## 1. Follow Up of RSF Reform Measures ## Source details **Canonical URL:** [1. Follow Up of RSF Reform Measures](https://www.imf.org/-/media/files/publications/cr/2025/english/1criea2025001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1criea2025001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1criea2025001-print-pdf.pdf.json) --- ### Context and recent developments - Economic growth and structure - Costa Rica has averaged over 5 percent growth since 2021 and is described as "one of the fastest-growing economies in the Western Hemisphere." - Real GDP increased by 4.3 percent in 2024 driven by exports, inward FDI, and buoyant private consumption. - Economic diversification toward advanced manufacturing (notably medical devices) and business services has increased exports as a share of GDP. - Inflation and monetary stance - Headline inflation fell to around zero since mid-2024 but is rising toward the BCCR’s 3 percent target; core inflation rose to 0.85 percent in March 2025. - One-year ahead expected inflation has returned to the BCCR’s tolerance range (2-4 percent); two-year ahead expected inflation remains well anchored. - The BCCR implemented a cumulative 500-basis-point cut to its policy rate between March 2023 and October 2024. - Financial sector and external metrics - Private sector credit grew by 5.4 percent as of December; NPL ratio for banks remains low and capital adequacy is well above the regulatory minimum. - Between mid-2022 and end-2024, the colon appreciated by about 25 percent against the dollar; gross reserves were US$14.2 billion at end-2024. - The cyclically adjusted current account was - 0.4 percent of GDP in 2024 compared to a norm of -3 .3 percent of GDP. - Fiscal position - The primary surplus fell to 1.1 percent of GDP in 2024; high interest costs were 4.8 percent of GDP, leading to an overall deficit of 3.8 percent of GDP. - Public debt declined by 8 percent of GDP between 2021 and 2024 and is now below 60 percent of GDP; public debt is assessed to be sustainable with high probability and the risk of sovereign debt distress is low. - Program completion and recent steps - The Extended Fund Facility (EFF) and Resilience and Sustainability (RSF) arrangements were successfully completed in June 2024. ### Outlook and balance of risks - Growth and external shock impacts - Growth is projected to slow to 3.4 percent in 2025 and remain broadly around its potential over the medium term. - A 0.5 percentage point impact on 2025 growth is estimated from U.S. tariffs of 10 percent on goods imports from Costa Rica, announced on April 2. - Net FDI inflows are expected to be weaker than previously projected due to increased uncertainty surrounding trade. - Inflation and current account - Inflation is expected to return to the lower end of the BCCR’s tolerance band in mid-2025 and reach the target rate of 3 percent in 2026. - The current account deficit is projected to widen to 1.8 percent of GDP in 2025 and to 1.9 percent of GDP in 2026, reflecting the April 2 U.S. tariff announcements and lower external demand. - Major identified downside risks - Weaker external demand; shocks to inward investment; tighter financial conditions; political fragmentation and upcoming elections; adverse terms of trade shocks; sustained high uncertainty lowering net exports, FDI, and other capital inflows. ### Fiscal policy — findings and near-term outlook - Near-term fiscal trajectory - Fiscal consolidation is expected to resume in 2025; unwinding of one-off factors should raise the primary surplus to 1.3 percent of GDP in 2025. - The overall deficit is expected to fall to 3.2 percent of GDP in 2025 and keep declining. - Debt is expected to fall below 55 percent of GDP by 2030. - Gross financing needs are expected to fall from 7½ percent of GDP in 2025-26 to 6.7 percent of GDP in 2030, mainly from 1 percent of GDP lower interest expenses. - Adjustment measures - Spending restraint through a wage freeze is expected to be the primary means of adjustment; spending priorities likely to shift toward social assistance and capital projects. - The public investment law (effective in March) should improve public investment prioritization and execution. - Higher tax receipts from increased imports are expected to be broadly offset by a reduction in fuel tax receipts. - Gains from tax administration efforts could allow for a higher primary balance; expenditure obligations from legal rulings pose offsetting risks. - Large contingent liability - The dispute between Caja Costarricense de Seguro Social (CCSS) and the Ministry of Finance (MoF) over social security payments represents a large contingent liability of the central government (8.5 percent of GDP). - Annual transfers to CCSS have been around 1 percent of GDP; CCSS claims this does not cover total healthcare and pension obligations. ### Fiscal policy — recommendations and revenue measures - Core recommendations - Maintain spending well below the ceilings established by the fiscal rule to ensure consolidation is delivered, since consolidation is almost fully reliant on spending reductions. - Fully implement the public employment law across remaining institutions to restrain spending and improve efficiency; legal challenges and amendment proposals are a concern. - Pursue a broader, revenue-increasing tax reform as part of a comprehensive medium-term revenue strategy to increase fiscal space and improve equity and efficiency. - Legislation that lowers revenues should be avoided. - Indicative reform measures and yields (as presented) - Proposed dual personal income tax reform: estimated yield shown as -0.1 (depends on thresholds and top rate). - Remove income tax exemption for 14th salary (salario escolar) paid to public sector workers: 0.1 - Remove exemption for lottery winnings: Up to 0.1 - Make tax on immovable property more progressive with a higher top rate: Up to 0.1 - Reduce VAT exemptions on car rentals, airfares, medical equipment, and wood/forestry products: 0.1 - Feebate scheme based on vehicle emissions: 0 (but fuel tax receipts could decline) - Tax dividends distributed by firms in free zones and passive income earned abroad by residents: Positive - Increase withholding on non-residents’ incomes (remesas): Up to 0.1 - Move to a single tax rate for corporate income and introduce simplified regime for smaller taxpayers: 0-0.1 (depending on migration to simplified regime) - The package could also consider scaling back corporate tax exemptions for free trade zones in light of the OECD/G20 Pillar 2 minimum global tax. ### Debt management reforms and borrowing costs - Institutional and market measures - Unification of debt management functions in one agency, improving sovereign asset and liability management, and centralizing cash holdings in the Treasury Single Account will lessen budget financing costs. - A new market makers program, which had debut auctions in November 2024, should increase liquidity in the sovereign debt market. - A successor to the 2022-2026 medium-term debt strategy should be conducted to revisit tradeoffs between lower interest costs and other desirable characteristics of the debt structure (such as maturity and currency composition). - A proposed constitutional amendment to grant the executive branch authority to issue external debt (within the overall borrowing limit approved during the budget process) would allow debt managers to reduce borrowing costs by adjusting the timing of external borrowing to market conditions. - As an interim measure, the bill seeking authorization to issue Eurobonds should be approved without further delay. ### Monetary and exchange rate policy - Strategy and policy space - The BCCR’s forward-looking data-dependent approach to monetary policy has proved effective and should continue to manage two-sided risks. - Following decisive rate cuts, the ex-ante real policy rate is now close to neutral. Staff estimates the real neutral rate to be about 1 percent. - If the convergence of inflation to the target weakens in the coming months, there is room for further cuts to ensure inflation expectations remain anchored. - Once inflation returns firmly to the target, the BCCR needs to remain vigilant and ready to act forcefully to manage both upside and downside risks to price stability. - Exchange rate and FX reserves - The exchange rate should be allowed to flexibly adjust to market conditions. The IMF’s Integrated Policy Framework provides support for the use of occasional Foreign Exchange Intervention (FXI) in response to large shocks. - Frequent FXI can hinder FX market development, incentivize dollarization, and weaken monetary policy transmission. - The BCCR is legally required to undertake FX purchases on behalf of the non-financial public sector (NFPS); NFPS institutions should be increasingly required to manage their FX needs independently and reduce reliance on the BCCR. - Reserves are adequate based on multiple indicators and a further accumulation of international reserves is unnecessary. ### Financial supervision, resolution, and crisis management - Legal and supervisory reforms under consideration - Proposed amendments to the bank resolution and deposit insurance law would expand supervisors’ legal authority to intervene and resolve failing financial institutions; clarify the ability of the government to use resolution proceeds; increase deposit insurance premia; and provide a fiscal backstop to the deposit insurance system (initially through extraordinary central bank financing that would be subsequently reimbursed by the budget). - The blanket deposit guarantee for state-owned banks should be eliminated to promote a level playing field with private banks. - Full implementation of risk-based bank supervision is expected to begin in early 2025 with improved focus on individual risks (including secondary risks) and strengthening of institutional and IT capabilities. - Consolidated supervision has been partially applied since January 2023 and is expected to be completed by 2028. - Expected outcomes - Make closure and exit of non-viable institutions feasible, prioritize orderly resolution rather than recapitalization, secure adequate resolution funding, limit reliance on bank reserves, and minimize strain on public resources. - Strengthened legal protection of supervisors, powers to replace senior management and board members, powers to restrict profit distribution when solvency is at risk, reinforced resolution authority powers, and introduction of a recovery and resolution planning framework. - Strengthened independence and autonomy of the Deposit Guarantee Fund (DGF), increased annual contributions from financial institutions (subject to safeguards), allowance for DGF to finance resolution with a public backstop for systemic risk, and gradual elimination of the state-owned bank guarantee. ### Pension funds, generational funds, and foreign investment limits - Current constraints and reform direction - Regulatory limits on foreign investments by local pension funds should be updated alongside the planned reform to restructure existing funds into generational funds. - Under existing regulation, pension funds can invest a maximum of 50 percent of their assets abroad contingent upon demonstrating that the real returns exceed those of domestic investments; additionally, funds must hedge foreign-currency denominated assets above the 50 percent threshold. - Current regulatory limits appear more restrictive than the average of OECD peers and should be updated; adjustments should be phased in over time and supported by measures to deepen the FX market and improve liquidity and availability of FX hedging instruments. - Régimen Obligatorio de Pensiones have total assets under management around 20 percent of GDP. ### Climate, energy, and green finance actions - Climate integration into fiscal and investment planning - Climate tagging guidelines have been implemented in the 2025 budget formulation, with training and quality control to improve consistency of application, and for expenditure tracking. - Climate transition risks are incorporated into the MTFF and negative environmental effects are included in tax expenditure reports; authorities intend to tag such tax expenditures in the budget as is done for spending. - Agencies are applying new climate criteria to prioritize public infrastructure projects and for urban planning. - Financing and project support - Government exploring catastrophe bonds, commercial climate-related insurance, loans with deferred drawdown options, and building up deposits in the National Emergency Fund. - Efforts underway to develop solar, wind, and geothermal energy through private participation to reduce reliance on hydroelectric power and support achieving "zero net-emissions by 2050". - To catalyze private climate financing, the government is working to expand PPPs, develop bankable climate projects, and issue green bonds; Banco Nacional plans to establish a US$200 million trust fund to help bus operators transition to electric vehicles. - With UNDP support, the government has developed a framework for green bonds and is exploring issuance of sustainability-linked bonds. - Selected RSF follow-up milestones (Box 1 highlights) - RM1: 2025 budget formulated using climate tagging; new climate-related sub-categories integrated into GFSM2014 functional classifiers. - RM5: Fiscal effects of decarbonization integrated into fiscal planning, including MTFF since 2024. - RM12: BCCR developed climate stress-testing methodology; implementation awaiting legal decisions on data sharing but methodology and capacity have been developed. ### Skills, labor market, infrastructure, and inclusiveness - Skills and labor market directions - Addressing skills gaps is crucial to sustain export and FDI-driven growth. - Authorities aligning school curricula with market needs, expanding dual education programs, promoting adult secondary education and bilingualism, and launching free community training centers to reduce the digital gap. - Scope to make public R&D funding more performance-based and market-oriented. - Numeric/contextual point: GDP growth has averaged above 5 percent per year since 2021 (see Staff Appraisal). - Infrastructure and business environment - New Public Investment Law enhances the Ministry of Planning’s role in selecting and appraising infrastructure projects. - Further efforts needed to improve infrastructure maintenance, institutional capacity, standardized methodology across agencies for capital spending, and swift approval and implementation of new PPP legislation. - Authorities have launched a one-stop window to facilitate permit applications for new businesses. - Inclusive growth and social policy - Reduction of the minimum contribution base for part-time workers has incentivized more formal employment. - There is scope to lower the tax wedge on labor for lower-income workers and to reduce gender gaps; implementing this would require broader tax reform with offsetting revenue measures. - Combined average marginal tax from social security contributions and payroll taxes is 29 percent of workers’ gross wages for lower income earners. ### Debt sustainability, DSA findings, and projections - Overall DSA conclusion and baseline - Overall DSA conclusion: Sustainable with high probability. - Public debt projected to decline further below 60 percent of GDP in the short run and to 50 percent of GDP well within 10 years. - Key debt and financing figures and projections (selected) - Central government debt (percent of GDP): 2024: 61.1; 2025: 59.8; 2026: 60.8; 2027: 59.7; 2028: 59.0; 2029: 57.9; 2030: 56.7; 2031: 55.3; 2032: 53.7. - Gross international reserves (millions of U.S. dollars): 2024: 14,441; 2025: 14,181; 2026: 15,174; 2027: 14,932; 2028: 15,792; 2029: 16,485; 2030: 17,301. - Real GDP growth (percent): 2024: 4.3; 2025: 3.4; 2026–2027: 3.4; 2028–2030: 3.5. - Central government primary balance (percent of GDP): 2024: 1.3; 2025: 1.1; 2026: 1.6; 2027: 1.3; 2028: 1.5. - Gross financing needs (Percent of GDP): 2024: 9.4; 2025: 7.7; 2026: 7.3; 2027: 6.2; 2028: 6.8; 2029: 7.0; 2030: 6.7. - Contingent liability stress test - Scenario: central government becoming liable for entire disputed claim by the CCSS of 8.5 percent of GDP, paid evenly over four years starting in 2026 — would postpone further debt reduction but not increase GFNs as much as default stress scenario. - Long-term fiscal pressures - Pensions: permanent adjustment needed in the pension system to keep pension assets positive for: - 30 years: 1.1% of GDP per year - 50 years: 2.7% of GDP per year - Until 2100: 4.3% of GDP per year ### Data, statistics, and modernization - GFSM2014 transition and data adequacy - Authorities are transitioning from GFSM 1986 to GFSM 2014 with the transition implemented at the Central Government level before the broader public sector by 2027. - Published comparisons (Percent of GDP) GFSM2014 vs National method (2019–2024) presented; example 2024 GFSM2014 revenue: 15.04; expenditure: 18.84; balance: -3.79. - Overall assessment: "The data provided to the Fund are adequate for surveillance." - Authorities committed to fully digitalize fiscal and tax information (Hacienda Digital) with work expected to be completed by the end of 2026. - Reserve adequacy and costs - GIR reached US$13.3 billion in 2023 and US$14.2 billion in 2024. - Reserve adequacy metrics (2024): Gross International Reserves, 2024: Million of US dollars 14,181.0. - ARA metric: 91.8 100-150; ARA metric (floating)1/: 140.4 100-150. - On average, annual costs (spreads proxy): 0.5 percent of GDP. - On average, annual costs (monetary policy differential proxy): 0.3 percent of GDP. - Monetary policy differential reference: 2015-2024 average is about 200 bps. - Floating ARA nominal level expected to reach end-2024 reserves levels in 2029. - Data and statistics strengthening - Ongoing capacity development from CAPTAC-DR, FAD, and STA on GFS, PSDS, and NA compilation. - Improvements in financial and external sector statistics (BPM6, IIP, CPIS, CDIS) noted; work ongoing to improve coverage of financial transactions of the nonfinancial private sector. ### Risk Assessment Matrix — prioritized risks and policy responses (selected) - High-likelihood events - Trade policy and investment shocks: Likelihood: High; Impact: Medium. Policy response: strengthen and diversify trade, investment, and financial linkages; if inflation/expectations exceed the target, tighten monetary policy. - Deepening geoeconomic fragmentation: Likelihood: High; Impact: Medium. Policy response: strengthen and diversify trade, investment, and financial linkages. - Sovereign debt distress (noted as a risk item in RAM): Likelihood: High; Impact: Medium. Policy response: allow currency to depreciate in response to capital outflows but use reserves in case of disorderly conditions; grant executive more flexibility to borrow externally; preserve fiscal consolidation. - Other notable risks - Tighter financial conditions and systemic instability: Likelihood: Medium; Impact: High. Policy response: allow currency to depreciate, use reserves in disorderly conditions, grant executive more flexibility to borrow, preserve fiscal consolidation, and improve debt management. - Political fragmentation and reform fatigue: Likelihood: Medium; Impact: Medium. Policy response: build legislative coalitions, prioritize proposals, and communicate consequences of adverse initiatives. - Climate change (extreme events): Likelihood: Medium; Impact: Medium. Policy response: implement RSF-backed reforms on resilient infrastructure and private climate financing instruments. ### Staff appraisal — key findings and policy priorities - Macroeconomic and fiscal stance - Costa Rica has achieved remarkable economic progress; GDP growth has averaged above 5 percent per year since 2021. - Inflation is rising toward the central bank’s target; risk of sovereign debt distress is low. - International reserves are at comfortable levels, and systemic financial stability risks are contained. - Fiscal and structural priorities - Continue fiscal consolidation with spending kept below ceilings permitted by the fiscal rule; implement tax reforms to increase equity, efficiency, and revenues while avoiding revenue-lowering legislation. - Resolve CCSS-MoF dispute by improving registries, clarifying budget-covered benefits, and reforming CCSS governance and accountability. - Continue debt management reforms, deepen FX markets, and consider granting the executive more flexibility to issue external debt. - Monetary, financial sector, and governance priorities - Strengthen the BCCR’s de jure institutional framework and approve legislative proposals to improve governance, transparency, and accountability. - Prioritize passing proposed amendments to the bank resolution and deposit insurance law and complete risk-based and consolidated supervision. - Supply-side and social policies - Advance supply-side reforms: boost graduation rates, align curricula with workforce needs, enhance infrastructure quality, implement PPP legislation, and integrate climate considerations into public investment decisions to sustain productivity and inclusive growth. *Source: IMF staff report excerpt — "1. Follow Up of RSF Reform Measures."* ### 1. Follow Up of RSF Reform Measures ____________________________________________________________ 16 ### 1. Follow Up of RSF Reform Measures ### Context and Recent Developments - Costa Rica has averaged over 5 percent growth since 2021 and is described as "one of the fastest-growing economies in the Western Hemisphere." - Economic diversification toward advanced manufacturing (notably medical devices) and business services has increased exports as a share of GDP. - The Extended Fund Facility (EFF) and Resilience and Sustainability (RSF) arrangements were successfully completed in June 2024. - Real GDP increased by 4.3 percent in 2024 driven by exports, inward FDI, and buoyant private consumption. - Headline inflation fell to around zero since mid-2024 but is rising toward the BCCR’s 3 percent target; core inflation rose to 0.85 percent in March 2025. - One-year ahead expected inflation has returned to the BCCR’s tolerance range (2-4 percent); two-year ahead expected inflation remains well anchored. - The BCCR implemented a cumulative 500-basis-point cut to its policy rate between March 2023 and October 2024. - Private sector credit grew by 5.4 percent as of December; NPL ratio for banks remains low and capital adequacy is well above the regulatory minimum. - The cyclically adjusted current account was - 0.4 percent of GDP in 2024 compared to a norm of -3 .3 percent of GDP. - Between mid-2022 and end-2024, the colon appreciated by about 25 percent against the dollar; gross reserves were US$14.2 billion at end-2024. - The primary surplus fell to 1.1 percent of GDP in 2024; high interest costs were 4.8 percent of GDP, leading to an overall deficit of 3.8 percent of GDP. - Public debt declined by 8 percent of GDP between 2021 and 2024 and is now below 60 percent of GDP; public debt is assessed to be sustainable with high probability and the risk of sovereign debt distress is low. ### Outlook and Balance of Risks - Growth is projected to slow to 3.4 percent in 2025 and remain broadly around its potential over the medium term. - A 0.5 percentage point impact on 2025 growth is estimated from U.S. tariffs of 10 percent on goods imports from Costa Rica, announced on April 2. - Major downside risks: weaker external demand, shocks to inward investment, tighter financial conditions, political fragmentation, and upcoming elections. - Inflation is expected to return to the lower end of the BCCR’s tolerance band in mid-2025 and reach the target rate of 3 percent in 2026. - The current account deficit is projected to widen to 1.8 percent of GDP in 2025 and to 1.9 percent of GDP in 2026, reflecting the April 2 U.S. tariff announcements and lower external demand. - Net FDI inflows are expected to be weaker than previously projected due to increased uncertainty surrounding trade. - Downside risks to the external position: adverse terms of trade shocks, tighter global financial conditions, and sustained high uncertainty lowering net exports, FDI, and other capital inflows. - Authorities’ views: during Article IV discussions in February 2025, authorities projected 4 percent growth on average for 2025-2026 and saw reduced risk of entrenched low inflation expectations. ### Policy Discussions — Fiscal Policy Findings and near-term fiscal outlook - Fiscal consolidation is expected to resume in 2025; unwinding of one-off factors should raise the primary surplus to 1.3 percent of GDP in 2025. - The overall deficit is expected to fall to 3.2 percent of GDP in 2025 and keep declining. - Debt is expected to fall below 55 percent of GDP by 2030. - Gross financing needs are expected to fall from 7½ percent of GDP in 2025-26 to 6.7 percent of GDP in 2030, mainly from 1 percent of GDP lower interest expenses. - Spending restraint through a wage freeze is expected to be the primary means of adjustment; spending priorities likely to shift toward social assistance and capital projects. - The public investment law (effective in March) should improve public investment prioritization and execution. - Higher tax receipts from increased imports are expected to be broadly offset by a reduction in fuel tax receipts. - Gains from tax administration efforts could allow for a higher primary balance; expenditure obligations from legal rulings pose offsetting risks. Policy recommendations and structural reforms - Maintain spending well below the ceilings established by the fiscal rule to ensure consolidation is delivered, since consolidation is almost fully reliant on spending reductions. - Fully implement the public employment law across remaining institutions to restrain spending and improve efficiency; legal challenges and amendment proposals are a concern. - Pursue a broader, revenue-increasing tax reform as part of a comprehensive medium-term revenue strategy to increase fiscal space and improve equity and efficiency. - The proposed dual personal income tax reform would place incomes from self-employment, salaries, and pensions under a single threshold and introduce a higher top marginal rate; estimated yield shown as -0.1 (depends on thresholds and top rate) in the table of proposals. - Other measures listed with indicative yields include: - Remove income tax exemption for 14th salary (salario escolar) paid to public sector workers: 0.1 - Remove exemption for lottery winnings: Up to 0.1 - Make tax on immovable property more progressive with a higher top rate: Up to 0.1 - Reduce VAT exemptions on car rentals, airfares, medical equipment, and wood/forestry products: 0.1 - Feebate scheme based on vehicle emissions: 0 (but fuel tax receipts could decline) - Tax dividends distributed by firms in free zones and passive income earned abroad by residents: Positive - Increase withholding on non-residents’ incomes (remesas): Up to 0.1 - Move to a single tax rate for corporate income and introduce simplified regime for smaller taxpayers: 0-0.1 (depending on migration to simplified regime) - The package could also consider scaling back corporate tax exemptions for free trade zones in light of the OECD/G20 Pillar 2 minimum global tax. - Legislation that lowers revenues should be avoided. Compliance, administration, and contingent liabilities - Legal and technological changes should improve compliance: tax arrears declined due to additional efforts to recover 0.2 percent of GDP in 2024; Hacienda Digital and expanded customs operations could strengthen collection and reduce compliance costs. - The dispute between Caja Costarricense de Seguro Social (CCSS) and the Ministry of Finance (MoF) over social security payments represents a large contingent liability of the central government (8.5 percent of GDP). - Annual transfers to CCSS have been around 1 percent of GDP; CCSS claims this does not cover total healthcare and pension obligations. - MoF cites flaws in the registry of beneficiaries and invoices. - Urgent needs: improve registry systems to track outlays and beneficiaries; CCSS and MoF, together with the legislature, should clarify the scope of services and benefits covered by the budget and identify additional funding sources to ensure actuarial soundness. - Any future changes to the social security system should be preceded by a thorough assessment of fiscal and labor market implications. - Reforms to enhance CCSS accountability, governance, transparency, and system simplicity are recommended to safeguard long-run sustainability as the population ages. *Source: IMF staff report excerpt — "1. Follow Up of RSF Reform Measures."* ### 17. Ongoing debt management reforms can help reduce borrowing costs. The unification of ### 17. Ongoing debt management reforms can help reduce borrowing costs. The unification of ### Debt management reforms and borrowing costs - Unification of debt management functions in one agency, improving sovereign asset and liability management, and centralizing cash holdings in the Treasury Single Account will lessen budget financing costs. - A new market makers program, which had debut auctions in November 2024, should increase liquidity in the sovereign debt market. - A successor to the 2022-2026 medium-term debt strategy should be conducted to revisit tradeoffs between lower interest costs and other desirable characteristics of the debt structure (such as maturity and currency composition). - A proposed constitutional amendment to grant the executive branch authority to issue external debt (within the overall borrowing limit approved during the budget process) would allow debt managers to reduce borrowing costs by adjusting the timing of external borrowing to market conditions. - As an interim measure, the bill seeking authorization to issue Eurobonds should be approved without further delay. ### Institutional measures to support fiscal planning and debt management - Establishing a formal macro-fiscal unit within the Ministry of Finance and activating the fiscal council would support improvements in budget preparation and allow the medium-term fiscal framework (MTFF) to play a more important role in identifying policy trade-offs, including by institutionalizing the macroeconomic projection and analysis tools used by the Ministry. ### Quality of government finance statistics - Authorities are continuing a multi-year effort to upgrade fiscal data quality and scope, centered around a transition from GFSM 1986 to GFSM 2014. - Published data suggest the reclassifications are likely to have minor effects on the headline fiscal figures. - The authorities are reviewing data that incorporates accrued interest and measures debt at nominal value. The modernization of this methodology is expected to be incorporated into the 2027 budget, the MTFF, and the fiscal rule, and then extended to the non-financial public sector. - Price statistics coverage is an area for further improvement, although the data provided to the Fund is assessed to be adequate for surveillance. ### Authorities’ views on fiscal consolidation and debt reduction - The authorities emphasized their commitment to continuing the task of debt reduction. - They will persist with their fiscal consolidation strategy and continue improving spending efficiency and debt management. - They will keep current spending growth below that permitted by the fiscal rule, including by limiting growth in public sector salaries. - There is agreement between MoF and CCSS about the urgency of finding a comprehensive and durable solution to the dispute over social security payments. - The authorities are using legislative tools and pursuing a clear communication strategy to resist bills that could reduce revenues and erode the public employment law and the fiscal rule. ### Monetary and exchange rate policy - The BCCR’s forward-looking data-dependent approach to monetary policy has proved effective and should continue to manage two-sided risks. - Following decisive rate cuts, the ex-ante real policy rate is now close to neutral. Staff estimates the real neutral rate to be about 1 percent. - If the convergence of inflation to the target weakens in the coming months, there is room for further cuts to ensure inflation expectations remain anchored. - Once inflation returns firmly to the target, the BCCR needs to remain vigilant and ready to act forcefully to manage both upside and downside risks to price stability. - Despite recent strong growth of private sector credit (especially FX loans driven in part by the appreciation of the colon), the estimated credit gap remains negative and small. - There could be scope to deploy macroprudential measures to mitigate potential risks to financial stability from the rise in FX lending. - The exchange rate should be allowed to flexibly adjust to market conditions. The IMF’s Integrated Policy Framework provides support for the use of occasional Foreign Exchange Intervention (FXI) in response to large shocks. - Frequent FXI can hinder FX market development, incentivize dollarization, and weaken monetary policy transmission. - The BCCR is legally required to undertake FX purchases on behalf of the non-financial public sector (NFPS); NFPS institutions should be increasingly required to manage their FX needs independently and reduce reliance on the BCCR. - Reserves are adequate based on multiple indicators and a further accumulation of international reserves is unnecessary. ### Pension fund investment limits and generational funds - Regulatory limits on foreign investments by local pension funds should be updated alongside the planned reform to restructure existing funds into generational funds. - Overseas investment provides diversification benefits given relatively underdeveloped domestic capital markets. - Planned reform to move the Régimen Obligatorio de Pensiones to generational funds would imply a greater demand for diversification into equity and other investments. - Under existing regulation, pension funds can invest a maximum of 50 percent of their assets abroad contingent upon demonstrating that the real returns exceed those of domestic investments; additionally, funds must hedge foreign-currency denominated assets above the 50 percent threshold. - Current regulatory limits appear more restrictive than the average of OECD peers and should be updated; adjustments should be phased in over time and supported by measures to deepen the FX market and improve liquidity and availability of FX hedging instruments. - Régimen Obligatorio de Pensiones have total assets under management around 20 percent of GDP. ### Central bank safeguards and governance - Significant progress has been made in implementing recommendations of the 2020 Safeguards Assessment, particularly on external audit and financial reporting. - Legislation aimed at improving the BCCR’s transparency and accountability and institutionalizing de facto independence is being actively considered by the Legislative Assembly. - A separate constitutional amendment to grant autonomy to the BCCR and allow governance reforms through internal regulations has been submitted to the legislature (although constitutional amendments move slowly). ### Authorities’ inflation and reserves outlook (BCCR) - During Article IV discussions in February 2025, the BCCR expected headline and core inflation to return steadily to the tolerance range in the third quarter of 2025 in their baseline scenario. - Downside risks include weaker global growth and slower than expected domestic monetary transmission; upside risks include supply-side disruptions and major climate events. - The BCCR reaffirmed intention to adjust monetary policy in a forward-looking and data-dependent manner with clear communication. - The BCCR agreed coverage of international reserves was comfortable and consistent with what it considers adequate for the economy. - The authorities reiterated commitment to strengthen de jure central bank autonomy through legal reforms. ### Financial oversight, resolution, and supervision - Recent resolution of two non-bank financial institutions was well managed; systemic risks are contained. - Proposed amendments to the bank resolution and deposit insurance law would: - expand supervisors’ legal authority to intervene and resolve failing financial institutions; - clarify the ability of the government to use resolution proceeds; - increase deposit insurance premia; and - provide a fiscal backstop to the deposit insurance system (initially through extraordinary central bank financing that would be subsequently reimbursed by the budget). - The blanket deposit guarantee for state-owned banks should be eliminated to promote a level playing field with private banks. - Shortcomings identified in the 2022 FSAP are being addressed through legislative and regulatory changes. - Full implementation of risk-based bank supervision is expected to begin in early 2025 with improved focus on individual risks (including secondary risks) and strengthening of institutional and IT capabilities. - Consolidated supervision has been partially applied since January 2023 and is expected to be completed by 2028 (once risk-based supervision is fully in place). - There is scope to improve oversight and external auditing requirements for nonbank entities including by fully implementing risk-based and consolidated supervision. ### Authorities’ views on financial supervision - Authorities agreed on the need to further strengthen the financial supervision framework and noted FSAP recommendations have been integrated into the superintendency’s institutional strategic plan. - A roadmap for implementation will be developed by June 2025. - Authorities seek technical assistance from the Fund to refine analytical tools, enhance risk-based assessments, strengthen consolidated supervision, and improve governance and coordination for intervention and resolution processes. ### Deposit insurance and bank resolution expected outcomes - Objectives: Make closure and exit of non-viable institutions feasible, prioritize orderly resolution rather than recapitalization, secure adequate resolution funding, limit reliance on bank reserves, and minimize strain on public resources. - Expected supervisory and resolution outcomes include strengthened legal protection of supervisors, powers to replace senior management and board members, powers to restrict profit distribution when solvency is at risk, enhanced intensive supervision powers, reinforced resolution authority powers, and introduction of a recovery and resolution planning framework. - Expected crisis management outcomes include strengthened independence and autonomy of the Deposit Guarantee Fund (DGF), increased annual contributions from financial institutions (subject to safeguards), allowance for DGF to finance resolution with a public backstop for systemic risk, central bank liquidity via newly issued government bonds, defined repayment arrangements to ensure fiscal costs are covered, and a gradual elimination of the state-owned bank guarantee to reduce distortions. ### Climate and supply-side policies and reforms - Costa Rica continues to advance climate-related reforms implemented under the RSF to integrate climate risks into fiscal planning, public investment, and financial sector oversight. - Climate tagging guidelines have been implemented in the 2025 budget formulation, with training and quality control to improve consistency of application, and for expenditure tracking. - Climate transition risks are incorporated into the MTFF and negative environmental effects are included in tax expenditure reports; authorities intend to tag such tax expenditures in the budget as is done for spending. - Authorities published a natural disaster implementation plan considering building up deposits in the National Emergency Fund and expanding use of catastrophe bonds, commercial climate-related insurance, and loans with deferred drawdown options. - Agencies are applying new climate criteria to prioritize public infrastructure projects and for urban planning. - The BCCR’s climate risk data repository has published research on bank exposure to hydrometeorological events; implementation of climate bank stress testing methodology is temporarily on hold pending a court decision on data access. - A data repository on economic activities by geographical location has been developed for bottom-up climate stress testing. ### Energy, private climate financing, and green finance - Efforts underway to develop solar, wind, and geothermal energy through private participation to reduce reliance on hydroelectric power and support achieving "zero net-emissions by 2050". - To catalyze private climate financing, the government is working to expand PPPs, develop bankable climate projects, and issue green bonds. - A bill to strengthen the PPP legal framework is advancing in the Legislative Assembly and, if approved, would allow creation of a specialized PPP agency to prioritize, select, and structure PPP projects for resilient infrastructure and renewable energy. - Banco Nacional plans to establish a US$200 million trust fund to help bus operators transition to electric vehicles. - With UNDP support, the government has developed a framework for green bonds and is exploring issuance of sustainability-linked bonds. - Efforts are underway to introduce a new green taxonomy to streamline identification of green assets and expand the green finance market. ### Box 1: Follow Up of RSF Reform Measures (selected highlights) - RM1: Ministry of Finance to develop and publish guidelines for climate budget tagging (January 2023). The 2025 budget was formulated using climate tagging; new climate-related sub-categories are being integrated into GFSM2014 functional classifiers. - RM5: Ministry of Finance to publish a quantitative analysis of climate transition fiscal risks (November 2023). Fiscal effects of decarbonization efforts have been integrated into fiscal planning, including in the MTFF since 2024. - RM6: MIDEPLAN to expand project appraisal to assess social cost of carbon (September 2023). Guidelines have been used since 2023; MIDEPLAN has been developing capacity for climate-resilient public infrastructure appraisal. - RM9: MIDEPLAN to publish guidelines on project selection criteria including climate change criteria for SNIP entities (December 2023). Guidelines have been used to build more climate-resilient infrastructure. - RM10: MIVAH and MINAE to develop guidelines for including climate change analysis in Regulatory Plans (March 2024). INVU presented regulatory plans guidelines to 32 local governments. - RM2: Government to approve implementing regulation to simplify private participation in renewable power generation for self-consumption (February 2023). Regulations are expected to be updated during 2025. ARESEP defined a methodology for setting tariffs from renewable sources. More than 250 new operators have joined electricity generation sector by end-2024, relative to end-2022 (before the regulation was issued). *Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1criea2025001-print-pdf.pdf* ### Box 1. Costa Rica: Follow Up of RSF Reform Measures (concluded) ### Box 1. Costa Rica: Follow Up of RSF Reform Measures (concluded) ### Supporting Decarbonization - RM7 (November 2023): Government to submit to the Legislative Assembly a bill to introduce feebate scheme to strengthen incentives for low-pollution private vehicles. - Analysis and development agencies involved: IMF CD on feebate design, using the Climate Policy Assessment Tool. - Follow-up outcome/impact: Submitted bill and draft modifications are being discussed in Legislative Assembly (Environmental Commission). - Potential impact: If approved, the proposed legislation would incentivize the transition to low-emission vehicles, supporting Costa Rica’s NDCs. - RM11 (April 2024): Government to appraise and publish a review of existing tax incentives with a negative effect on the environment to support decarbonization efforts. - Analysis and development agencies involved: GIZ technical support to develop a methodology to assess tax expenditures through a climate lens. - Follow-up outcome/impact: A detailed analysis of 2023 tax expenditures with negative environmental effects will be included in the annual tax expenditure report to be published in April 2025. - Outcome: The review has built capacity for the authorities to propose legislation to eliminate exemptions with negative environmental effects and new alternatives to finance legislators’ spending proposals. ### Greening Reserves and Strengthening Financial Sector Resilience - RM4 (March 2023): BCCR to publish indicators of the “greenness” of its reserve holdings in its 2022 Annual Report. - Agencies: Priority identified in BCCR climate change roadmap, guided by recommendations of the NGFS. - Follow-up outcome/impact: The best-in-class strategy is actively applied to reserve management. There is pending approval from the BCCR’s legal department for investments in green bond funds. - Outcome: The BCCR has better aligned monetary policy objectives with green financial strategies. - RM3 (February 2023): 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. - Agencies: Critical intermediate step to achieve RM12 developed with inputs from IMF staff. - Follow-up outcome/impact: The BCCR data repository on climate risks has facilitated innovative research on banking exposure to hydrometeorological events. - Outcome: The BCCR published innovative research to assess credit risk and exposures to hydrometeorological events. Other countries have indicated interest in developing similar data repositories building on Costa Rica’s work. - RM8 (October 2023): CONASSIF to approve regulation on management of socioenvironmental risks and climate change risks in the credit portfolio. - Agencies: Priority identified by the authorities. - Follow-up outcome/impact: Several financial institutions have been working to implement this regulation. Authorities launched a joint green taxonomy to classify accurately green projects and are working to make implementation mandatory starting in 2027. - Outcome: Financial institutions are improving their assessment of socioenvironmental and climate change risk in their portfolios. - RM12 (April 2024): 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. - Agencies: Priorities identified in the BCCR’s climate change roadmap. Methodology guided by recommendations of the NGFS. - Follow-up outcome/impact: Although a new climate stress methodology applied to the banking sector by the BCCR is still awaiting legal decisions on data sharing, some banks have expressed interest in learning how it can be applied to their own data. - Outcome: The BCCR has developed a methodology and built the capacity to implement top-down stress testing to estimate impacts of hydrometeorological events on banks’ loan portfolios. ### Skills and Labor Market - Findings and policy directions: - Addressing skills gaps is crucial to sustain Costa Rica’s export and FDI-driven growth. - Authorities are aligning school curricula with market needs, expanding dual education programs, and promoting adult secondary education and bilingualism. - Free community training centers have been launched to reduce the digital gap. - There is scope to make public R&D funding, including for public universities, more performance-based and market-oriented. - Accelerating these efforts will help develop a highly skilled workforce to support knowledge-intensive industries and enhance Costa Rica’s attractiveness for FDI. - Numeric/contextual points: - GDP growth has averaged above 5 percent per year since 2021 (see Staff Appraisal for broader context). ### Infrastructure and Business Environment - Findings and policy directions: - Reducing infrastructure gaps and fostering a more competitive business environment are key for private sector-led growth. - The new Public Investment Law enhances the Ministry of Planning’s role in selecting and appraising infrastructure projects. - Further efforts needed: improve infrastructure maintenance, build institutional capacity, establish a standardized methodology across agencies for allocating and executing capital spending, and swift approval and implementation of new PPP legislation. - Authorities have addressed key regulatory bottlenecks and launched a one-stop window to facilitate permit applications for new businesses. - Continued efforts should focus on reducing market distortions, fostering competition and leveling the playing field—particularly in the financial and electricity sectors—to drive long-term productivity growth. ### Inclusive Growth and Social Policy - Findings and policy directions: - Building on recent improvements in social indicators, sustained efforts are needed to achieve long-term inclusive growth. - The reduction of the minimum contribution base for part-time workers has incentivized more formal employment. - There is scope to lower the tax wedge on labor for lower-income workers and to reduce gender gaps in the labor market; implementing this would require a broader tax reform that encompasses offsetting revenue measures. - Improving the quality and availability of child- and adult-care networks would help raise female labor force participation. - To improve employability and reduce long-term dependence on social assistance, authorities are linking social transfers to participation in training and entrepreneurship programs. - Numeric point: - The combined average marginal tax from social security contributions and payroll taxes is 29 percent of workers’ gross wages for lower income earners. ### Authorities’ Views - Authorities’ commitments and strategies: - Committed to advancing green and inclusive growth agenda. - Noted growth has become more inclusive due to the overall economy and recent structural reforms enhancing the efficiency and quality of social spending. - Continued focus on increasing female labor force participation and improving the quality of education. - RSF plays a critical role in advancing climate reforms, building capacity and catalyzing green financing. - Climate finance strategy will include the issuance of use of proceeds bonds in local markets and the development of bankable green projects. ### Staff Appraisal — Key Findings and Recommendations - Macroeconomic and fiscal stance: - Costa Rica has achieved remarkable economic progress due to very strong fundamentals, policies, and policy frameworks. - GDP growth has averaged above 5 percent per year since 2021. - Inflation is rising toward the central bank’s target. - The risk of sovereign debt distress is low. - International reserves are at comfortable levels, and systemic financial stability risks are contained. - Fiscal policy and public debt: - Public debt has fallen steadily to below 60 percent of GDP, but reducing the debt burden to rebuild fiscal space is not yet complete. - The increase in the primary surplus embedded within the medium-term fiscal framework is appropriately paced but will require spending to be kept below the ceiling permitted by the fiscal rule. - Tax reforms should aim to increase equity, efficiency, and the revenue-to-GDP ratio, allowing for higher human capital, infrastructure, and social assistance spending. - Legislation to reduce revenues should be avoided. - Public employment and spending quality: - Full implementation of the public employment law would improve the quality of spending. - Legislative proposals aimed at amending the law would significantly undermine progress in containing the public-sector wage bill and should be avoided. - Sovereign asset and liability management, and social security: - Efforts to reduce interest costs should continue and the disputed claim by the social security system should be resolved. - Recommendations include improving sovereign asset and liability management and granting the executive branch more flexibility in issuing external debt. - Addressing the social security system’s claim on the central government will require improving the CCSS’s registries of beneficiaries, clarifying which benefits are covered by the central government budget, and reforming CCSS’s governance and accountability. - Monetary and exchange rate policies: - The BCCR’s inflation targeting regime is working well; there is scope to further strengthen its de jure institutional framework. - If convergence of inflation to the 3 percent target weakens, there is room to cut the policy rate further. - Proposals to improve BCCR governance, transparency, and accountability, and institutionalize the central bank’s de facto autonomy should be approved by the legislature. - The exchange rate should be allowed to flexibly adjust to market conditions; further accumulation of international reserves is unnecessary and foreign exchange intervention should be used sparingly to address market volatility. - The non-financial public sector’s reliance on the BCCR as an FX intermediary should be reduced. Regulatory limits on foreign investment should be adjusted in a phased manner. - Financial sector oversight and crisis management: - There is scope to further capitalize on the significant progress made in financial sector oversight. - Indicators of financial soundness remain comfortable, yet the resolution of small non-bank financial institutions last year highlights the importance of a very strong supervisory and crisis management framework. - The Legislative Assembly should prioritize passing the proposed amendments to the bank resolution and deposit insurance law. - Supply-side reforms and productivity: - Advancing supply-side reforms would help sustain Costa Rica’s impressive economic performance. - Boosting graduation rates and aligning curricula with workforce needs will help reduce skills mismatches. - Enhancing infrastructure quality and implementing legislation on public private partnerships would further strengthen potential growth. - Better integrating climate considerations into public investment decisions will make infrastructure more resilient against natural disasters. - Removing barriers to competition and formal employment would strengthen long-term growth. *Source: IMF staff summary as presented in the original content unit.* ### 44. Staff recommends that the next Article IV consultation take place on the standard 12- ### Costa Rica: IMF Staff Report Extract ### Article IV recommendation and IMF engagement - Staff recommends that the next Article IV consultation take place on the standard 12-month cycle. - With CRI’s credit outstanding to the Fund exceeding 200 percent of quota, a Post-Financing Assessment (PFA) was initiated and the first report published in December 2024. - PFAs are generally expected on an annual cycle as long as credit outstanding exceeds 200 percent of quota and there is no current financing arrangement in place. ### Real sector developments - Real GDP (annual percent change): - 2021: 7.9 - 2022: 4.6 - 2023: 5.1 - 2024: 4.0 - 2025: 4.3 - 2026: 3.5 - 2027: 3.5 - 2028: 3.4 - 2029: 3.5 - 2030: 3.5 - 2031: 3.5 - 2032: 3.5 - Domestic demand (annual percent change) and components shown in figures (private consumption, public consumption, investment, exports, imports, inventory building) underpin contributions to growth (see figure series). ### External sector highlights - Current account balance (percent of GDP): - 2021: -3.2 - 2022: -3.3 - 2023: -1.4 - 2024: -1.9 - 2025: -1.4 - 2026: -1.9 - 2027: -1.8 - 2028: -1.9 - 2029: -1.6 - 2030: -1.5 - 2031: -1.6 - 2032: -1.6 - Trade balance (percent of GDP) and services contributions (including travel) detailed in tables and figures; exports of goods and services (millions of U.S. dollars) shown in memorandum items. - Gross international reserves (millions of U.S. dollars): - 2021: 6,921 - 2022: 8,724 - 2023: 13,261 - 2024: 14,441 - 2025: 14,181 - 2026: 15,174 - 2027: 14,932 - 2028: 15,792 - 2029: 16,485 - 2030: 17,301 - 2031: 18,026 - 2032: 18,869 ### Fiscal sector developments - Central government overall balance (percent of GDP): - 2021: -5.1 - 2022: -2.8 - 2023: -3.3 - 2024: -3.7 - 2025: -3.8 - 2026: -3.2 - 2027: -3.2 - 2028: -2.8 - 2029: -2.5 - 2030: -2.3 - 2031: -2.0 - 2032: -1.7 - Central government primary balance (percent of GDP): - 2021: -0.3 - 2022: 2.1 - 2023: 1.6 - 2024: 1.3 - 2025: 1.1 - 2026: 1.6 - 2027: 1.3 - 2028: 1.5 - 2029: 1.6 - 2030: 1.6 - 2031: 1.7 - 2032: 1.7 - Central government debt (percent of GDP): - 2021: 67.6 - 2022: 63.0 - 2023: 61.1 - 2024: 61.1 - 2025: 59.8 - 2026: 60.8 - 2027: 59.7 - 2028: 59.0 - 2029: 57.9 - 2030: 56.7 - 2031: 55.3 - 2032: 53.7 - Central government revenues and expenditures (billions of colones) and composition (tax revenue, nontax revenue, current noninterest, wages, goods and services, transfers, interest, capital) presented in Table 2. ### Monetary and financial sector indicators - Policy and retail interest rates, inflation, credit growth, asset quality, and banking sector capitalization/profitability are presented in figures and tables. - Credit to the private sector (percent change, annual): - 2021: 3.7 - 2022: 3.3 - 2023: 1.9 - 2024: 6.5 - 2025: 6.2 - 2026: 6.7 - 2027: 6.4 - 2028: 6.5 - 2029: 6.6 - 2030: 6.7 - 2031: 7.1 - 2032: 7.2 - Financial soundness indicators (end-Dec series): - Risk-adjusted capital ratio around 16.7–19.1 across years shown. - Nonperforming loans to total loans around 2.1–2.5 across series. - Return on assets (ROA) around 0.6–1.0; Return on equity (ROE) around 4.6–7.0. ### Gross external financing needs and financing sources - Gross external financing needs (millions of U.S. dollars), projected: - 2021: -9,336 - 2022: -11,985 - 2023: -8,937 - 2024: -12,493 - 2025: -13,903 - 2026: -13,519 - 2027: -15,528 - 2028: -15,876 - 2029: -17,134 - 2030: -18,502 - 2031: -20,666 - 2032: -22,213 - Gross external financing sources (millions of U.S. dollars), projected: - 2021: 8,182 - 2022: 10,409 - 2023: 8,514 - 2024: 11,242 - 2025: 12,652 - 2026: 12,073 - 2027: 14,131 - 2028: 14,783 - 2029: 16,342 - 2030: 18,091 - 2031: 20,318 - 2032: 22,245 - Change in international reserves (increase +, millions of U.S. dollars): - 2021: 263 - 2022: -1,803 - 2023: -4,537 - 2024: -1,180 - 2025: -920 - 2026: -733 - 2027: -751 - 2028: -860 - 2029: -693 - 2030: -816 - 2031: -725 - 2032: -843 ### IMF credit, obligations, and scenarios - Outstanding IMF credit based on existing and prospective drawings (Millions of SDRs), projected: - 2024: 1,930.1 - 2025: 1,791.6 - 2026: 1,740.0 - 2027: 1,636.9 - 2028: 1,465.0 - 2029: 1,258.8 - 2030: 1,052.5 - 2031: 846.3 - 2032: 691.6 - 2033: 588.5 - 2034: 526.4 - 2035: 471.0 - 2036: 415.6 - 2037: 360.2 - 2038: 304.8 - 2039: 249.3 - 2040: 193.9 - 2041: 138.5 - 2042: 83.1 - 2043: 27.7 - 2044: 0.0 - Total obligations based on existing and prospective credit (Millions of SDRs) and relative metrics (percent of exports, percent of gross international reserves, percent of government revenue, percent of public external debt service, percent of GDP, percent of quota) are presented in Table 7. - Net use of IMF credit (millions of SDRs) path shown (e.g., 2024: 1,930.1; 2025: -138.5; 2026: -51.6; 2027: -103.1; 2028: -171.9; 2029: -206.2; …; 2043: -27.7; 2044: 0.0). *Source: Central Bank of Costa Rica and IMF staff estimates.* ### Annex I. Implementation of Past Fund Policy Advice ### Annex I. Implementation of Past Fund Policy Advice ### Fiscal policy and debt sustainability - Recommendation: Pursue further consolidation to create more space for spending to improve public services and respond to shocks through a mix of spending restraint and revenue measures. - Implementation status and findings: - Structural consolidation has continued though one-offs reduced the primary balance in 2024 compared to 2023. - The fiscal rule has safeguarded spending discipline. - Proposals to increase the equity and efficiency of the tax system have not yet been approved, while legislators have approved reforms that erode revenues. - Actions to improve efficiency of spending: - Public Employment Bill implemented by institutions under MIDEPLAN’s purview and ongoing in others. - Reforms to improve targeting and efficiency of social spending undertaken. - Public financial and debt management: - Laws creating a unified debt management office and centralizing cash balances in a Treasury Single Account approved. - New Public Investment Law as well as project appraisal and selection guidelines aim to improve Public Investment Management. ### Monetary and financial stability - Recommendation: Loosen monetary policy to a neutral stance, keep monetary policy data-dependent and forward-looking. - Implementation status and findings: - Stance loosened to be broadly consistent with neutral before end-2024. - Monetary policy continues to be transparent and well-communicated. - Institutional autonomy and governance: - A subset of key recommended amendments is advancing through the Legislative Assembly. - Constitutional amendment was submitted to the Assembly. - FX intervention and market development: - Based on the Integrated Policy Framework, limit FX intervention to periods of excessive volatility and develop the FX market. - Interventions in the exchange market have been focused on those to build reserves. - Limited progress on FX market development. - Financial oversight: - Risk-based supervision is being scaled up. - Proposed legal amendments to the Bank Resolution and Deposit Insurance Law that would strengthen supervisory powers/protections and improve the crisis management framework are advancing through the legislative process. ### Structural reforms and climate-related policy - Recommendations: Improve productivity and inclusiveness; continue with climate change adaptation and mitigation including by enabling climate finance. - Implementation status and findings: - Measures to incentivize formalization enacted. - Regulations streamlined to reduce red tape. - Guidelines to strengthen infrastructure resilience published. - Top-down stress-testing methodology developed but application subject to pending legal decisions on data sharing. - Bill submitted to enhance PPP framework and facilitate establishment of a project preparation facility. --- ### Annex II. External Sector Assessment ### Overall assessment and outlook - Overall Assessment: The external position of Costa Rica in 2024 was stronger than the level implied by fundamentals and desirable policies. - Current account trajectory: - Current account (CA) deficit of 1.4 percent of GDP in 2024. - CA deficit expected to widen to1.8 percent of GDP in 2025 (reflecting the impact of US tariffs announcement on April 2), further deteriorating to 1.9 percent of GDP in 2026, before gradually stabilizing around 1.6 percent of GDP over the medium term. - Policy implications: - Authorities’ fiscal consolidation (mainly driven by spending restraint) and BCCR’s forward-looking and data-dependent monetary policy should continue to support external sustainability. - Gross international reserves are assessed as adequate; limited rationale to intervene in the FX market to accumulate additional reserves. - Authorities should allow the exchange rate to adjust more flexibly to market conditions. - Structural reform agenda (diversifying markets and trading partners, deepening integration into global value chains and attracting FDI) expected to support medium-term external position. ### Foreign assets and liabilities (position and trajectory) - NIIP and components: - NIIP reached -40.33 percent of GDP in 2024, up from -44.38 and -57.56 percent of GDP in 2023 and 2022, respectively. - Foreign assets in 2024: 61.4 percent of GDP (mostly portfolio and other investments assets: 57.4 percent of total; international reserves: 24.2 percent of total). - Foreign liabilities in 2024: 101.8 percent of GDP (FDI: 69.5 percent of total; other investments: 20.6 percent; portfolio: 9.9 percent). - External debt: 42 percent of GDP in 2024, almost 10 percentage points down from the level in 2022. - Projection: external debt slightly increase to 44-45 percent in the medium term. - Short-term external debt: about 14.5 percent of external debt at short-term maturity; nearly all external debt denominated in foreign currency. - Assessment: - Significant gross external liabilities mitigated by substantial FDI share. - FDI inflows robust, exceeding 70 percent of GDP in 2024, particularly in advanced manufacturing and technology industries. - The ES model indicates the positive CA gap implies the CA is higher than level required to stabilize the NIIP. Key 2024 (% GDP) figures: - NIIP: -40.33 - Gross Assets: 61.4 - Debt Assets: 28.39 - Gross Liab.: 101.8 - Debt Liab.: 30.00 ### Current account analysis - Background and trends: - CA deficit narrowed to 1.4 percent of GDP in 2024, below the five-year average of 2.2 percent, driven by strong exports and favorable terms of trade. - Medium-term offsetting factors: increased imports and larger net primary income outflows from higher returns on foreign investments and public debt service payments. - Model assessments: - EBA CA model: cyclically adjusted CA balance of 0.4 percent of GDP; cyclically adjusted CA norm of -3.3 percent of GDP → current account gap of 3.7 percent of GDP in 2024. - Fiscal balance gap reflects relatively tighter fiscal stance due to fiscal consolidation under the 2021-2024 EFF program. - EBA external sustainability (ES) model indicates a CA gap of 3.1 percent of GDP (CA deficit larger than level needed to stabilize net foreign assets at the 2024 level). - Trade policy developments: - 2023: free trade agreement with Ecuador. - 2024: became a member of the Pacific Alliance. - Began a trade agreement with the UAE earlier in the year. - Soon to become member of the CPTPP; began negotiations of a trade agreement with Israel. ### Real exchange rate (REER) - Background: - Average REER in 2023 appreciated by 15.2 percent, mostly driven by nominal appreciation; average NEER appreciation of 19.4 percent compared with average 2022 NEER. - As of 2024Q3, average appreciation relative to 2023 averages: REER up 3.2 percent; NEER up 6.2 percent. - Assessment: - EBA CA model implies a REER undervaluation of 13.7 percent (semi-elasticity of 0.27 applied). - EBA REER index and level models estimate overvaluations of 8.9 and 29.6, respectively, in 2024. - ES model estimates an undervaluation of 11.5. - Assessment relies on the CA model given weaker fit of REER models. ### Capital and financial accounts - Flows in 2024: - Net FDI inflows increased to 4.5 percent of GDP (from 4.3 percent in 2023). - Inward FDI represented 86.6 percent of net inward capital flows (debits). - Net FDI (debit and credit) accounted to 331.2 percent of the CA. - Portfolio investments: net outflows of 3.2 percent of GDP in 2024 (compared with net outflows of about 0.5 percent of GDP in 2023); downward trend since 2022 (4.1 percent of GDP). - Other investments (mostly debt-creating inflows): moderated to 0.4 percent of GDP in 2024 from about 2.2 and 4.7 percent in 2023 and 2022, respectively. - Assessment and policy implications: - Robust external financing structure with strong FDI inflows adequately covering the current account balance. - Portfolio investments abroad by pension funds increased in 2024 after declining since 2022H2. - Planned pension reform to restructure existing OPCs into generational funds by 2025 may promote international diversification and restart of capital flows. - Trend could be influenced by external and/or domestic financial conditions. ### FX intervention and reserves level - Reserves trajectory: - GIR reached US$13.3 billion in 2023 and US$14.2 billion in 2024, up from US$8.6 billion in 2022. - Reserve adequacy metrics (2024): - Gross International Reserves, 2024: Million of US dollars (2024) 14,181.0 - Million of US dollars (2023) 13,261.0 - ARA metric: 91.8 100-150 - ARA metric (floating) 1/: 140.4 100-150 - Short-term debt at remaining maturity: 157.4 100 - Broad money: 28.7 20 - Months of next year's imports: 5.3 3 - 1/ Metric adapted as if Costa Rica were classified as having a floating exchange rate regime. - FX intervention activity: - Substantial increase in FX interventions over the last two years. - BCCR net purchases: about US$3.7 billion in 2023 and US$2.3 billion in 2024 (up from US$2 million in 2022), in addition to reserve changes from external debt disbursements and service. - BCCR intermediary role for SOEs: 2024 intervention to address volatility amounted to US$10 million in net FX sales; intervention on behalf of SOEs amounted to US$5 million in net purchases. - Assessment and recommendations: - Given sufficient reserves and an external position stronger than medium-term fundamentals and desirable policies, limited rationale to accumulate more reserves. - Need concerted efforts including legal reforms to deepen FX markets and strengthen non-financial public sector’s ability to manage currency risks, reducing reliance on the BCCR as intermediary for FX transactions. - Regulatory limits on foreign investments by local pension funds need to be updated alongside FX market development; adjustments should be phased in and supported by FX market development. - Final assessment: In 2024, Costa Rica’s GIR is assessed to be comfortable based on various reserve adequacy metrics. --- ### Annex III. Sovereign Risk and Debt Sustainability Assessment ### Summary assessment and outlook - Overall DSA conclusion: Sustainable with high probability. - Mechanical signal: - The mechanical signal is low for a third year albeit sensitive to changes in the assumptions. - Final assessment informed by signals and scenarios, which postpone debt reduction and generate higher financing needs that could be comfortably met from domestic sources and regional partners. - Baseline projections and financing: - Under the baseline, public debt is assessed to remain sustainable with high probability. - Public debt projected to decline further below 60 percent of GDP in the short run and to 50 percent of GDP well within 10 years. - Gross financing needs estimated at about 7.5 percent of GDP this year and expected to decline. - Financing expected to come from official external sources, domestic debt, and Eurobonds. - Risk mitigation and data coverage: - Important risks to the outlook are mitigated by available financing, a fiscal rule that responds to the debt ratio, and the authorities' track record in taking corrective action. - Broader coverage beyond the central government would aid a more comprehensive assessment. - Climate and demographic risks: - Climate-related long-term debt risks are limited. - Debt risks from aging include an alternative baseline of slower GDP growth as well as scenarios illustrating pension and healthcare pressures in the absence of further reforms. ### Debt coverage and disclosures - Coverage choices and rationale: - Coverage in the DSA: central government (coverage of the central government due to data timeliness and quality concerns for the broader public sector). - Question: If central government, are non-central government entities insignificant? Yes. - Subsector inclusion in the chosen coverage (central government): Budgetary central government: Yes; Extra budgetary funds (EBFs): No; Social security funds (SSFs): No; State governments: No; Local governments: No; Public nonfinancial corporations: No; Central bank: No; Other public financial corporations: No. - Commentary on consolidated debt: - Coverage is of the central government; general government consolidated debt is lower than that for the central government alone partly on account of social security fund holdings of government securities. - Authorities are improving data timeliness, quality, and coverage including by adopting GFSM2014 standards and accrual methods to the general government. - Selected disclosure notes and indicative figures: - Reporting on intra-government debt holdings: <0.1% of GDP; Nonfinancial public corp. <0.3% of GDP; GG: expected State govt. Local govt. CG NFPS <0.2% of GDP; Debt securities 5.5% of GDP. - Consolidated GG debt 46% of GDP in (fragment in source). *Source: Annex I–III, "Annex I. Implementation of Past Fund Policy Advice" from the provided IMF content unit.* ### 2023. Consolidated PS debt 57%. ### 1criea2025001-print-pdf - 2023. Consolidated PS debt 57%. ### Public debt structure and recent dynamics - Consolidated PS debt 57%. - Central government perimeter shown for debt breakdown charts. - Currency & deposits: CPS 6.5% of GDP. - Commentary: Consistent with the Medium-term Debt Strategy, the authorities are expected to continue to benefit from multilateral funding in the short term. The authorities returned to the Eurobond market in 2023 and have conditional legislative approval for further issuance. - Debt composition indicators (central government perimeter, percent of GDP): - Debt by Currency: projections show mix of Foreign currency and Local currency across 2015–2033. - Public Debt by Holder (2015–2023): External private creditors, External official creditors, Domestic other creditors, Domestic commercial banks. - Public Debt by Governing Law, 2024: Domestic law, Foreign law ex. multilateral, Multilateral. - Debt by Instruments: Marketable debt and Nonmarketable debt (2020–2030). - Public Debt by Maturity: Residual maturity: 8.3 years; maturity buckets ≤ 1 year, 1-5 years, > 5 years. ### Baseline scenario and projections (Figure 4) - Public debt (Percent of GDP) actual and projected: - Actual 2024: 59.8 - 2025: 59.7 - 2026: 59.0 - 2027: 57.9 - 2028: 56.7 - 2029: 55.3 - 2030: 53.7 - 2031: 52.2 - 2032: 50.7 - 2033: 49.3 - 2034: 47.8 - Change in public debt (Percent of GDP): - 2024: -1.4 - 2025: -0.1 - 2026: -0.7 - 2027: -1.1 - 2028: -1.2 - 2029: -1.4 - 2030: -1.6 - 2031: -1.5 - 2032: -1.5 - 2033: -1.5 - 2034: -1.4 - Contribution of identified flows (Percent of GDP): - 2024: -1.7 - 2025: 0.1 - 2026: -0.6 - 2027: -1.0 - 2028: -1.1 - 2029: -1.3 - 2030: -1.5 - 2031: -1.5 - 2032: -1.5 - 2033: -1.4 - 2034: -1.4 - Primary deficit (Percent of GDP): - 2024: -1.1 - 2025: -1.3 - 2026: -1.5 - 2027: -1.6 - 2028: -1.6 - 2029: -1.7 - 2030: -1.7 - 2031: -1.7 - 2032: -1.7 - 2033: -1.7 - 2034: -1.6 - Noninterest revenues and expenditures (Percent of GDP): - Noninterest revenues: 15.1 (2024–2034, constant in table) - Noninterest expenditures: 14.0 (2024), 13.8 (2025), 13.7 (2026), 13.6 (2027–2028), 13.5 (2029–2034) - Automatic debt dynamics and components (Percent of GDP): - Automatic debt dynamics: 1.1 (2024), 1.2 (2025), 0.8 (2026), 0.5 (2027), 0.4 (2028), 0.3 (2029), 0.1 (2030), 0.2 (2031–2034) - Real interest rate and relative inflation: 4.3 (2024), 3.1 (2025), 2.8 (2026), 2.5 (2027), 2.4 (2028), 2.2 (2029), 2.0 (2030), 2.0 (2031), 1.9 (2032), 1.8 (2033–2034) - Real interest rate: 4.8 (2024), 2.9 (2025), 2.5 (2026), 2.3 (2027), 2.1 (2028), 2.0 (2029), 1.8 (2030), 1.7 (2031), 1.7 (2032), 1.6 (2033–2034) - Relative inflation: -0.5 (2024), 0.2 (2025), 0.3 (2026–2027), 0.2 (2028–2034) - Real growth rate: -2.5 (2024), -2.0 (2025–2029), -1.9 (2030–2031), -1.7 (2032–2033), -1.6 (2034) - Gross financing needs (Percent of GDP): - 2024: 9.4 - 2025: 7.7 - 2026: 7.3 - 2027: 6.2 - 2028: 6.8 - 2029: 7.0 - 2030: 6.7 - 2031: 6.1 - 2032: 5.7 - 2033: 6.5 - 2034: 6.7 - Debt service components (Percent of GDP): - Total debt service: 10.5 (2024), 9.1 (2025), 8.8 (2026), 8.7 (2027), 8.3 (2028), 8.7 (2029), 8.3 (2030), 7.8 (2031), 7.3 (2032), 8.2 (2033), 8.4 (2034) - Local currency debt service: 7.4 (2024), 5.9 (2025), 6.3 (2026), 5.2 (2027), 6.5 (2028), 5.9 (2029), 6.3 (2030), 6.0 (2031), 5.4 (2032), 6.2 (2033), 6.4 (2034) - Foreign currency debt service: 3.1 (2024), 3.2 (2025), 2.5 (2026), 2.6 (2027), 1.8 (2028), 2.7 (2029), 2.1 (2030), 1.8 (2031), 1.9 (2032), 2.0 (2033–2034) - Memo macro assumptions: - Real GDP growth (percent): 4.3 (2024), 3.4 (2025–2027), 3.5 (2028–2030), 3.4 (2031), 3.3 (2032), 3.3 (2033), 3.2 (2034) - Inflation (GDP deflator; percent): 0.0 (2024), 3.0 (2025), 3.2 (2026–2034 with small variations) - Nominal GDP growth (percent): 4.4 (2024), 6.5 (2025), 6.7 (2026), 6.8 (2027–2030), 6.6 (2031–2032), 6.5 (2033–2034) - Effective interest rate (percent): 8.3 (2024), 8.1 (2025), 7.7 (2026), 7.3 (2027), 7.1 (2028), 6.8 (2029), 6.6 (2030–2034, with small declines to 6.4 by 2034) - Commentary: Fiscal consolidation, a stronger currency, and strong GDP growth have significantly reduced debt since 2021. In 2024, debt reduction was driven by use of cash buffers (1% of GDP) and centralization of cash holdings in the Treasury Single Account (0.7%), which reduced financing needs. Looking ahead, a reduction in debt is expected to be supported by lower interest payments and a rising primary balance. In the short run, a moderate rise in cash balances is assumed. Although further centralization of cash balances, which would reduce debt, is likely, the projections prudently exclude this dynamic. ### Medium-term risk assessment (Figure 5) - Debt fanchart module: - Fanchart width: 49.1 (percent of GDP) - Terminal debt-to-GDP x27.6 - Debt fanchart index (DFI): 1.37 - Risk signal: Moderate (signal definitions: low if DFI < 1.13; high if DFI > 2.08) - Probability metrics: - Probability of debt non-stabilization (percent): 7.5 - Final Fanchart (Percent of GDP) contribution: 0.7 (percent of GDP) - Gross financing needs (GFN) module: - Average baseline GFN: 7.0 (percent of GDP) - Initial Banks' claims on the general government (pct bank assets): 9.9 - Change in banks' claims in stress (pct bank assets): 7.9 - GFN financeability index (GFI): 8.2 - Risk signal: Moderate (signal definitions: low if GFI < 7.6; high if GFI > 17.9) - Medium-term index and final assessment: - Medium-term index: combined signals produce final assessment: Risk signal: 5/ (final assessment) - Prob. of missed crisis, 2025-2030, if stress not predicted: 9.1 pct. - Prob. of false alarms, 2025-2030, if stress predicted: 45.5 pct. - Contingent liability stress test described: - Central government becoming liable for entire disputed claim by the CCSS of 8.5 percent of GDP, paid evenly over four years starting in 2026. Shock would postpone further debt reduction but not increase GFNs as much as default stress scenario. - Natural disaster shock: - Fiscal cost: 2.3 percent of GDP and a 0.7 percent of GDP reduction (context implies reduction in output or similar). ### Realism of baseline assumptions (Figure 6) - Commentary: Realism analysis does not trigger major concerns. The improvement in the primary balance is underpinned by the implementation track record and the MTFF. The spread is expected to be lower than before due to large use of more favorable multilateral financing sources and less pressure on local markets, though a lower share of multilateral finance is expected to increase the spread over the medium term. GDP growth projections are in line with recent averages, implied fiscal multipliers, and potential growth estimates. ### Long-term and sectoral risk modules - Long-term risk assessment (Figure 7) summary: - Staff baseline custom scenario: primary balance averaging 1.3 percent of GDP over the long term; GDP growth slowing to about 2.5 percent in 2050 due to declining labor force. Declining debt and GFN paths consistent with a low overall long-term risk. - Long-term variable assumptions for 2030 and 2034–2038 averages: - Real GDP growth: 3.5% (2030), 3.2% (2034–2038 average), custom scenario 2.9% - Primary Balance-to-GDP ratio: 1.7% (2030), 1.5% (2034–2038 average), custom scenario 1.3% - Real depreciation: -2.3% (both columns) - Inflation (GDP deflator): 3.2% (both columns) - Pensions (Figure 8): - Permanent adjustment needed in the pension system to keep pension assets positive for: - 30 years: 1.1% of GDP per year - 50 years: 2.7% of GDP per year - Until 2100: 4.3% of GDP per year - Commentary: Modelled demographic pressures run down assets by 2036; indexation to inflation instead of wages and linking retirement age to life expectancy could reduce costs by 2 percent of GDP by 2050. - Health (Figure 9) and demographics: - Scenario of higher spending per capita by 0.6 percent per year suggests contingent fiscal pressures that could prevent sustained declines in debt. - Climate change adaptation and mitigation (Figures 10–11): - Adaptation: standardized module adds investment costs of 0.3 percent of GDP in 2030-2034 and 0.1 percent of GDP in the long term — small effect on debt and financing needs (implicit assumption that investment cancels negative growth impact). - Mitigation: customized scenario (National Decarbonization Plan costing) based on 0.3 percent of GDP per year for a decade and permanent fuel revenue losses of 0.1 percent of GDP per year — small effect on debt and financing needs given Costa Rica's renewable electricity profile. ### Contingent liabilities and debt decomposition (Table 1) - Total public debt stock (end-2024) and shares: - Total debt stock: 57,373.8 (In US$); Percent total debt: 100.0%; Percent GDP: 60.2% - Debt service (2024–2026 in US$): 9,769.9 (2024), 9,698.9 (2025), 10,098.0 (2026) - Memo: Nominal GDP: 95,365.0 (2024); projected Nominal GDP: 95,365.0 (2025), 102,590.6 (2026), 108,600.1 (2026 listed again) - External debt: - External debt stock: 15,283.1 (In US$); Percent total debt: 26.6%; Percent GDP: 16.0% - External debt service (US$): 1,481.4 (2024), 2,088.5 (2025), 1,618.1 (2026) - Multilateral creditors (subtotal): - Multilateral creditors stock: 7,128.0 (In US$); Percent total debt: 12.4%; Percent GDP: 7.5% - Multilateral debt service (US$): 936.0 (2024), 997.8 (2025), 969.0 (2026) - IMF stock: 2,518.356 (In US$); Percent total debt: 4.4%; Percent GDP: 2.64% (debt service: 375.3 US$ shown) - World Bank stock: 1,504.8 (In US$); Percent total debt: 2.6%; Percent GDP: 1.6% (debt service: 158.5 US$ shown) - ADB/AfDB/IADB stock: 1,921.4 (In US$); Percent total debt: 3.3%; Percent GDP: 2.0% (debt service: 228.5 US$ shown) - Other Multilaterals stock: 1,183.4 (In US$); Percent total debt: 2.1%; Percent GDP: 1.2% (debt service: 173.6 US$ shown) - Bilateral creditors: - Bilateral creditors stock: 655.1 (In US$); Percent total debt: 1.1%; Percent GDP: 0.7% - Bilateral debt service: 51.1 (2024), 66.9 (2025), 65.1 (2026) - Paris Club: 326.7 (In US$); Percent total debt: 0.6%; Percent GDP: 0.3%; debt service 23.8 (2024) - Non-Paris Club: 328.4 (In US$); Percent total debt: 0.6%; Percent GDP: 0.3%; debt service 27.3 (2024) - Bonds and other international creditors: - Bonds: 7,500.0 (In US$); Percent total debt: 13.1%; Percent GDP: 7.9% - Bonds debt service: 494.3 (2024), 1,023.9 (2025), 584.1 (2026) - Other international creditors (same line repeated): 7,500.0 (In US$); Percent total debt: 13.1%; Percent GDP: 7.9%; debt service 494.3 (2024) - Domestic: - Domestic debt stock: 42,090.7 (In US$); Percent total debt: 73.4%; Percent GDP: 44.1% - Domestic debt service: 8,288.5 (2024), 7,610.4 (2025), 8,479.9 (2026) - Held by residents, total: 41,857.9 (In US$); Percent total debt: 73.0%; Percent GDP: 43.9% - Held by non-residents, total: 232.8 (In US$); Percent total debt: 0.4%; Percent GDP: 0.2% - T-Bills and Bonds combined: 42,004.2 (In US$); Percent total debt: 73.2%; Percent GDP: 44.0%; debt service: 8,184.8 (2024), 7,600.6 (2025), 8,469.9 (2026) - Loans: 86.6 (In US$); Percent total debt: 0.2%; Percent GDP: 0.1%; debt service: 103.7 (2024), 9.7 (2025), 10.0 (2026) - Contingent liabilities and guarantees (memo items): - Contingent liabilities total: 9,491.0 (In US$); Percent GDP: 16.5%; percent not shown for all years in table - Public guarantees: 844.8 (In US$); Percent total debt: 1.5%; Percent GDP: 0.9% - Other explicit contingent liabilities: 8,646.3 (In US$); Percent total debt: 15.1%; Percent GDP: 9.1% - Notes relevant to decomposition: - 1/ As reported by Country authorities according to their classification of creditors, including by official and commercial. Debt coverage is the same as the DSA. - 2/ Multilateral creditors are simply institutions with more than one official shareholder and may not necessarily align with creditor classification under other IMF policies (eg. Lending into Arrear). - 3/ Debt service figures reflect budgetary execution, which is not forecast beyond the current year at the creditor level. - 4/ Debt is collateralized when the creditor has rights over an asset or revenue stream that would allow it, if the borrower defaults on its payment obligations, to rely on the asset or revenue stream to secure repayment of the debt. Collateralization entails a borrower granting liens over specific existing assets or future receivables to a lender as security against repayment of the loan. Collateral is “unrelated” when it has no relationship to a project financed by the loan. - 5/ Includes other one-off guarantees not included in publicly guaranteed debt (e.g. credit lines) and other explicit contingent liabilities not elsewhere classified (e.g. potential legal claims, payments resulting from PPP arrangements). *Source: 1criea2025001-print-pdf - 2023. Consolidated PS debt 57%.* ### Annex IV. Risk Assessment Matrix ### Annex IV. Risk Assessment Matrix ### External risks: key events, likelihood, impact, and policy responses - Trade policy and investment shocks. - Likelihood: High - Impact: Medium - Policy response: - Strengthen and diversify trade, investment, and financial linkages by improving business environment, lowering trade costs (e.g., infrastructure, processing times) and implementing trade and investment agreements. - If inflation/expectations exceed the target, tighten monetary policy. - Tighter financial conditions and systemic instability. - Likelihood: Medium - Impact: High - Policy response: - Allow currency to depreciate in response to dollar strength but use reserves in case of disorderly conditions. - Grant executive more flexibility to borrow according to market conditions. - Preserve fiscal consolidation to contain financing needs and grow fiscal space in case needed to respond to weakening activity. - Further improve debt management to manage interest costs. - Regional conflicts. - Likelihood: Medium - Impact: Medium - Policy response: - Allow exchange rate to help absorb shocks to energy and food prices but use reserves in case of disorderly conditions. - Increase fiscal space for protection of social goals. - Global growth acceleration (upside scenario). - Likelihood: Low - Impact: Low - Policy response: - Remove bottlenecks (e.g. infrastructure, skills) to take advantage of upside opportunities. - Commodity price volatility. - Likelihood: Medium - Impact: Medium - Policy response: - Allow flexible exchange rate to help absorb shocks to energy and food prices but use reserves in case of disorderly conditions. - Adjust monetary policy stance to limit the impact on domestic inflation. - Increase fiscal space. - Sovereign debt distress. - Likelihood: High - Impact: Medium - Policy response: - Allow currency to depreciate in response to capital outflows but use reserves in case of disorderly conditions. - Grant executive more flexibility to borrow externally. - Preserve fiscal consolidation to contain financing needs and limit contagion. - Preserve financial sector’s capital and liquidity buffers to cushion the impact of capital outflows as well as to mitigate potential sovereign-bank feedback effects. - Deepening geoeconomic fragmentation. - Likelihood: High - Impact: Medium - Policy response: - Strengthen and diversify trade, investment, and financial linkages by improving business environment, lowering trade costs (e.g., infrastructure, processing times) and implementing trade and investment agreements. - Climate change (extreme climate events). - Likelihood: Medium - Impact: Medium - Policy response: - Build on reforms supported by the RSF arrangement and other measures supporting the implementation of public investment in adaptation and mitigation (e.g., resilient infrastructure, renewable energy, ecosystems conservation). - Create enabling environment for private-sector climate financing, including the introduction of climate-related financing instruments to channel capital flows to climate-related investments. ### Domestic risks: key events, likelihood, impact, and policy responses - Political fragmentation and reform fatigue (inability to pass key government reform measures; adverse initiatives). - Context: The government only holds 8 out of 57 seats. Costa Rica’s government has shown capacity to build coalitions in the Legislative Assembly to approve key legislation, including several complex reforms during the program. However, its ability to submit new reform proposals has significantly weakened more recently. - Likelihood: Medium - Impact: Medium - Policy response: - Continue to build coalitions across party lines in the Legislative Assembly and assess the macrocriticality of the ongoing proposals supported by the executive branch to elaborate strategies to get agreement in the legislative process. - Prioritize proposals to discuss in Legislative Assembly. - Communicate negative consequences of adverse initiatives. - Sudden surge of migration flows. - Likelihood: High - Impact: Medium - Policy response: - Increase priority social spending while safeguarding the fiscal consolidation process to ensure that public debt firmly remains on a downward trend. - Close coordination with key stakeholders and additional support from development partners could help Costa Rica cope with rising migration flows. - Loss of confidence in non-bank financial institutions (following intervention and resolution of Coopeservidores and Desyfin). - Likelihood: Low - Impact: Medium - Policy response: - Maintain adequate levels of capital and liquidity buffers. - Strengthen risk-based supervisory tools and processes for data quality and validation. ### Risk Assessment Matrix (RAM) methodology note - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). - Relative likelihood definitions: “low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent. - The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. *Source: Annex IV. Risk Assessment Matrix.* ### 7. The authorities are committed to the process of modernization. The authorities are ### 7. The authorities are committed to the process of modernization. The authorities are ### Modernization of fiscal statistics and GFSM2014 transition - Authorities are addressing challenges of collecting information from the financial statements of the institutional units of the public sector. - Ongoing efforts: strengthen consistency of institutional classification, update projection modelling, and expand coverage of instruments to encompass liabilities and financial assets. - The country is transitioning gradually to GFSM2014; transition is being implemented at the Central Government (CG) level before being extended to the broader public sector by 2027. - Since March 2023, monthly GFS statistics for consolidated central government revenues and expenditures (above the line) aligned with GFSM2014 are compiled and published, excluding accrued interest. - Transition risks: movement of classificators may cause breaks in the data; fiscal data discrepancies among national compilers on specific items are not regularly reconciled. - Technical assistance and capacity development provided or planned: CAPTAC-DR, FAD, and STA; MTFF adaptation to GFSM2014 (Jan 2025); Monthly Indicator of Economic Activity (MIEA, Oct 2024); PSDS: Compilation PSDS - CAPTAC (Sept 2024); GFS: Compilation GFS & PSDS - CAPTAC (May 2024); GDP-NA accounts (Jan 2024); TA - NA - ISA (Dec 2023). ### Comparison between GFSM2014 and National Method Estimates (Percent of GDP), 2019-2024 - Method / Year columns: 2019, 2020, 2021, 2022, 2023, 2024 - GFSM2014 (Revenue): 14.74, 13.64, 15.55, 16.20, 15.28, 15.04 - GFSM2014 (Expenditure): 20.11, 21.41, 20.87, 19.12, 18.50, 18.84 - GFSM2014 (Balance 1/ Net lending/borrowing): -5.37, -7.77, -5.32, -2.92, -3.21, -3.79 - National method (Revenue): 14.18, 13.09, 15.77, 16.59, 15.26, 15.09 - National method (Expenditure): 20.83, 21.05, 20.79, 19.11, 18.52, 18.86 - National method (Balance 2/ Overall surplus/deficit): -6.65, -7.96, -5.02, -2.52, -3.26, -3.77 - Difference (GFSM2014 minus National Method) (Revenue): 0.57, 0.55, -0.22, -0.39, 0.02, -0.04 - Difference (Expenditure): -0.72, 0.36, 0.08, 0.01, -0.02, -0.02 - Difference (Balance 3/ Negative number implies higher deficit under new GFSM 2014 methodology): 1.28, 0.19, -0.30, -0.40, 0.04, -0.01 - Source: Ministerio de Hacienda ### Data adequacy assessment and national statistics - Overall assessment: "The data provided to the Fund are adequate for surveillance." (explicitly stated) - General: quality of macroeconomic data has continued to improve; further improvements pursued in real, fiscal, and balance of payments sectors. - Principal agencies publish timely official data: Central Bank (www.bccr.fi.cr), Ministry of Finance (www.hacienda.go.cr), National Institute of Statistics and Census (www.inec.go.cr). - National accounts: - Compiled generally in accordance with the System of National Accounts 2008 (2008 SNA). - Annual national accounts: years 1991-2022; quarterly estimates up to 2024 Q3 (preliminary). - Quarterly estimates lag: around a 90-day lag and a 30-day lag for the preliminary estimate. - Benchmark year revised to 2017 (from 2012) for chained volume measures in late 2020; revision published January 2021. - Informal activity of households as producers is included in GDP levels. - Price statistics: - CPI compilation generally follows CPI Manual concepts and definitions; structure, scope, and coverage updated January 2021. - Index reference period: December 2020. - CPI weights based on 2018/2019 Income and Expenditure Survey. - CPI covers resident urban households only (explains rating "B" on coverage). - PPI follows PPI Manual; calculated by product and economic activity. ### Government Finance and Public Sector Debt Statistics - GFS compilation for surveillance generally follows GFSM 1986; country is transitioning to GFSM2014. - Public Sector Debt Statistics (PSDS): classification of domestic vs foreign debt follows market of issuance (Costa Rica or abroad) instead of internationally recommended holder residency criterion. - Quarterly PSDS for general government compiled and disseminated to the joint World Bank/IMF database with latest data for 2024 Q3. - Fiscal statistics are not regularly reconciled with monetary or other macroeconomic statistics. - Authorities committed to fully digitalize fiscal and tax information (Hacienda Digital) with work expected to be completed by the end of 2026. - Implementation of GFSM2014 was slowed by a cyberattack in April 2022, but significant milestones have been achieved. ### Corrective actions and capacity development priorities - Ongoing Capacity Development planned by CAPTAC-DR on GFS, complemented by FAD CD on integrating improved data in fiscal management with transition to GFSM2014. - Implementation approach: phased (Central Government first, broader public sector by 2027). - Need to include classifiers for the GFS transition in the calculation of debt. ### Monetary and financial statistics and financial sector surveillance - Central Bank of Costa Rica (BCCR) reports SRFs for central bank, other depository corporations, other financial corporations, and monetary aggregates monthly with a lag of one month to IMF IFS. - Reported monetary statistics broadly align with the Monetary and Financial Statistics Manual (MFSM). - BCCR expanded coverage to include MMF in the 2SR, non-MMF investment funds, pension funds, and insurance companies in the 4SR. - BCCR reports some key series and indicators of the Financial Access Survey (FAS). - Financial sector surveillance: Costa Rica reports 15 out of 18 core Financial Soundness Indicators (FSIs), 11 additional FSIs for deposit takers, and 2 additional FSIs for real estate markets monthly with less than one quarter lag. ### External sector statistics - BCCR compiles and disseminates quarterly balance of payments and IIP statistics on a BPM6 basis. - Work ongoing to improve coverage of financial transactions of the nonfinancial private sector (trade credit and advances) and remuneration of employees. - BCCR compiles and disseminates monthly Data Template on International Reserves and Foreign Currency Liquidity; reports semi-annual CPIS data and annual CDIS; submits quarterly external debt statistics to QEDS. ### Foreign exchange reserves coverage and costs - Role of reserves: meet FX demand by the Nonfinancial Public Sector (legal requirement), occasional intervention to smooth exchange rate fluctuations, maintain FX liquidity, contribute to financial system stability. - Dollarization remains high; residents can switch between deposits denominated in local and foreign currency. - ARA (Assessing Reserve Adequacy) results: - For non-floating exchange rate regimes, gross reserves = 92 percent of the ARA metric. - For floating exchange rate regimes (previous de facto regime), reserves = 140 percent of the ARA metric. - De facto exchange rate regime described as crawl-like arrangement with appreciation within a 2 percent band. - Other metrics and buffers: - An extra buffer of about US$ 0.6 billion for additional FX demand by oil importers is comfortably accommodated. - Coverage above 100 percent when augmenting external financing needs with a buffer of $1.4 billion (one standard deviation of sum of portfolio and other flows) for a capital flight scenario. - FX coverage in support of financial stability seems satisfactory. - Netting and contingent credit access: - Excluding temporary borrowed resources such as IMF credit outstanding increases net-reserves coverage across metrics. - Accounting for access to contingent credit lines (such as the Latin American Reserve Fund) further boosts liquidity. - Costs of holding reserves: - Costa Rica’s spreads averaged 216 basis points in 2024. - Accounting for negative effect of FX reserves on spreads reduces marginal cost by about 25 bps. - Applying marginal costs to end-2024 reserves implies an annual cost of 0.3 percent of GDP. - Opportunity cost of holding reserves in excess of minimum ARA threshold under previous de facto floating regime is 0.1 percent of GDP per year. - Sterilization costs recently negative because of a positive differential between U.S. and Costa Rican monetary policy rates. - Opportunity costs proxied by local currency long-term yields are substantially higher. - Calculations do not account for valuation effects, which have contributed to volatility in returns. - Cost implications of less flexible exchange rate regimes: - Under current non-floating exchange rate regime, reserves are assessed to be below the minimum ARA threshold. - Extra coverage prescribed by the ARA metric would add about 0.1 percent of GDP to Costa Rica’s annual costs. - An excessively large BCCR footprint in the FX market can stifle monetary policy transmission, FX market development, financial sector de-dollarization, and the shock-absorbing role of a flexible exchange rate. ### Reserve Coverage Indicators, 2024 (levels and percent of metric) - USD million (end-2023) Gross: 132,618; Net (EFF definition)1: 126,610; Net2: 86,713; Gross (incl. FLAR)3: 138,07 - USD million (levels): 141,817; 95,411; 64,811; 56,72 - Percent of GDP: 158; 121; 6 - ARA (not float)4: 92, 52, 75, 102 - ARA (float)5: 140, 79, 115, 5 - ARA (oil buffer)6: 132, 74, 109, 146 - 3 months' imports7: 177, 99, 145, 196 - Short-term debt: 157, 88, 129, 174 - External Financing Needs (EFN)7: 138, 77, 113, 152 - EFN + domestic capital flight8: 122, 69, 100, 135 - EFN + oil buffer6: 130, 73, 107, 144 - Banking sector FX liabilities9: 66, 37, 54, 73 - Source: BCCR, FLAR, and IMF staff estimates. - Notes included in source: - 1/ Definition used for completed EFF arrangement. Excludes outstanding IMF credit, non-government FX deposits by residents, and liabilities to nonresidents in convertible FX. - 2/ Excludes outstanding FLAR credit (0 in 2024) and IMF credit. - 3/ Includes access to FLAR resources of 2.5 times Costa Rica's paid in capital. Excludes World Bank CAT DDO access. - 4/ Metric for when not classified as having a floating exchange rate regime. - 5/ Metric for when classified as having a floating exchange rate regime. - 6/ Coverage needed adds a 1 std-deviation rise in oil import values for 2025 to ARA (float) or EFN. - 7/ Short-term debt plus current account deficit (if in deficit). - 8/ Coverage needed adds a 1 std-deviation rise in net non-FDI outflows. - 9/ Liabilities to residents and non-residents. *Source: IMF staff report content provided in the PDF chapter.* ### 5. Reserve coverage is at decadal highs, ### 5. Reserve coverage is at decadal highs, but costs are below pre-pandemic levels ### Current coverage and cost findings - Since early 2022, coverage has risen to its highest since at least 2015. - Opportunity costs proxied by spreads are well below pre-pandemic averages following a sharp decline since 2020. - On average, annual costs by this measure have been 0.5 percent of GDP. - Using monetary policy rate differentials as a proxy, costs have averaged 0.3 percent of GDP. - 2015-2024 average is about 200 bps (monetary policy rate differential reference). ### Projections and scenario signals - The floating ARA metric is expected to rise in nominal terms but only reach end-2024 reserves levels in 2029. - Costs implied by monetary policy differentials are expected to rise—a return to neutral in the U.S. would imply a differential of about 150 bps. ### Costa Rica in comparative context - Costa Rica’s FX coverage is in line with peers, but costs are above average. - Compared to regional peers, Costa Rica’s ARA coverage was slightly lower and spreads were slightly higher. - In a broad sample of investment grade emerging markets, average ARA coverage was seven percentage points lower than Costa Rica’s, but low spreads in Asia drove average costs significantly below Costa Rica’s. ### Key numeric indicators (as reported) - On average, annual costs (spreads proxy): 0.5 percent of GDP. - On average, annual costs (monetary policy differential proxy): 0.3 percent of GDP. - Monetary policy differential reference: 2015-2024 average is about 200 bps. - U.S. neutral scenario differential implication: about 150 bps. - Floating ARA nominal level expected to reach end-2024 reserves levels in 2029. *Source: IMF staff calculations and BCCR, Bloomberg data as presented in the chapter.* ### 2020. Since the last assessment in 2009, the BCCR has enhanced safeguards in its external audit ### 1criea2025001-print-pdf - 2020. Since the last assessment in 2009, the BCCR has enhanced safeguards in its external audit ### Safeguards, Legal Framework, and Governance - Since the last assessment in 2009, the BCCR has enhanced safeguards in its external audit mechanism and financial reporting. - Most recommendations have been implemented, but some areas for improvement remain in the legal framework and governance arrangements. - Specific legal and governance issues identified: - The BCCR Law, last amended in 2019 to improve personal autonomy provisions, requires further amendments to safeguard the central bank's institutional, functional, and financial autonomy. - Need to further strengthen the decision-making structure of the BCCR, clearly distinguishing between executive and oversight functions. - Need to safeguard the independence of internal audit. - Legislative actions submitted in 2024 (pending consideration by the Legislative Assembly) to address remaining Safeguards Assessment recommendations on transparency, accountability, and autonomy. - Staff will continue monitoring the implementation of these recommendations per the safeguards policy for as long as Fund credit remains outstanding. ### Technical Assistance (TA) and Capacity Development (CD) - Costa Rica’s capacity development efforts since the 2021 Article IV Consultation were aligned with reform objectives under the EFF and RSF arrangements. - Costa Rica is expected to remain a heavy user of CD as it maintains reform momentum and institutionalizes progress made under IMF-supported reform programs. - Main CD objectives: - Consolidate achievements to date. - Make further progress on macro-critical reform priorities, including: - Further improving fiscal institutions and implementing fiscal reforms to boost private investment and support inclusive and green growth while ensuring debt sustainability. - Further strengthening the central bank’s autonomy and governance and the supervisory and crisis management framework. - Financial sector supervision and crisis management. - Advancing structural reforms to incentivize private investment and support inclusive and green growth. - Engagement and ownership by the authorities remain strong. - Integration and coordination of CD activities with program priorities and other technical assistance are ongoing and facilitated through regular publications. ### Recent Macroeconomic Developments (first quarter of 2025) - Inflation: - Year-on-year headline inflation averaged 1.2 percent (0.0 percent in the previous quarter and 0.8 percent last December). - Core inflation remained below 1.0 percent. - BCCR considers monetary and credit aggregates in the first three months of 2025 will not generate inflationary pressures that exceed the inflation target in the next 24 months. - Growth: - GDP growth registered an increase of 3.9 percent in Q1 2025. - This rate is higher than the global economy forecast of 2.8 percent for 2025. - External accounts and reserves: - Current account deficit: 0.2 percent of GDP. - Direct investment inflows: 1.3 percent of GDP. - Net external financing in Q1 2025: 0.6 percent of GDP (0.3 p.p. higher than same period previous year). - Reserve asset accumulation in Q1 2025: around 0.4 percent of GDP. - Balance of reserve assets at end-March: USD 14,645.7 million (14.3 percent of GDP). - Net international reserves (IR) tracking indicator: 143.1 percent of the minimum adequate level defined by the Board of Directors of the Central Bank. - Monetary policy: - Three monetary policy meetings in Q1 2025: January 23, March 13, and April 10. - Monetary Policy Rate (TPM) maintained at 4.0 percent annually since October 17, 2024. - On April 10, the BCCR cited higher probability of inflation below central projection and uncertainty about global trade measures as reasons for caution in TPM movements. - Exchange rate policy: - In accordance with its Organic Law, the BCCR will participate in the foreign exchange market to meet its own requirements and those of the non-banking public sector and to mitigate disruptive fluctuations. - If conditions allow, the BCCR may seek to further strengthen the country's financial shield cautiously, according to parameters and guidelines defined by its Board of Directors. ### Fiscal Developments and Medium-Term Fiscal Framework (MTFF) - Early 2025 fiscal balances (first two months): - Central government primary balance: 0.1 percent of GDP. - Central government financial balance: -0.8percent of GDP. - Comparable figures in same period previous year: 0.3 percent (primary) and -0.8 percent (financial). - 2024 fiscal outcomes: - Primary fiscal surplus for the third consecutive year. - Debt reached 59.8 percent of GDP. - MTFF baseline scenario projections for 2025–2026: - Primary surplus would increase to 1.3 percent of GDP in 2025 and 2026. - Overall financial deficit projected to improve to 3.3 percent of GDP in 2025 and 3.1 percent of GDP in 2026. - Debt ratio projected to reach 59.5 percent of GDP in 2025 and 59.1 percent of GDP in 2026. - Fiscal strategy: - Commitment to medium-term fiscal consolidation anchored in sizable primary surpluses and a decreasing trajectory of interest spending in terms of GDP. - Continued reform agenda to improve debt management, promote a fairer tax system, and consolidate primary surpluses to gain fiscal space. - MoF will continue reforms to reinforce fiscal consolidation and create buffers while protecting the poor. ### Outlook, Risks, and Policy Priorities - Growth and inflation outlook: - Economic growth estimate: 3.6 percent for 2025 and 3.8 percent for 2026. - Projected headline inflation would return to the tolerance range around the target in Q1 2026. - Core inflation would return to the tolerance range in Q4 2025. - Risks to the inflation forecast are skewed downward amid much greater uncertainty; the Central Bank does not foresee inflationary pressures exceeding its target under plausible scenarios. - Policy priorities and reforms: - Continue strengthening central bank autonomy, governance, and operational framework through legislative proposals in Congress to improve governance, transparency, accountability, and institutionalize de facto autonomy. - Continue efforts to secure a vote on the bank law resolution as soon as possible. - Maintain prudent monetary policy based on forward-looking and data-dependent analysis; improve public communication on monetary policy decisions. - Pursue climate-related reform agenda and leverage RSF’s catalyzing effect to further improve climate resilience and fully decarbonize the economy. - Reinforce fiscal sustainability, diversify the economy, invest in infrastructure and human capital, and maintain close engagement with the IMF. *Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1criea2025001-print-pdf.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1criea2025001-print-pdf.pdf_