of transport
- Legislative Assembly approved bill to extend tax incentives for electric vehicles to 2034.
- Feebate scheme design and status:
  - Sliding scale of fees for light-duty vehicles with above-average emission rates and sliding rebates for 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.
  - Aims to be revenue-neutral with safeguards to reduce risks of revenue loss.
  - Technical design completed with IMF TA; bill submitted to the Legislative Assembly in November 2023 (RSF reform measure).
- Tax incentives and reviews:
  - Appraised and published review of existing tax incentives with a negative effect on the environment in April 2024 (RSF reform measure) as part of cost-benefit analysis of tax exemptions (¶11).
- Public transport electrification:
  - New promotional electric tariffs developed for charging centers for electric buses and incorporated into current tariff schedules.
  - With IDB support, 55 fast charging centers installed nationwide by end-December 2022.
  - Scheme took effect in March 2024 and requires new buses to follow the National Decarbonization Plan, Nationally Determined Contributions, and National Electric Transportation Plan.
  - Launched plan for self-sustainable financing to electrify public transport buses by end-2024.
  - Expectation: 500 zero-emissions buses by end-2025.
  - Public transport sectorization plan to be launched by end-2024, including cost-efficient route redesign, electronic payment, and integration of the urban train.
  - Pilot project: electric taxis introduced at Juan Santamaria Airport in December 2023.

### Agriculture and forestry
- Role: agriculture and forestry critical for carbon sequestration and reaching zero net emissions.
- Support and pilots:
  - GIZ support to promote resilient and low-carbon technologies, technical assistance, agricultural research on low-carbon and resilient solutions, and financing instruments.
  - Scaling up of nationally appropriate mitigation actions (NAMAs) for coffee, livestock, rice, sugarcane, and bananas with support from IDB, AFD, and GIZ-EU and participation of CONARROZ, CORBANA, FEDECANA and private-sector actors.
  - Advanced pilot in rice sector; started sugar pilot.
- Financing and schemes:
  - Assessment of costs and identification of suitable financing for scaling up completed by end-March 2023.
  - With WB and Global Environmental Facility support, refine payment for ecosystems schemes to cover entire landscape and differentiate payment according to environmental benefit and source of financing; reduce transaction costs as envisaged in PSA 2.0 directive to be published by June 2024.
  - 2022 National Development and Investment Plan envisages additional training and land coverage.
  - Initiatives established to promote job creation, including in wood industry.

### Marine ecosystems and blue economy
- Exceeded goal to protect 30 percent of marine territory under conservation schemes by end-December 2022 early.
- Decree 43368-MINAE signed December 2021 to expand protection of Coco Island National Park and Montes Submarinos Marine Area.
- Regional strategy: part of Eastern Tropical Pacific transboundary biosphere reserve effort connecting Cocos Island (Costa Rica), Galapagos (Ecuador), Malpelo (Colombia) and Coiba (Panama); technical papers ready and interim governance structures established; application filed in March 2024.
- Mangroves and wetlands:
  - Piloting programs to strengthen wetlands and mangroves with donor support.
  - 300 permits issued to community members to protect and sustainably use mangrove resources; expect to issue another 300 permits.
- Extending payment for environmental services model to marine sectors starting with fisheries, with WB support.

### Environmental trade and branding
- Negotiating Agreement on Climate Change, Trade and Sustainability (ACCTS) with Fiji, Iceland, New Zealand, Norway, Switzerland to align trade policy with National Decarbonization Plan.
- ACCTS members agreed to work towards eliminating tariffs on environmental goods trade, barriers to environmental services trade, and environment-damaging subsidies and commitments.
- Roadmap published November 2023; sustainable agro-landscapes strategy presented at COP 28 with support from IDB, World Bank, GIZ and others to position agro products as sustainable and carbon neutral under unified brand "Essential Costa Rica".
- MINAE supporting Ministry of Foreign Trade in negotiations and seeking financial support for implementing good practices.
- Strategy phases include moving agriculture from net-zero in deforestation to carbon neutral (initially excluding transport) and low in use of agrochemicals.

### Transition mitigation strategy, jobs, and sectoral modeling
- Territorial Economic Strategy for an Inclusive and Decarbonized Economy 2020-2050 released March 2021; includes 12 development poles, six corridors, and 12,750 km2 of territorial management areas.
- Strategy covers economic growth, social inclusion, human capital, gender, infrastructure and connectivity, and natural capital.
- Modeling estimates for National Decarbonization Plan: economic benefits of US$41 billion in net present value terms and a net positive effect on jobs by 2050 (support from IDB and UN).
- Green and blue jobs analysis:
  - Pilot study with ILO on North East coast: women’s jobs tend to be more green and more blue than men’s jobs but women expected to account for a minority of new green and blue jobs; growing gap expected between demand for jobs and graduates.
  - Policies being developed to promote enrollment in relevant programs, especially by women.
  - 2022 National Development and Investment Plan includes pilot program to help women transition to a green urban economy.
  - Decree and strategy to promote gender equality in climate action issued May 2023 with UN support.
  - AFD and ILO support for analytical work on technical profiles for new green and blue jobs by end-September 2024; expected incorporation into just transition strategy in 2025.
- Energy substitution and innovation:
  - Promoting electricity and biomethane (produced from agricultural waste) as substitutes for bunker oil, LPG, and diesel fuel.
  - Published long-term green hydrogen strategy in July 2023 with IDB support; seeks to make Costa Rica a regional hub for green hydrogen innovation and explore export opportunities.
  - Green hydrogen strategy estimates an annual reduction of 225 000 tons of CO2e by 2030 and the creation of 18,000 jobs over the period 2022-2030.
  - Financing for green hydrogen provided through the NAMA facility and the Green Climate Fund.

### Macro-fiscal integration of climate risks
- Functional budget classification system approved in May 2022 in line with the 2014 IMF Government Finance Statistics Manual and international concepts and definitions of climate change and disaster risk expenditure.
- Climate budget tagging:
  - Methodology developed with IDB and AFD; MOF published guidelines for climate budget tagging in January 2023 (RSF reform measure).
  - Plan to enhance capacities of ministries and agencies and modify financial management information systems to operationalize new classification in time for the 2025 budget.
- Disaster risk financial management:
  - National Strategy for Financial Management of Disaster Risks published September 2022; quantifies financial losses and identifies instruments mobilized ex ante or ex post.
  - MOF and National Commission for Risk Prevention and Emergency Care to develop and publish an implementation plan selecting an optimal combination of instruments by end-December 2024.
  - National Development and Investment Plan target: increase emergency funds available for managing risks to 0.25 percent of GDP.
  - Actuarial valuation of the fund being conducted with WB support.
  - 2023: evaluation of contingent liability started with WB support to determine future spending related to care and recovery from disaster events.
  - March 2023: Disaster Risk Management Policy Loan with a Catastrophe Drawdown Option signed with the WB.
- Fiscal risk integration and analysis:
  - Transition risks: 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 the National Decarbonization Strategy published November 2023 (RSF reform measure) with IMF support.
  - Findings integrated into the risk analysis of the March 2024 Medium-Term Fiscal Framework.

*Source: 1criea2024001 - 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

### 45. The BCCR and the supervisory authorities are pressing ahead with efforts to address climate change effects on the financial sector

### Institutional arrangements and strategic roadmap
- 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.
- With support from GAECC, the BCCR developed a roadmap to integrate climate change considerations into the design of 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.
- CONASSIF and the Superintendencies have worked to raise awareness and train the industry on risks and opportunities associated with climate change and have aligned their agendas with the National Strategic Plan 2050.
- GAECC now regularly coordinates efforts on climate change issues with CONASSIF and the Superintendencies.
- The BCCR has dedicated permanent staff resources to the GAECC to ensure continuity and strengthen its coordination function.
- 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 taking stock of required data to analyze climate change impacts and identify suitable indicators to measure and monitor climate-related risks, including documenting main climate risks faced by Costa Rica at a more granular level 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 their 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 leverage information currently reported by financial entities about destinations of resources.
- An integrated database with more granular information is needed to systematically capture risks at the national level.
- The BCCR completed the RSF reform measure of creating 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 has developed an integrated economic and environmental model to conduct impact analysis of climate and environmental policies and is further 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.
- The BCCR remains committed to expanding coverage of the data repository to map main transmission channels of climate-related shocks to financial institutions and improve stress testing methodologies for macro-financial risk surveillance.
- The objective is to 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 capturing new risks on credit risk parameters.
- Expansion of the data repository has been delayed due to an ongoing legal process to determine the BCCR’s right to access needed detailed information about the credit portfolio.
  - Without detailed information, credits cannot be properly matched with the 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 are likely to be misleading.
- Despite the legal process, the BCCR finalized the new stress test methodology in April 2024 (RSF reform measure) and preliminary information on the methodology was published in May 2024.
- Once full coverage of data is obtained, the BCCR will use the methodology to incorporate climate effects in its top-down stress tests and will further develop methodologies and climate risk macro-financial scenario building to address Costa Rica’s specific risks.
- SUGEF has started early work, supported by GIZ, to develop methodological guidelines and, as a pilot project, identify risk exposure in one bank with preparation starting in June 2024.
  - Technical assistance focused on assessment of the financial system and proposing a methodology for the pilot stress testing.
  - Additional technical assistance is in progress to support SUGEF in integrating climate-change related risks into supervision: supervision guidelines and practices, training for financial entities and supervisors, and defining a roadmap including:
    - developing the definition of green taxonomy,
    - developing the data analysis capacities,
    - follow-up with supervised entities about regulatory changes.

### Greening international reserves
- The BCCR aims to increase investments for international reserves that are environmentally friendly and increase exposures to issuers with the best environmental performance.
- The BCCR published a final selection of indicators of the “greenness” of its reserve holdings together with its 2022 Annual Report published in March 2023 (RSF reform measure).
- The indicators for 2023 were published in March 2024 and will be updated annually.
- The indicators are used to increase investment limits for issuers that perform well from an environmental perspective using a “best in class strategy” while maintaining capital preservation, liquidity and return objectives.

### Regulation of socioenvironmental risks
- 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 aims to strengthen risk management by requiring banks to:
  - put in place policies and processes to manage socioenvironmental risks,
  - incorporate them into decision-making processes,
  - promote actions to identify, assess and mitigate such risks.
- The regulation specifies:
  - roles for the Board and senior management;
  - main risk areas to be covered for credit risk management purposes (including physical and transition risks);
  - classification of credit operations according to socioenvironmental and climate change risk assessment;
  - disclosure requirements in the Annual Risk Report of the financial entity.
- Scope: all supervised financial intermediaries except for some of the small and less complex cooperatives.
- Timelines:
  - 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.
- Authorities are strengthening internal training for supervisors and processes to determine bank compliance.
- As national and international practice and information collection improve, further steps can be taken toward establishing 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 the requirements of the Task Force on Climate-related Financial Disclosures (TFCD) concerning governance, strategy, risk management, metrics and targets.

### Developing green financing and instruments
- The overall reform agenda (including fiscal consolidation, PFM reforms, enhanced financial sector risk management, and efforts to develop deeper and more open capital markets) creates an enabling environment for attracting green public and private financing.
- A study with GIZ identified activities with potential to attract foreign direct green investments, such as components for green hydrogen (¶43), green data centers for digitization, and development of materials from waste recovery.
  - FDI in these sectors will be supported by the overall agenda to improve the investment climate (¶37).
- Specific actions to attract green financing:
  - Law 10.051 (approved by the Legislative Assembly in October 2021) to Promote Financing and Investment for Sustainable Development through Thematic Public Offering Securities.
  - CONASSIF updates approved in May 2022 require supervised entities to:
    - incorporate the sustainable or responsible component in their investment policies;
    - incorporate ESG risk management into their risk management framework;
    - allow supervised entities to issue ESG bonds; and
    - recommend voluntary disclosures on ESG actions in annual reports.
    - The first two measures had a transitional period that ended in December 2023 and were complemented by the October 2023 regulation on management of socioenvironmental risks and climate change risks in the credit portfolio.
  - Development of a single green taxonomy for the financial sector:
    - Following initial technical assistance from the WB, the 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.
  - Exploration of ESG sovereign recognition and sustainable bond structures:
    - Sovereign bonds are already included in indices recognizing Costa Rica’s green credentials.
    - Authorities, with advisors and UNDP, have advanced exploration of Costa Rica’s ability to be further recognized as an Environmental Social Governance (ESG) sovereign to catalyze private financing via possible issuance of Use of Resources bonds or sustainability-linked Eurobonds (SLBs) referencing key performance indicators related to forest coverage, ecological integrity, and biodiversity.
    - Internal coordination between ministries (including the Debt Management Office of the MOF), MINAE and others is being strengthened to support 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) development:
    - Working with IDB support to create a pipeline of sustainable projects to catalyze private financing.
    - Steps are being taken to strengthen the institutional PPP framework, including reviewing legislation and regulations supported by IDB technical assistance, to create conditions to establish the PPF.
    - Initial operational costs of the PPF would be jointly covered with development partners; once fully operational it would be self-financed.
    - The PPF will assist with screening, appraisal and structuring of projects, improving project selection and management of fiscal risks (for instance through analysis of contingent liabilities from PPPs).
    - The PPF is expected to facilitate potential de-risking support for structured finance by the IDB and other development agencies.
    - The PPF could catalyze US$1.2 billion in private sector investments.

### Risks, contingencies, and program monitoring (contextual implications)
- Risks identified include:
  - intensified regional conflicts and supply disruptions;
  - renewed global financial market turmoil and sustained tightening of global financial conditions;
  - weaker-than-expected global downturn;
  - these shocks and policy responses could slow domestic activity, raise domestic financial vulnerabilities and weaken revenue performance, affecting fiscal consolidation.
  - legislative pressures risk weakening fiscal consolidation;
  - exposure to natural disasters continues to pose important risks likely to increase over time;
  - downside risks could renew concerns about debt sustainability.
- Authorities’ stance:
  - committed to reducing risks under their influence and stand ready to adjust policies promptly if risks materialize;
  - on the upside, stand ready to accelerate adjustment and reform if domestic or external developments support stronger economic performance.
- Program monitoring:
  - Progress in implementation of IMF-supported policies is monitored through semi-annual reviews, performance criteria (PCs), indicative targets (ITs), and structural benchmarks (SBs).
  - Progress in meeting the inflation target is monitored through a MPCC.
  - Purchases and disbursements under the EFF and RSF arrangements will be used for direct budget support during the program period consistent with Memoranda of Understanding on responsibilities for servicing IMF financial obligations.
  - The EFF arrangement ends on July 31, 2024.

*Source: 1criea2024001 - 45. The BCCR and the supervisory authorities are pressing ahead with efforts to address*

### introduction of a single pay spine.

### introduction of a single pay spine.

### Structural benchmarks and implementation status
- Introduction of a single pay spine.
  - End-March 2023 — Not met. Pending for the CCSS, the judicial branch, and municipalities.
  - MIDEPLAN to incorporate 90 percent of the executive branch’s job positions in the single wage spine.
    - End-September 2023 — Met.

- 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.

- 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 — Met.

- Monetary and financial sector reforms
  - The BCCR to submit to the Ministry of Finance draft amendments to the BCCR Law, prepared in consultation with IMF staff, to strengthen the central bank’s operational autonomy and governance framework.
    - 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 — Not met. Submitted in April 2024.

- 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 Completed.
  - 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 Completed.

- 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 Completed.

- 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 Completed.

### Technical Memorandum of Understanding (TMU): program monitoring framework
- Purpose and scope
  - Framework for monitoring performance under the Extended Arrangement under the Extended Fund Facility (EFF), specifying performance criteria and indicative targets (including adjustors) monitored through semiannual reviews.
  - Quantitative performance criteria and indicative targets in Table 1 of the MEFP include:
    - a) a quantitative performance criterion on central government primary balance (floor);
    - b) a quantitative performance criterion on net official international reserves (floor);
    - c) a continuous quantitative performance criterion on new external payment arrears by the nonfinancial public sector and the BCCR (ceiling);
    - d) a monetary policy consultation clause;
    - e) an indicative target on debt stock of the central government (ceiling).

- Standard continuous performance criteria (monitored continuously)
  - a) no imposition or intensification of restrictions on the making of payments and transfers for current international transactions;
  - b) no imposition or intensification of import restrictions for balance of payments reasons;
  - c) no introduction or modification of multiple currency practices;
  - d) no conclusion of bilateral payments agreements that are inconsistent with Article VIII of the IMF Articles of Agreement.

- Program exchange rates and gold valuation (Program rates are those that prevailed on 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

### Definition, consolidation, and central government coverage
- Central government figures for program purposes 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”;
  - the public entities required to be consolidated under central government (CG) from 2021 by Law 9524.
- The Central Bank of Costa Rica (BCCR), the state-owned enterprises and other public sector agencies are excluded from the definition of central government.
- Entities required to be consolidated under CG by Law 9524 (listed in source):
  1. Agencia de Protección de Datos de los Habitantes (PRODHAB),
  2. Casa de Cultura de Puntarenas,
  3. Centro Costarricense de Producción Cinematográfica,
  4. Centro Cultural e Histórico José Figueres Ferrer,
  5. Centro Nacional de la Música,
  6. Comisión Nacional para la Gestión de la Biodiversidad (CONAGEBIO),
  7. Comisión Nacional de Prevención de Riesgos y Atención de Emergencias (CNE),
  8. Comisión Nacional de Vacunación y Epidemiología,
  9. Comisión de Ordenamiento y Manejo de la Cuenca Alta del Río Reventazón (CONCURE),
  10. Consejo Nacional de Clubes 4-S,
  11. Consejo Nacional de Concesiones (CNC),
  12. Consejo Nacional de la Persona Adulta Mayor (CONAPAM),
  13. Consejo Nacional de la Política Pública de la Persona Joven (CPJ),
  14. Consejo Nacional de Vialidad (CONAVI),
  15. Consejo de Salud Ocupacional (CSO),
  16. Consejo de Seguridad Vial (COSEVI),
  17. Consejo Nacional de Investigación en Salud (CONIS),
  18. Consejo Nacional de Personas con Discapacidad (CONAPDIS),
  19. Consejo Superior de Educación (CSE),
  20. Consejo Técnico de Asistencia Médico Social (CTAMS),
  21. Consejo Técnico de Aviación Civil (CTAC),
  22. Consejo de Transporte Público (CTP),
  23. Dirección Nacional de Centros de Educación y Nutrición y de Centros Infantiles de Atención Integral (Dirección de CEN-CINAI),
  24. Dirección Nacional de Notariado,
  25. Fondo de Desarrollo Social y Asignaciones Familiares (FODESAF),
  26. Fondo Nacional de Becas (FONABE),
  27. Fondo Nacional de Financiamiento Forestal (FONAFIFO),
  28. Instituto sobre Alcoholismo y Farmacodependencia (IAFA),
  29. Instituto Costarricense sobre Drogas (ICD),
  30. Instituto Costarricense de Investigación y Enseñanza en Nutrición y Salud (INCIENSA),
  31. Instituto Nacional de Innovación y Transferencia en Tecnología Agropecuaria (INTA),
  32. Instituto de Desarrollo Profesional Uladislao Gámez Solano,
  33. Junta Administrativa del Archivo Nacional (JAAN),
  34. Junta Administrativa de la Dirección General de Migración y Extranjería,
  35. Junta Administrativa de la Imprenta Nacional (JAIN),
  36. Junta Administrativa del Registro Nacional,
  37. Laboratorio Costarricense de Metrología (LACOMET),
  38. Museo de Arte Costarricense,
  39. Museo de Arte y Diseño Contemporáneo (MADC),
  40. Museo Histórico Cultural Juan Santamaría,
  41. Museo Nacional de Costa Rica (MNCR),
  42. Museo Dr. Rafael Ángel Calderón Guardia,
  43. Oficina de Cooperación Internacional de la Salud (OCIS),
  44. Patronato de Construcciones, Instalaciones y Adquisiciones de Bienes,
  45. Servicio Fitosanitario del Estado,
  46. Servicio Nacional de Salud Animal (SENASA),
  47. Sistema Nacional de Áreas de Conservación (SINAC),
  48. Sistema Nacional de Educación Musical (SINEM),
  49. Teatro Nacional (TNCR),
  50. Teatro Popular Melico Salazar (TPMS),
  51. Tribunal Registral Administrativo (TRA).

- Data from Unidad Ejecutora del Proyecto (UEP) was included in the historical series presented in the program document in 2019. From 2020 onwards, data related to UEP is already included in the budgetary central government.

### I. 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 are 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 (modified cash system).
  - Proceeds from privatization or commercialization of public assets to residents or non-residents will not be recorded as part of central government revenues.
  - Consolidation of entities required by Law 9524 and other central government entities considers funds granted as both current and capital transfers; consolidation is done entity by entity and never aggregated.
  - Residuals affecting primary and overall balance are treated as capital transfers (income and/or expense) when consolidation adjustments are necessary.
  - For program monitoring, the cash primary balance of the central government will be monitored from above-the-line data as described.

- 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 the health system, targeted support to families, workers, firms, social assistance programs).
  - Such additional expenditure should be clearly identified and reflected in an appropriate document (e.g., supplementary budget, government resolution, a circular of the MOF).
  - The adjustor is capped at CRC 95 billion for 2023 (about 0.2 percent of GDP) cumulatively.

### II. Performance criterion on Net Official International Reserves (Program NIR)
- Measurement and components
  - Program NIR = U.S. dollar value of (a) Gross international reserves of the BCCR minus (b) Gross reserve-related liabilities of the BCCR.
  - (a) Gross international reserves include monetary gold; foreign exchange balances (foreign currency cash, deposits with foreign correspondents, and holding of foreign securities); the reserve position at the IMF and SDR holdings.
    - Exclusions from gross foreign reserve assets: participation in international financial institutions; holdings of nonconvertible currencies; holdings of precious metals other than monetary gold; claims on residents; pledged, non-liquid, collateralized or otherwise encumbered foreign assets; and claims in foreign exchange arising from derivative transactions.
  - (b) Gross reserve-related liabilities include: all short-term liabilities to nonresidents denominated in convertible foreign currencies with an original maturity of one year or less; all short-term liabilities to residents denominated in convertible foreign currencies; the stock of IMF credit outstanding; the nominal value of all short-term derivative positions (including swaps, options, forwards, and futures) implying a sale of foreign currency or other reserve assets.
    - Exclusions from these liabilities: foreign exchange liabilities to the general government or related to deposit guarantees.

- Key figures and adjustors
  - At end-2021, the Program NIR, evaluated at market exchange rates, stood at US$2,884 million.
  - Targets for the Program NIR are set for cumulative flows from the end of the previous year; cumulative flows are calculated using the program exchange rates and gold price specified in the TMU.
  - Adjustment mechanisms to the NIR floor:
    - 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.

### II. Continuous performance criterion on new external payment arrears
- Coverage and definition
  - Continuous performance criterion applies to non-accumulation of new external payment arrears on external debt contracted or guaranteed by the nonfinancial public sector and the BCCR.
  - The nonfinancial public sector is defined following the 1986 Government Finance Statistics Manual and the 2008 System of National Accounts and includes the central government (as defined in paragraph 4) and nonfinancial public enterprises.
  - External payments arrears = debt-service obligations (principal and interest) to nonresidents falling due after the date of Board approval of the arrangement that have not been paid at the time they are due, as specified in contractual agreements, subject to any applicable grace period.
  - Exclusions: overdue debt and debt service obligations in dispute with respect to amount and/or validity; arrears on external financial obligations of the government subject to rescheduling; failure to make payment on obligations not considered debt (e.g., payment on delivery) will not give rise to debt for program-monitoring purposes.

*Source: 1criea2024001 - introduction of a single pay spine.*

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

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

### Inflation measurement and test-date computation
- Year-on-year inflation (headline CPI published by the National Institute of Statistics and Census (INEC)) for each test date is measured 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 clauses and triggers
- If observed year-on-year inflation falls outside the outer band limits of +/- 3 percentage points around the targets (as specified in Table 1 attached to the MEFP) for the relevant semi-annual test dates:
  - The authorities will complete a consultation with the IMF Executive Board focused 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 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 targets — central government debt
- Definition of “debt” follows the Guidelines on Public Debt Conditionality in IMF Arrangements, Decision No. 15688-(14/107), i.e., a current (not contingent) liability created under a contractual arrangement requiring future payments to discharge principal and/or interest.
- All foreign currency denominated debt will be converted into colones using the program exchange rates set out in Table 1.
- All domestic debt denominated in inflation-indexed units (TUDES) will be converted into colones using the program rate set out in Table 1.
- The performance criterion on debt stock of the central government will have one adjustor for 2023:
  - The ceiling on debt stock of the central government will be adjusted upward by the full amount of any increase in COVID-19 emergency spending compared to budgeted amounts (e.g., transfers to the health system, transfers for targeted support to families, workers, and firms, or social assistance programs to the most vulnerable groups).
  - Such additional expenditure should be clearly identified and reflected in an appropriate document (e.g., supplementary budget, government resolution, a circular of the Ministry of Finance (MOF)).
  - The adjustor is capped at CRC 95 billion.

### Data reporting requirements and timelines
- General provision:
  - Costa Rica shall provide the Fund, through reports at intervals or dates requested by the Fund, with 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.
  - Program monitoring data will be provided by the MOF, IMAS, FODESAF, BCCR, and SUGEF.
- 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 to total stock of debt of the central government: monthly, no later than three weeks after the end of the month, with breakdowns listed in Table 4.
- External targets (Table 5) and monetary consultation band:
  - Furnished within no more than three weeks after the end of each month.
  - Data on official reserve assets (Table 6): furnished within one week after the end of each week.
- Priority social spending (Table 7):
  - Program spending data (not including wages and salaries and administrative costs): quarterly, no later than four weeks after the end of the quarter.
- Financial sector data:
  - Financial soundness indicators of banks and cooperatives, bank by bank, group (public and private), and system level: monthly, no later than four weeks after the end of each month.
  - Anonymized bank-by-bank asset quality indicators (by asset classification and provisioning by currency and type of credit, currency and economic sector): monthly, no later than four weeks after the end of each month.
    - Such data on individual banks will be treated as strictly confidential and will not be published except in aggregate form.

### Inflation trajectory, recent breaches, and key statistics
- Inflation outcomes triggering MPCC consultation:
  - Inflation in December 2023 and March 2024 (as defined for MPCC in the TMU) stood at -1.6 and -1.4 percent, respectively.
  - These results breach the lower outer band limit agreed in the MPCC by 1.6 percentage points in December 2023 (semi-annual test date) and by 1.4 percentage points in March 2024.
- Historical and recent inflation path:
  - Peak headline inflation: 12.1 percent (y-o-y) in August 2022.
  - Headline inflation declined sharply thereafter; reached negative values starting in June 2023.
  - Inflation remained below the BCCR’s tolerance band (2-4 percent) and below the lower outer band limit agreed in the MPCC from July 2023 to March 2024.
  - Inflation reached -0.5 percent (y-o-y) in April 2024.
- Core and expectations:
  - Core inflation decreased continuously since August 2022 peak; remained in positive territory and stabilized close to zero since the beginning of 2024.
  - Inflation expectations at 12 and 24 months adjusted downwards and, since Q2 2023, have remained between the inflation target and the lower limit of the BCCR’s tolerance band.
- Producer Price Index (IPP-MAN):
  - Average annual rate of IPP-MAN: -2.2 percent in 2023.
  - IPP-MAN: -4.9 percent during the first quarter of 2024.

### Policy response and outlook
- Monetary policy actions:
  - Since March 2023, the BCCR gradually reduced its monetary policy rate by 425 basis points to 4.75 percent.
  - The Central Bank has announced that it will keep reducing its policy rate to reach a neutral stance as soon as conditions allow.
  - In July 2023, the Central Bank launched new bonds (Bonos de Estabilización Monetaria) with maturities of 3 and 6 months to enhance monetary policy transmission and facilitate valuation of financial assets.
- Policy guidance:
  - The Central Bank has reiterated commitment to continuous monitoring of macroeconomic indicators to take necessary monetary policy actions in a timely fashion.
  - Monetary policy stance will continue to be data-dependent and forward-looking, in line with the inflation targeting framework, to achieve the long-term inflation target of 3 percent.
- Projections:
  - BCCR models project that the disinflationary process will revert during 2024.
  - Projections of headline and core inflation suggest both indicators will return to the BCCR’s tolerance band in the next 12 months.
  - In annual terms, inflation is expected to return to positive in 2024.

*Source: 1criea2024001 - 12.*

### 8.      As all forecasts, inflation projections are conditional on risk factors. The risks evaluated

### 8.      As all forecasts, inflation projections are conditional on risk factors. The risks evaluated

### Inflation risks
- Short-run bias: risks evaluated at the monetary policy meeting of April 2024 suggest a downward bias on inflation trajectory in the short run while it is balanced for longer horizons.
- Downside risks:
  - Slow growth in our main trading partners induced by a longer than expected restrictive monetary policy.
  - Domestically, lower and slower transmission of the adjustments in monetary policy rate to the lending rates in the financial system.
- Upward risks:
  - Supply shocks and global trade fragmentation due to geopolitical tensions and weather phenomena.
  - Upward inflation expectations caused by depreciation pressures on the exchange rate, which may encourage capital outflows and the demand for foreign currency by residents.

### Statement by authorities (Alfonso Guerra and Valerie Lankester Campos) — June 14, 2024
- Authorities express gratitude to staff for close and active engagement to conclude the sixth and last review under the Extended Fund Facility (EFF) arrangement and the third and last review under the Resilience and Sustainability Arrangement (RSF).
- Appreciation to Mr. Ding Ding, the Mission Chief, and his team for their work, commitment, and candid discussions with authorities and civil society.
- Welcome engagement with the Fund’s capacity development and collaborative work with the World Bank and the Interamerican Development Bank’s staff.
- Programs supported by the EFF and RSF have been crucial to:
  - Safeguard macroeconomic stability.
  - Anchor fiscal consolidation efforts.
  - Strengthen the country’s climate agenda.
  - Catalyze financial and technical support from other multilateral institutions and support more resilient access to international capital markets.

### The EFF Program: objectives and context
- Arrangement approved on March 1, 2021.
- Context at approval:
  - Economic contraction of 5 percent.
  - Overall fiscal deficit exceeding 9 percent of GDP.
  - Debt-to -GDP ratio reaching nearly 70 percent.
- Outcomes by 2023:
  - Growth: 5.1 percent.
  - Overall fiscal deficit: 3.3 percent.
  - Primary balance: 1.5 percent surplus.
  - Debt-to -GDP: decreased to 61 percent.
- Program design three key objectives:
  - (i) Gradually implement equitable fiscal reforms to ensure debt sustainability while protecting the most vulnerable.
  - (ii) Maintain monetary and financial stability while strengthening central bank autonomy and governance and addressing structural financial vulnerabilities.
  - (iii) Advance structural reforms to promote inclusive, green, and sustainable growth.
- Implementation outcomes:
  - Structural benchmark: single window for social assistance programs met as scheduled.
  - Bill to improve bank resolution and deposit insurance framework met with a delay.
  - All performance criteria (PC) were comfortably met.
  - All September, December, and March indicative targets (IT) were met except for the December debt IT, which was breached by 0.4 percent of GDP (MoF built up liquidity buffers ahead of coming repayment obligations).
  - Authorities thanked staff for the updated country strategy note on capacity development aligning CD provision with Fund-supported programs.

### Macroeconomic performance and growth
- Long-term strategy: diversification into specialized manufacturing, tourism, services, complemented by traditional agriculture; attraction of high-tech electronic and medical sectors driving exports and productivity.
- Recent resilience:
  - Growth in 2023: strong (5.1 percent noted above).
  - Q1 2024 economic activity: grew 4.9 percent y-o-y.
  - Private consumption: grew robustly in Q1 2024, similar pace to H2 2023.
  - Capital formation: continued to increase but at a lower rate.
  - Government consumption: stagnated amid strict spending controls.
  - Drivers of consumption: improvements in consumer confidence, growth in household credit, increase in real disposable income linked to acceleration in real wages, decreasing inflation, currency appreciation, and improvements in terms of trade.
- Current account:
  - For Q1 2024, current account deficit increased to 0.1 percent of GDP, a lower level (in 0.2 p.p.) compared to the previous year.
- Growth projections:
  - For 2024 and 2025, the BCCR projects that the economy will grow by around 3.8 percent.
- Labor market:
  - Unemployment rate decreased from peak of 24.4 percent to 7.8 percent.
  - Underemployment rate: 3.0 percent in Q1 2024.
  - Employment level increased; formal employment and real wages in the private sector continued improvement and are well above pre-pandemic levels.

### Inflation, monetary policy, and reserves
- Inflation (CPI) and core inflation, monthly variation: were 0.08 percent in May 2024.
- Year-on-year variation: CPI y-o-y recorded at -0.33 percent and core inflation y-o-y at 0.16 percent.
- BCCR estimates:
  - Return to positive values for y-o-y inflation will occur in the second half of 2024.
  - Inflation will be within the tolerance range (3.0 percent ± 1 p.p.) by the beginning of 2025.
  - Inflation expectations remain within the tolerance range around the target.
- Monetary policy framework: inflation targeting, forward-looking and data dependent; BCCR evidences de facto independence.
- TPM (Monetary Policy Interest Rate) actions:
  - Raised and then lowered: from 9 to 5.25 percent between March 2023 and March 2024.
  - In April, Board unanimously agreed to further reduce it by 50 b.p., bringing monetary policy closer to a neutral stance.
  - Changes in TPM will continue to be gradual and prudent.
- Liquidity conditions:
  - Domestic financial system maintained ample liquidity; excesses contained in BCCR's deposit instruments.
  - Excess liquidity over 20 months (until April 2024) largely originated from BCCR's purchases of foreign currencies in the context of a surplus private exchange market.
- BCCR participation motives: reserve accumulation, mitigating excessive fluctuations, and serving public sector needs.
- Exchange rate and reserves:
  - April-May bimonthly: lower relative foreign currency abundance due to tourism off-season, lower TPM, and post-tax payment periods from foreign firms.
  - This translated into an increase of 23.64 colones in the exchange rate with the US dollar relative to end-March.
  - By the end of May, the average exchange rate was 527.49 colones.
  - That level represents a -3.14 percent y-o-y variation.
  - As of May 29, the balance of net international reserves (NIR) was equivalent to 13.3 percent of the GDP and 142.5 percent of the level considered adequate by the Board of Directors of the Central Bank and estimated with the IMF’s ARA metric.

### Financial sector resilience and regulatory actions
- Banking system: strong capital and liquidity buffers due to sound prudential policies.
- Crisis preparedness: advanced considerably.
- Recent episode: intervention in one small financial cooperative, Coopeservidores R.L.:
  - CONASSIF agreed to intervene after SUGEF detected administrative decisions jeopardizing safety and solvency.
  - Situation is specific and not systemic; risk of contagion is limited.

### Fiscal performance and consolidation
- Fiscal discipline: authorities maintained commitment to fiscal rule and fiscal discipline without increasing or creating new taxes.
- Fiscal results:
  - At end of first two months of 2024:
    - Central Government primary surplus equal to that of a year earlier, 0.3 percent of GDP.
    - Slightly higher financial deficit of 0.8 percent (0.7 percent in previous year).
  - For 2023:
    - Overall fiscal deficit: 3.3 percent.
    - Primary balance surplus: 1.6 percent of GDP (second consecutive year with a surplus).
  - Central Government debt decreased by 1.9 p.p. compared to 2022, falling from 63 to 61.1 percent of GDP.
  - For 2024, the MoF estimates a primary result of 1.8 percent of GDP and a financial deficit of 3.2 percent of GDP.
- Market signals:
  - Fiscal consolidation contributed to reducing most interest rates on local and foreign currency.
  - Sovereign spreads have fallen since 2020; yields of sovereign bonds positioned below the EMBI LATAM and the EMBI Global.
  - EMBI CR decreased by approximately 188 b.p. between early 2020 and 2024.

### Structural reforms and social protection
- Public employment law (SB under program): fully implemented for executive branch job positions in the single wage spine in early-September 2023.
- Single window for social assistance (SB): increasing quality of social spending by consolidating social programs and prioritizing based on urgency of need.
- Payment system for cash transfer social assistance programs: centralized and digitalized.
- SINIRUBE (Sistema Nacional de Información y Registro Único de Beneficiarios del Estado) enhanced to quantify intensity of a person’s needs and aid prioritization.
- Efforts to promote inclusive growth: focused on increasing female labor force participation.

### The RSF Program: climate and resilience agenda
- Country goals: carbon neutrality and proactive environmental policies to balance environmental, economic, and fiscal sustainability; reach net zero emissions by 2050.
- RSF objectives: enhance crisis preparedness, climate-resilient infrastructure, greening the financial sector, and mobilizing official and private financing.
- RSF implementation:
  - For the third and last review, the four reform measures (RMs) were completed:
    - RM9: published guidelines including climate change mitigation and adaptation factors when selecting public investment projects.
    - RM10: published guidelines including climate change mitigation and adaptation factors when making urban regulatory plans.
    - RM11: published a list of tax exemptions that could be removed on environmental grounds.
    - RM12: developed a methodology to incorporate climate considerations in stress testing of banks’ credit risk once necessary data becomes available.
  - Completion of these four RMs completes implementation of all twelve reform measures targeted under the RSF.
- Authorities’ plans:
  - Continue strong climate-related reform agenda and build on RSF’s catalyzing effect.
  - Potentially issue sovereign bonds recognized for country’s climate and social credentials.
  - Work with multilateral partners to launch a sustainable project preparation facility and crowd in climate investments to identify and prepare a pipeline of bankable projects.
- Financial challenge: efforts to improve resilience to climate change and fully decarbonize are financially costly; RSF considered critical to catalyze additional climate finance.

### Going forward: policy priorities and commitments
- Authorities ready to implement strong policy and institutional economic framework and necessary policy actions in response to external shocks (including geopolitical tensions), internal challenges, and medium- to long-run climate risks.
- Key commitments and targets:
  - Remain vigilant and focused on debt sustainability, with public debt (ratio of GDP) remaining on a firm downward trend.
  - MoF explicit long-term objective: achieve a debt-to-GDP ratio of 50 percent by 2035.
  - Continue reform agenda to strengthen supervisory tools in line with the 2022 World Bank Financial Sector Assessment recommendations and implement policies to address financial system vulnerabilities.
  - Critical legislative priorities: discussion in Congress of the bank resolution project; BCCR law project to request constitutional autonomy will be presented before the end of this year to consolidate de jure independence and governance.
  - Fund support requested and considered vital throughout Congressional discussions on both projects.
  - Maintain a close relationship with the IMF after current arrangements end in July through the Post Financing Assessment (PFA), surveillance, and capacity development.

_Statement by Alfonso Guerra, Executive Director for Costa Rica and Valerie Lankester Campos, Senior Advisor to Executive Director — June 14, 2024_

---


_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1criea2024001.pdf_