## 1criea2026001 ## Source details **Canonical URL:** [1criea2026001](https://www.imf.org/-/media/files/publications/cr/2026/english/1criea2026001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2026/english/1criea2026001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2026/english/1criea2026001.pdf.json) --- ### Context and recent macro‑financial developments - IMF engagement: - Access to the IMF’s Flexible Credit Line (FCL) since June 2025; track record of policies largely aligned with staff’s advice. - Political developments: - On February 1, 2026, Laura Fernández of the Sovereign People’s Party (PPSO) won the presidential election; government took office on May 8. - PPSO secured 31 of 57 seats in the Legislative Assembly. - Growth and labor market: - Growth increased by 4.6 percent y/y in 2025. - Growth outside of the free trade zones (definitive regime): 3 percent y/y in 2025. - Growth in the FTZs: 12.7 percent y/y in 2025. - Production outside FTZs accounts for around 80 percent of GDP. - Unemployment: 6.7 percent in February 2026 (down from 7.4 percent a year earlier). - Employment growth slowed in trade, tourism, and professional services; labor force participation weakened. - Authorities rebased national accounts in November 2025 (base year updated from 2017 to 2022) and implemented the System of National Accounts 2025 (2025 SNA). - Inflation and monetary policy: - Headline inflation: -2.1 percent y/y in March 2026 (eleventh consecutive month of deflation). - Core inflation: 0 percent y/y in March 2026. - One-year-ahead inflation expectations below the BCCR’s tolerance range (2–4 percent) since June 2025. - BCCR reduced its policy rate by 25 basis points in July, September, and December 2025. - Ex‑ante real policy rate (deflated by one-year ahead inflation expectations) remains above neutral. - Credit and financial sector: - Credit growth: 3.6 percent y/y in 2025. - Banks’ aggregate NPL ratio: 2.1 percent as of December 2025. - Signs of declining profitability due to more stringent loan loss provisioning. - External sector and reserves: - Current account deficit narrowed by 0.2 percentage point to 0.7 percent of GDP in 2025. - International reserves: US$17 billion at end‑2025, equal to 5.8 months of prospective imports and 104 percent of the IMF reserve adequacy (ARA) metric. - Colón appreciation: 2.2 percent in 2025 and an additional 9 percent as of end‑April 2026. - Sovereign spreads declined to around 130 basis points in April 2026; Moody’s and S&P upgraded the sovereign. ### Drivers of the colón appreciation (SVAR evidence) - Methodology: - Bayesian structural vector autoregression (SVAR) with sign restrictions using daily data over January 2015–March 2026. - Key identified drivers since July 2022: - Domestic monetary tightening (notably during 2022–23). - Favorable terms‑of‑trade (TOT) shocks (higher agricultural export prices and lower oil import prices). - Strong domestic growth: robust goods exports, FDI, and sustained tourism flows. - External factors since 2024: pause and then easing of U.S. monetary policy (late 2023 and late 2024) led to U.S. dollar depreciation; adverse U.S. growth shocks (including after April 2025 tariff announcements) further weakened the U.S. dollar. - BCCR’s net FX purchases marginally mitigated appreciation pressures; appreciation largely driven by Costa Rica’s fundamentals and institutional frameworks. ### Fiscal developments, tax policy, and public debt - Fiscal outcomes: - Primary surplus narrowed to 0.9 percent of GDP in 2025. - Overall deficit fell to 3.4 percent of GDP in 2025. - Central government debt: 60.4 percent of GDP by end‑2025 (partly due to accumulation of cash buffers). - Fiscal stance and projections: - Staff projects a broadly neutral fiscal stance in 2026–27. - Primary balance projected at around 0.9 percent of GDP in 2026 (unchanged relative to 2025 after extracting business cycle effects). - Under staff baseline, central government debt expected to reach 54 percent of GDP by 2035 (assessed as sustainable with a low risk of sovereign distress). - Recommended revenue measures and estimated yields (reported exactly): - Corporate income tax (Single CIT rate and revised regime for small taxpayers): "0.0 0.1 0.0 0.1" - Removing tax expenditures: "0.5 1.1 0.5 1.6" - Feebate scheme (assumed revenue neutral): "0.0 0.0 0.0 0.0" - Personal income tax (Reduce PIT threshold for salaried workers and raise marginal rate on highest earners): "0.0 0.1 0.0 0.1" - Revenue measures total: "0.5 1.3 0.5 1.8" - Recommended expenditure reallocation (reported exactly): - Expenditure measures: "-0.5 -0.8 -0.5 -1.3" - Infrastructure investment: "-0.5 0.0 -0.5 -0.5" - Other social and public services (education, elderly care, childcare, targeted social programs, non‑contributory pensions, security, primary and preventative care): entries ranging between "0.0" and "-0.2" as presented. - Memorandum items (reported exactly): - Primary balance (baseline): "0.9 0.9" - Primary balance (reform scenario): "0.9 1.4" - Fiscal impulse (baseline): "0.0 -0.1" - Fiscal impulse (reform scenario): "0.0 -0.6" - Government debt (baseline): "61.1 61.4" - Government debt (reform scenario): "61.1 60.9" - Tax expenditures and distribution: - Over 400 tax expenditures. - Tax expenditures estimated at "4 percent of GDP in 2024." - Tax expenditures accounted for "31 percent" of total tax revenues in 2023. - VAT basic basket expenditures: "Just 18 percent of the 1 percent of GDP in tax expenditures related to the basic basket of goods benefit the lowest 20 percent of income earners." "21½ percent for the top earning quintile." Corresponding to "6 and 1 percent respectively, of those households’ gross incomes." - Recent fiscal measures and administration gains: - Gradual reduction in the selective consumption tax and increase in income tax thresholds for the self‑employed. - Improved tax administration yielded an additional "0.3 percent of GDP in tax collections during 2025." - Reducing personal income tax thresholds for salaried workers and raising the marginal rate on the highest income earners estimated to raise "0.1 percent of GDP." ### Social security, pensions, and healthcare fiscal pressures - Central government transfers to CCSS: averaged about "1 percent of GDP since 2017." - CCSS claims on the government: estimated at "8½ percent of GDP" (largely disputed healthcare obligations; recorded as contingent liability). - Demographics: - Fertility rate: "2.4 children per woman in 2000" to "1.3 in 2023" (projected to stabilize around that level). - Life expectancy: "77 years in 2000" to "81 years in 2023" (projected to reach 85 years in 2050). - Old‑age dependency ratio: expected to increase from "18 percent in 2025 to 41 percent in 2050." - Pension projections: - Present discounted value of net IVM cash flows: "–10 percent of GDP." - Annual IVM deficits covered by reserves widen from "around 0.2 percent of GDP in 2024 to 0.5 percent of GDP in 2036." - With reserves exhausted, IVM cash flow deficits would be "around 1.7 percent of GDP by 2050" to be covered by the central government. - Healthcare (SEM) projections: - SEM reserves projected to run out by "2029." - Annual SEM cash flow deficit: "0.3 percent of GDP in 2024 to 0.8 percent of GDP in 2028." - After reserves exhausted, SEM deficit projected to widen to "3.3 percent of GDP in 2050." - Policy direction recommended: - Consider parametric reforms on the spending side for pensions and healthcare. - Expand investment in primary care, improve preventive services, reduce healthcare costs through new medical technologies and better procurement, and re‑examine coverage of expensive treatments. - Regular public reporting on system viability. ### Debt management and fiscal framework - Constitutional reform to permit external debt issuance by the executive within overall borrowing limit would diversify financing and reduce borrowing costs. - Interim issuance: three "€1 billion" domestic bonds in November 2025, and January and April 2026. - Legislative vote to permit issuance of "up to US$1.5 billion each year" noted as helpful for predictability. - Fiscal rule (enacted 2020) improved the overall fiscal balance by "5 percentage points of GDP" and reduced central government debt by "6.1 percentage points of GDP." - Authorities introduced explicit debt anchor: "50 percent of GDP by 2035" into MTFF. - Recommended institutional measures: expand fiscal rule coverage, prohibit ad‑hoc exclusions, operationalize the Fiscal Council, fully staff a macro‑fiscal unit. ### Monetary policy, transmission, and FX intervention - Monetary policy guidance: - BCCR should stand ready to bring inflation and inflation expectations back to target "in a sustained way." - Inflation target: "3 percent." - Staff note real policy rate above staff estimates of neutral and that inflation would remain below the central bank’s target until at least "2029," assuming oil prices follow the April 2026 WEO reference forecast. - Scope for a pause in monetary easing to evaluate supply shocks; resume policy rate cuts once effects are clearer to avoid deflationary dynamics. - Monetary policy transmission (Box 4 findings): - Pass‑through at 12 months: - Lending rate in CRC: around 65 percent. - Deposit rate in CRC: around 85 percent. - Lending rate in USD: around 35 percent. - Deposit rate in USD: around 25 percent. - Heterogeneity: CRC lending rate pass‑through estimated to be complete for private banks and less than half for public banks. - Incomplete pass‑through linked to dollarization and market frictions. - FX intervention: - Continued central bank FX intervention in 2026 (reserve accumulation, NFPS operations, addressing excessive volatility) weakens monetary transmission and hinders FX derivatives market development. - Policy recommendation: limit FX interventions to ensure orderly market conditions in large shocks and episodes of disorderly market conditions; further reserve accumulation unnecessary given adequate reserve coverage. - Public sector institutions should manage FX needs independently to increase clarity, transparency, and FX market liquidity. - Strengthening transmission: - Accelerate reforms to reduce dollarization (stricter prudential requirements on open FX positions and dollar lending), foster local currency capital markets, modernize central bank communications, and strengthen BCCR governance, transparency, and accountability. ### Outlook, scenarios, and policy responses - Growth and inflation projections: - Growth projected to moderate to 3.6 percent in 2026 and converge to potential growth of 3.5 percent over the medium term. - Under April 2026 WEO reference (Average petroleum spot prices assumed at US$82 and US$76 per barrel for 2026 and 2027, respectively), headline inflation projected to remain relatively low and return to the lower end of BCCR’s tolerance band only by 2027. - Under April 2026 WEO adverse scenario (Average petroleum spot prices assumed at US$100 and US$75 per barrel for 2026 and 2027, respectively), inflation would reach the 3 percent target in 2027. - Under the more severe WEO scenario (Average petroleum spot prices assumed at US$110 and US$125 per barrel for 2026 and 2027, respectively, before dissipating in 2028), real global growth reduced by about 1.3 and 1.0 percentage points in 2026 and 2027, respectively; Costa Rica’s real GDP growth would slow by around 0.7 percentage point in 2026 and 2027. - Current account and external financing: - Current account deficit projected to widen to 1½ percent of GDP in 2026 as higher oil prices and U.S. tariffs fully materialize and remittances slow. - Policy response in downside scenarios: - Near term: provide temporary, targeted fiscal support within expenditure limits of the fiscal rule; recalibrate monetary policy to keep inflation and expectations close to target beyond an initial spike. - Once shocks subside: fiscal policy should ensure debt returns to original downward path and falls below 60 percent of GDP by 2030. - Precautionary and contingent credit lines—including the FCL—available to maintain confidence and ensure stable financing of the balance of payments. ### External position, reserves, and market access - Current account and NIIP: - Noninterest current account surplus: 0.9 percent of GDP. - NIIP improved to -45.9 percent of GDP at end‑2025. - Current account deficit narrowed to 0.7 percent of GDP in 2025. - Capital flows and reserve coverage: - Private flows share of gross inflows/outflows: 55.1 percent (2023), 59.6 percent (2024), 66.2 percent (2025). - Reserve accumulation accounted for 27.6 percent of total flows in 2023. - International reserves (GIR): US$17,086.4 million in 2025 (US$14,177.3 million in 2024); ARA metric: 103.8 (benchmark: 100‑150); ARA (float): 162.4. - Months of next year's imports: 5.8 (end‑2025). - Gross external financing needs (selected indicators): External financing needs: 107 157 186 227 222 (2022–2026 percentages as presented in source table). - Assessment: ARA metric above 100 percent in 2025; staff concludes a comfortable international reserve position. - Sovereign market access: - Sovereign issuance: public sector issued sovereign debt in four out of past five years. - EMBI spreads declined to about 130 basis points in April 2026 (lowest on record); sovereign credit rating two notches below investment grade. - FCL access maintained at 300 percent of quota; in hypothetical full drawdown, total outstanding Fund credit would peak at 3.6 percent of GDP or 9.0 percent of exports of goods and services in 2026. ### Financial sector soundness and supervision - Banking metrics (as of December 2025): - Capital ratios averaging 18.6 percent. - Liquidity ratios averaging 75.2 percent. - NPLs low with adequate loan loss provisions. - Supervision and safeguards: - Fund TA supporting 2022 World Bank FSAP recommendations: risk‑based and consolidated supervision, enhanced governance of regulators. - External auditor issued an unmodified audit opinion on BCCR’s 2024 financial statements; no significant safeguards issues. ### External Debt Sustainability (Annex VI and DSA highlights) - External debt: - Increased to 42.0 percent of GDP in 2025 from 40.6 percent in 2024. - Projected to rise to 46.0 percent of GDP by 2031 under baseline. - Scenario outcomes (external debt in percent of GDP): - Interest rate shock: 46.9 - Growth shock: 49.8 - Current account (Non‑interest) shock: 49.0 - Combined shock: 49.8 - Real depreciation shock (one‑time 30 percent in 2026): 67.6 - Gross external financing needs (US$ billions, 2021–2031): 7.3; 6.6; 7.4; 8.0; 7.5; 8.5; 8.9; 9.2; 9.8; 10.5; 11.2 (as presented). - Baseline external debt path (percent of GDP): 2025: 42.0; 2026: 43.3; 2027: 44.2; 2028: 45.0; 2029: 45.5; 2030: 45.8; 2031: 46.0. - Staff assessment: external debt dynamics manageable but vulnerable to large depreciation and adverse shocks. ### Risk assessment and recommended policy priorities - Overall risk of sovereign stress: Low (near, medium, and long term assessed as Low). - Key policy priorities (staff recommendations): - Implement revenue‑enhancing tax policy changes to widen the tax base and improve progressivity. - Reform debt management to improve flexibility of external issuance and reduce borrowing costs. - Continue avoiding fuel price subsidies and allow domestic prices to adjust to mitigate terms‑of‑trade shock impacts. - Comprehensive reforms to social security (parametric reforms, investments in primary care, resolve CCSS disputed claims, clarify government financing of benefits). - Allow exchange rate flexibility to act as main shock absorber; limit FX intervention to disorderly market conditions. - Strengthen monetary policy transmission and central bank communication; resume policy rate cuts when appropriate to avoid entrenchment of below‑target inflation. - Accelerate structural reforms to boost private investment beyond FTZs, close infrastructure gaps, increase labor force participation, and leverage AI readiness. ### Authorities’ views and implementation progress - Authorities largely agreed with staff on outlook, risks, and policy responses, while emphasizing heightened uncertainty from the Middle East war. - BCCR assessed potential growth around 4 percent over the medium term (staff estimate: 3.5 percent). - Authorities expect headline inflation to return gradually to tolerance range by last quarter of 2026 under their baseline; stand ready to use monetary easing and temporary fiscal stimulus within the fiscal rule, supported by contingent financial instruments. - Implementation highlights: - Hacienda Digital roll‑out and tax administration improvements. - Public Employment Law implemented across most institutions; full implementation expected by end‑2026. - Three euro‑denominated bonds issued in domestic market in November 2025, January and April 2026. - Debt management institutional steps: General Directorate of Public Debt Management established. - Legislative advances: PPP Framework Law advanced; TRP financing bill passed unanimously in its second reading and signed into law. ### Capacity development (CD) integration and priorities (Annex I) - CD supports fiscal reforms, revenue administration, PFM, debt management, BCCR autonomy and governance, crisis management, and supervision reforms. - Sequencing coordinated with authorities and partners; Costa Rica expected to remain a heavy user of CD to institutionalize progress under prior arrangements. *Source: IMF staff report content provided in the supplied PDF excerpt (content unit 1criea2026001).* ### 1. Drivers of Costa Rica’s Exchange Rate Fluctuations _____________________________________________ 6 ### 1. Drivers of Costa Rica’s Exchange Rate Fluctuations ### Context and recent macro-financial developments - Costa Rica has had access to the IMF’s Flexible Credit Line (FCL) since June 2025 and benefited from a track record of policies largely aligned with staff’s advice. - Political developments: - On February 1, 2026, Laura Fernández of the Sovereign People’s Party (PPSO) won the presidential election and her government took office on May 8. - The PPSO secured 31 of 57 seats in the Legislative Assembly. - Growth and labor market: - Growth increased by 4.6 percent y/y in 2025. - Growth outside of the free trade zones (definitive regime) was 3 percent y/y in 2025; growth in the FTZs was 12.7 percent y/y in 2025. - Production outside of the free trade zones accounts for around 80 percent of GDP. - Employment: unemployment stood at 6.7 percent in February 2026 (down from 7.4 percent a year earlier); employment growth has slowed in trade, tourism, and professional services; labor force participation has weakened. - The authorities rebased national accounts in November 2025 (base year updated from 2017 to 2022) and implemented the System of National Accounts 2025 (2025 SNA). - Inflation and monetary policy: - Headline inflation fell to -2.1 percent y/y in March 2026 (eleventh consecutive month of deflation). - Core inflation dropped to 0 percent y/y in March 2026. - One-year-ahead inflation expectations have remained below the BCCR’s tolerance range (2–4 percent) since June 2025. - The BCCR reduced its policy rate by 25 basis points in July, September, and December 2025. - The ex-ante real policy rate (deflated by one-year ahead inflation expectations) remains above neutral. - Credit and financial sector: - Credit growth decelerated to 3.6 percent y/y in 2025. - Banks’ aggregate nonperforming loans (NPL) ratio was 2.1 percent as of December 2025. - Signs of declining profitability for banks and cooperatives, largely due to more stringent loan loss provisioning. - External sector and reserves: - Current account deficit narrowed by 0.2 percentage point to 0.7 percent of GDP in 2025. - International reserves were US$17 billion at end-2025, equal to 5.8 months of prospective imports and 104 percent of the IMF reserve adequacy (ARA) metric. - The colón appreciated by 2.2 percent in 2025 and had appreciated further by 9 percent as of end-April 2026. - Sovereign spreads declined to around 130 basis points in April 2026; both Moody’s and S&P upgraded the sovereign. ### Box: Drivers of the colón appreciation (SVAR evidence) - Methodology: - A Bayesian structural vector autoregression (SVAR) with sign restrictions was estimated using daily data over January 2015–March 2026. - Key identified drivers of appreciation since July 2022: - Domestic monetary tightening (notably during 2022–23). - Favorable terms-of-trade (TOT) shocks (higher agricultural export prices and lower oil import prices). - Strong domestic growth: robust goods exports, FDI, and sustained tourism flows. - External factors since 2024: the pause and then easing of U.S. monetary policy (late 2023 and late 2024) led to U.S. dollar depreciation; adverse U.S. growth shocks (including after April 2025 tariff announcements) further weakened the U.S. dollar and supported colón strength. - The BCCR’s net FX purchases have marginally mitigated appreciation pressures; appreciation continued to be driven by Costa Rica’s strong fundamentals and institutional frameworks. ### Fiscal developments and public debt - Fiscal outcomes: - The primary surplus narrowed to 0.9 percent of GDP in 2025. - The overall deficit fell to 3.4 percent of GDP in 2025. - Central government debt stood at 60.4 percent of GDP by end-2025 (partly due to accumulation of cash buffers to meet upcoming debt repayments). - Fiscal stance and projections: - Staff projects a broadly neutral fiscal stance in 2026–27. - Staff projects a primary balance of around 0.9 percent of GDP in 2026 (unchanged relative to 2025 after extracting the business cycle effects). - Under staff’s baseline, central government debt is expected to reach 54 percent of GDP by 2035 (assessed as sustainable with a low risk of sovereign distress). ### Outlook and scenario-specific projections - Growth and inflation projections: - Growth is projected to moderate to 3.6 percent in 2026 and converge to potential growth of 3.5 percent over the medium term. - Under the April 2026 WEO reference forecast (Average petroleum spot prices assumed at US$82 and US$76 per barrel for 2026 and 2027, respectively), headline inflation is projected to remain relatively low and return to the lower end of the BCCR’s tolerance band only by 2027. - Under the April 2026 WEO adverse scenario (Average petroleum spot prices assumed at US$100 and US$75 per barrel for 2026 and 2027, respectively), inflation would reach the 3 percent target in 2027. - Under the more severe WEO scenario described (Average petroleum spot prices assumed at US$110 and US$125 per barrel for 2026 and 2027, respectively, before dissipating in 2028), real global growth is reduced by about 1.3 and 1.0 percentage points in 2026 and 2027, respectively, relative to the pre-conflict WEO forecast; Costa Rica’s real GDP growth would slow by around 0.7 percentage point in 2026 and 2027. - Current account and external financing: - The current account deficit is projected to widen to 1½ percent of GDP in 2026 as higher oil prices and U.S. tariffs fully materialize and remittances slow. - Policy response in downside scenarios: - Near-term policy advice: provide temporary, targeted fiscal support within expenditure limits of the fiscal rule; recalibrate monetary policy to keep inflation and inflation expectations close to target beyond an initial spike. - Once shocks subside: fiscal policy should ensure debt returns to its original downward path and falls below 60 percent of GDP by 2030. - Precautionary and contingent credit lines—including the FCL—are available to maintain confidence and ensure stable financing of the balance of payments. ### Authorities’ views - Key differences and agreements with staff: - The authorities largely agreed with staff on the outlook, risks, and policy responses but emphasized heightened uncertainty from the Middle East war. - The BCCR assessed potential growth at around 4 percent over the medium term (staff estimate: 3.5 percent), citing strong private consumption, FDI, high-tech exports (notably medical devices), and tourism. - The authorities expect headline inflation to return gradually to the tolerance range by the last quarter of 2026 under their baseline, subject to significant upside risks from commodity prices. - The authorities stand ready to use monetary easing, if necessary, and temporary fiscal stimulus within the fiscal rule, supported by contingent financial instruments from multilateral organizations. - Authorities emphasized planned structural reforms and investments in infrastructure to build resilience. ### Policy discussions and recommendations - Overall policy priorities: - Keep debt on a downward trajectory while creating fiscal space for spending priorities. - Bring inflation and inflation expectations back to the BCCR’s target in a sustained way. - Support stronger and more inclusive growth. - Specific policy measures recommended: - Implement a revenue-enhancing tax package to fund additional spending on capital investment, education, security, healthcare, and targeted social transfers. - Reform public pensions and healthcare to ensure sustainability of the social security system. - Resume policy rate cuts when there is greater clarity on the commodity price shock. - Strengthen monetary policy transmission. - Implement supply-side reforms to remove structural bottlenecks to growth. - Fiscal policy specifics and tax reform measures (estimated budgetary impacts): - Introduce a single rate for corporate income tax with a simplified regime for small taxpayers (0.1 percent of GDP). - Review and remove tax expenditures (Box 2). Proposed removals and changes include: - Removing VAT exemptions on airline tickets, medical equipment, lottery winnings, wood/forestry products, and the rental of vehicles (collectively 0.2 percent of GDP). - Taxing the basic goods basket at the standard 13 percent rate (1.0 percent of GDP). - Making bonuses and the 14th salary paid to public sector employees taxable (0.3 percent of GDP). - Design higher social transfers to offset the increased tax burden for the poorest households. - Conduct periodic cost-benefit analysis of new and existing tax expenditures to increase transparency and accountability in annual budget prioritization. - Fiscal rule and spending: - The fiscal rule is expected to constrain spending in 2027, keeping the primary balance broadly unchanged. - There is scope to increase capital investment (security, housing, roads) and social spending (notably for pensions, healthcare, and education) within the projected neutral fiscal stance for 2026. *Source: IMF staff report content as provided.* ### introduction of measures to subsidize the rise in imported fuel prices. ### introduction of measures to subsidize the rise in imported fuel prices. ### Fiscal measures and revenue implications - Recent measures include the gradual reduction in the selective consumption tax and an increase in the income tax thresholds for the self-employed. - Approving a feebate scheme based on vehicle emissions to encourage transition to electric vehicles; the scheme is described as "assumed to be revenue neutral." - Reducing the personal income tax thresholds for salaried workers and raising the marginal rate on the highest income earners is estimated to raise "0.1 percent of GDP." - Ongoing improvements to tax administration—including increased digitization, tax cooperation with bilateral partners, an intensive information campaign, and consolidation of arrears collection within a unified office in the Ministry of Finance—are estimated to have yielded an additional "0.3 percent of GDP in tax collections during 2025." ### Tax expenditures: scale and distribution - Costa Rica maintains over 400 tax expenditures. - Tax expenditures are estimated at "4 percent of GDP in 2024." - Tax expenditures accounted for "31 percent" of total tax revenues in 2023. - Cross-country peer shares: OECD average "22" and Latin America and the Caribbean "24" (as reported for comparison). - Distributional detail for VAT expenditures on the basic tax basket: - "Just 18 percent of the 1 percent of GDP in tax expenditures related to the basic basket of goods benefit the lowest 20 percent of income earners." - "21½ percent for the top earning quintile." - Corresponding to "6 and 1 percent respectively, of those households’ gross incomes." ### Recommended fiscal measures and quantified yields (as presented) - Table headings and values are reported exactly as presented (columns correspond to the table layout shown in the source): - Expenditure measures: "-0.5 -0.8 -0.5 -1.3" - Infrastructure investment: "-0.5 0.0 -0.5 -0.5" - Elderly care and childcare services: "0.0 -0.1 0.0 -0.1" - Education: "0.0 -0.2 0.0 -0.2" - Targeted social programs: "0.0 -0.2 0.0 -0.2" - Non-contributory pensions: "0.0 -0.1 0.0 -0.1" - Security: "0.0 -0.1 0.0 -0.1" - Primary and preventative care: "0.0 -0.1 0.0 -0.1" - Revenue measures: "0.5 1.3 0.5 1.8" - Corporate income tax (Single CIT rate and revised regime for small taxpayers): "0.0 0.1 0.0 0.1" - Removing tax expenditures: "0.5 1.1 0.5 1.6" - Feebate scheme (feebate scheme based on vehicle emissions; assumed to be revenue neutral): "0.0 0.0 0.0 0.0" - Personal income tax (Reduce PIT threshold for salaried workers and raise marginal rate on highest earners): "0.0 0.1 0.0 0.1" - Total fiscal consolidation: "0.0 0.5 0.0 0.5" - Memorandum items (reported exactly): - Primary balance (baseline): "0.9 0.9" - Primary balance (reform scenario): "0.9 1.4" - Fiscal impulse (baseline): "0.0 -0.1" - Fiscal impulse (reform scenario): "0.0 -0.6" - Government debt (baseline): "61.1 61.4" - Government debt (reform scenario): "61.1 60.9" ### Social security, pensions, and healthcare sustainability - The central government’s annual transfers to the CCSS have averaged about "1 percent of GDP since 2017." - The CCSS has recorded claims on the government estimated at "8½ percent of GDP," the majority related to disputed healthcare obligations; this claim is recorded as a contingent liability. - Demographics and projections: - Fertility rate: "2.4 children per woman in 2000" to "1.3 in 2023" and "projected to stabilize around that level in the long term." - Life expectancy: "77 years in 2000" to "81 years in 2023" and "projected to reach 85 years in 2050." - Old-age dependency ratio: "expected to increase rapidly from 18 percent in 2025 to 41 percent in 2050." - Pension projections and fiscal impact: - Under staff estimates, the present discounted value of net IVM cash flows would amount to "–10 percent of GDP." - Annual IVM deficits covered by existing reserves would widen from "around 0.2 percent of GDP in 2024 to 0.5 percent of GDP in 2036." - With reserves exhausted, IVM cash flow deficits would be "around 1.7 percent of GDP by 2050" covered by the central government. - Healthcare (SEM) projections: - SEM reserves are projected to run out by "2029." - Annual cash flow deficit projected to increase from "0.3 percent of GDP in 2024 to 0.8 percent of GDP in 2028." - After reserves are exhausted, the deficit is projected to widen to "3.3 percent of GDP in 2050," to be fully covered by the central government. - Policy direction recommended: - Consider parametric reforms on the spending side for pension and healthcare systems. - Expand investment in primary care, improve preventive services, reduce healthcare costs through new medical technologies, better procurement, and re-examine coverage of expensive treatments. - Regular public reporting on the viability of the pension and healthcare system. ### Debt management and fiscal framework - Approval of the constitutional reform to permit external debt issuance by the executive branch within the overall borrowing limit approved by the Legislative Assembly would diversify financing and reduce borrowing costs. - In the interim, authorities issued three "€1 billion" domestic bonds in November 2025, and January and April 2026. - A legislative vote to permit issuance of "up to US$1.5 billion each year" is noted as helpful for predictability and deepening the domestic debt market. - The fiscal rule (enacted in 2020) has improved the overall fiscal balance by "5 percentage points of GDP" and reduced central government debt by "6.1 percentage points of GDP." - Authorities introduced an explicit debt anchor: "50 percent of GDP by 2035" into the MTFF. - Recommended institutional measures: expand fiscal rule coverage, prohibit ad-hoc exclusions, operationalize the Fiscal Council, and fully staff a macro-fiscal unit in the Ministry of Finance. ### Monetary and exchange rate policy - Monetary policy guidance: - The BCCR should stand ready to bring inflation and inflation expectations back to target "in a sustained way." - The inflation target is "3 percent." - Staff note the real policy rate is above staff estimates of neutral and that inflation would remain below the central bank’s target until at least "2029," assuming oil prices evolve in line with the reference forecast in the April 2026 WEO. - There is scope for a pause in monetary easing to evaluate supply shocks, but once effects are clearer, the BCCR should be prepared to resume cuts in the policy rate to avoid deflationary dynamics. - Strengthening transmission: - Incomplete pass-through from the policy rate to lending and deposit rates with heterogeneity between private and public banks hinders full transmission. - Recommended actions include accelerating reforms to reduce dollarization and market frictions (e.g., stricter prudential requirements on open FX positions and dollar lending, fostering development of capital markets in local currency), modernizing central bank communications, and passing legislation to strengthen the BCCR’s governance, transparency, and accountability to institutionalize de facto autonomy. - Supporting analysis: - In a low-inflation environment, incomplete transmission can raise real borrowing costs and slow re-anchoring of inflation expectations. - The BCCR’s ongoing review of the inflation targeting framework is an opportunity to re-examine analytical foundations, communication, and peer comparisons. *IMF staff and Costa Rica authorities content as presented in the source PDF.* ### Box 4. Monetary Policy Transmission in Costa Rica ### Box 4. Monetary Policy Transmission in Costa Rica ### Overview - Costa Rica’s inflation targeting regime began in 2005 and transitioned to a full-fledged inflation targeting regime in January 2018 after achieving exchange rate flexibility. - In addition to an exchange rate channel, the interest rate channel remains incomplete due to market frictions and dollarization in the banking sector. ### Empirical approach and data - Methods used: local projection methods (introduced by Jordà (2005)) and instrumental variables (constructed following Romer and Romer (2004) and Holm et al (2021)). - Data windows cited: - Lending rate data: 2018M1–2025M10. - Deposit rate data: 2016M1–2025M10. - Instrument construction: 2006M11–2025M10. ### Key empirical findings on pass-through - Pass-through is incomplete from the policy rate to average lending and deposit rates offered by other depository corporations. - At a 12-month horizon: - Pass-through to the lending rate in CRC: around 65 percent. - Pass-through to the deposit rate in CRC: around 85 percent. - Pass-through to the lending rate in USD: around 35 percent. - Pass-through to the deposit rate in USD: around 25 percent. - Heterogeneity across bank types and currencies: - CRC lending rate pass-through is estimated to be complete for private banks. - CRC lending rate pass-through is less than half for public banks. ### Institutional and regulatory influences - Banks may have kept lending rates high to offset tighter financial regulations, partially offsetting effects of recent policy rate cuts. - Specific regulatory changes noted: - January 2024: introduction of a new regulation governing the calculation of credit risks requiring higher loan loss provisions. - Reactivation of regulations around countercyclical provisions. ### FX intervention and monetary transmission - Continued central bank FX intervention in 2026 (including for reserve accumulation, NFPS operations, and addressing excessive exchange rate volatility) is said to weaken monetary transmission and hinder development of the FX and FX derivatives market. - Policy recommendation on FX intervention: - Foreign exchange interventions should be limited to ensuring orderly market conditions in the event of large shocks and to episodes of disorderly market conditions. - Given adequate reserve coverage, further reserve accumulation is unnecessary. - To increase clarity, transparency, and FX market liquidity, public sector institutions should be required to manage their FX needs independently, without relying on the central bank. ### Sources and notes (methodological) - Sources referenced: BCCR, Consensus Forecast, and IMF staff calculations. - Notes: Other depository corporations include banks, cooperatives, mutuals, and finance companies. Interest rates are negotiated rates for new transactions weighted by the amount. Shaded areas in analysis correspond to 90 percent confidence intervals. Pass-through is calculated as the “cumulative multiplier” specified in Leigh and Xu (2025), Jordà and Taylor (2024), and Ramey and Zubairy (2018). *Source: IMF staff calculations and BCCR as presented in Box 4. Monetary Policy Transmission in Costa Rica.* ### 42.0 percent of GDP in 2025 from 40.6 percent in 2024 (Annex VI) while the noninterest current ### 1criea2026001 - 42.0 percent of GDP in 2025 from 40.6 percent in 2024 (Annex VI) while the noninterest current ### External position and capital flows - Current account and NIIP: - Noninterest current account surplus was 0.9 percent of GDP. - Net international investment position (NIIP) improved to -45.9 percent of GDP at end-2025. - The current account deficit narrowed to 0.7 percent of GDP in 2025. - Capital account composition (2023–2025): - Private flows accounted for 55.1 percent of gross inflows and outflows (67.3 percent excluding reserve accumulation). - Reserve accumulation accounted for 27.6 percent of total flows in 2023. - Private flows share rose to 59.6 percent in 2024 and to 66.2 percent in 2025. - Private sector’s share of IIP liabilities remained over 80 percent at end-2025. - Private share of IIP assets was around 47 percent. ### Sovereign market access and external borrowing - Sovereign issuance record: - Public sector issued sovereign debt in four out of the past five calendar years. - Issuances are equivalent to 11.7 times Costa Rica’s quota, well above the FCL threshold of 50 percent. - Market indicators: - EMBI spreads declined to about 130 basis points in April 2026, the lowest on record. - Costa Rica’s sovereign credit rating is currently two notches below investment grade. - USD-denominated external bond issuances (2019–2025) summarized as outstanding amounts: - Central government eurobonds: 146,729,21 (USD million) [as reported in source table]. - Central government GDNs 1/: 7191600800 (USD million) [as reported in source table]. - Banco Nacional (blue bond): 50 (USD million). - ICE (SLB): 300 (USD million). - Total: 21871900800292150 (USD million) [as reported in source table]. - Note: Global Depository Notes only include USD-denominated notes with underlying security denominated in USD; data based on outstanding amounts at time data was accessed. ### Reserve coverage and external financing needs - Reserve coverage indicators (2022–2026, Percent of metric) — selected figures: - ARA (float): 107 144 147 162 167 (2022 2023 2024 2025 2026 (est.)) [values presented in source table]. - ARA (not float): 70 94 94 104 107. - 3 months of next year's imports: 118 171 171 192 202. - Broad money (M4) (metric is 20% of coverage): 120 155 146 163 172. - External financing needs1/: 107 157 186 227 222. - Short-term debt: 140 185 209 250 274. - Other factors supporting reserve position: - Access to the Latin American Reserve Fund of about 9.2 percent of end-2025 reserves. - Contingent credit lines with CAF and the World Bank. - Macroprudential measures that significantly reduce FX risks. - High weight of FDI in external financing. - Assessment: - ARA metric above 100 percent in 2025. - Staff concludes a comfortable international reserve position. ### Public finances and debt sustainability - Fiscal performance: - Primary surpluses averaged 1.4 percent of GDP in 2022–25. - For 2026, primary balance projected at 0.9 percent of GDP (fiscal stance broadly neutral). - Debt assessment: - Central government debt above 60 percent of GDP in 2025. - Debt is assessed to be sustainable with high probability; overall risk of debt distress is low. - Policy implications: - Need for revenue-enhancing tax policy changes to widen the tax base and improve progressivity. - Reforms to improve flexibility of external issuance to improve debt management and reduce borrowing costs. - Fiscal rule parameters expected to constrain fiscal policy in 2027. ### Monetary policy, inflation, and exchange rate - Inflation and monetary framework: - BCCR maintained a very strong monetary policy framework with low and stable inflation between 2021 and 2025; average annual inflation remained in single digits. - BCCR reduced the policy rate three times during 2025. - Inflation expected to return to the BCCR’s 2–4 percent tolerance band within the next eight quarters; speed of convergence depends on global commodity prices. - Near-term inflation risks are tilted to the upside, but drift down of inflation expectations suggests risk of lower-than-target inflation becoming entrenched. - Exchange rate guidance: - Solid FDI inflows have helped bring international reserves to record highs and the central bank should avoid further FX intervention unless needed to address disorderly market conditions. ### Financial sector soundness and supervision - Banking system metrics (as of December 2025): - Capital ratios averaging 18.6 percent. - Liquidity ratios averaging 75.2 percent. - Both are well above regulatory minimums. - Asset quality and buffers: - Nonperforming loans remain low with adequate loan loss provisions. - Recent changes to provisioning rules strengthen buffers. - Relatively small non-bank financial sector, limited sovereign-bank linkages, and bank credit below historical high levels — systemic risks assessed to be contained. - Supervision: - With Fund TA, authorities implementing 2022 World Bank FSAP recommendations: risk-based and consolidated supervision frameworks, enhanced governance of regulators. - Safeguards: - External auditor issued an unmodified audit opinion on BCCR’s 2024 financial statements; no significant safeguards issues emerged. ### Data transparency and institutional quality - Costa Rica has complied with the Special Data Dissemination Standard (SDDS) since 2019. - Data deemed timely and of high quality with strong institutional protection to data integrity. - Institutional assessment: - Quality of institutions relevant to FCL qualification is very strong: good governance indicators, low corruption levels, mature democracy, independent judiciary, policy continuity. ### FCL qualification and capacity to repay - Qualification table highlights (comparison of 2025 FCL Request and 2026 FCL Mid-Term Review): - Capital account position dominated by private flows: Average (2022–24): 55.1 percent; Average (2023–25): 55.1 percent. - Track record of steady sovereign access: 4 issuance years in 2021–2025 amounting to 1,170 percent of quota. - Reserve position: ARA average (2023–25): 97 percent and always above 80 percent; gross external financing needs average: 190 percent. - Banks’ risk-adjusted capital ratio: 18.6 percent (end-2025) — above regulatory minimum (10 percent). - Capacity to repay: - In the event of a FCL disbursement of all available access, total outstanding Fund credit would peak at 3.6 percent of GDP or 9.0 percent of exports of goods and services in 2026. - Total obligations to the Fund under the FCL drawdown scenario would peak at 46.8 percent of external public debt service in 2030. - Authorities’ intent: - Authorities intend to continue treating the FCL arrangement as precautionary. - Current level of access maintained at 300 percent of quota, consistent with state-contingent exit strategy. ### External Economic Stress Index (EESI) — methodology and scenarios - Design and weights: - EESI is a weighted sum of standardized deviations of external proxies from their means (based on 2001–2025). - Proxy variables and weights: - U.S. GDP growth weight: +0.60 (proxies external demand). - Oil price level weight: -0.04 (higher oil prices increase stress). - U.S. 10-year Treasury yield weight: -0.18 (proxies global financial conditions). - World Uncertainty Index (WUI) weight: -0.18. - Baseline scenario: - Uses April 2026 WEO projections for U.S. growth and U.S. 10-year bond yield. - EESI suggests external stress increased in the past year compared to time of 2025 FCL request, driven mainly by increase in WUI; EESI expected to remain elevated and gradually return to historic average over projection period. - Downside scenario: - Builds on April 2026 WEO severe scenario of a more prolonged war in the Middle East. - Assumes a decline in U.S. real GDP growth of around 0.9 percentage point on average below the baseline in 2026 and 2027. - Assumes U.S. interest rates increase by 50 basis points in 2026 and 100 basis points in 2027, both relative to the baseline. - WUI stays constant at high December 2025 levels, reaching five standard deviations above baseline. - Oil prices assumed around 35 and 65 percent higher than the baseline in 2026 and 2027, respectively. - Under downside, external stress would be severe through early 2027 but would gradually return toward average stress in late 2027. ### Staff appraisal and policy recommendations - Growth and inflation outlook: - Real GDP growth reached 4.6 percent in 2025. - Growth projected to moderate to 3.6 percent in 2026. - Inflation expected to return to the BCCR’s 2–4 percent tolerance band within the next eight quarters; convergence speed depends on global commodity prices. - Risks and buffers: - Risks to the outlook tilted to the downside, primarily from heightened global uncertainty and the war in the Middle East. - Costa Rica maintains ample buffers, access to contingent credit lines, some fiscal space, and strong policy frameworks to smooth shocks. - Key policy priorities: - Implement revenue-enhancing tax policy changes to widen the tax base and improve progressivity to raise revenue-to-GDP and allow higher productive spending. - Reform debt management to improve flexibility of external issuance and reduce borrowing costs. - Continue avoiding fuel price subsidies and allow domestic prices to adjust to mitigate terms of trade shock impacts. - Comprehensive reforms to the social security system to ensure financial sustainability: - Address actuarial imbalances through parametric reforms on the spending side. - Invest in primary care, preventive services, and mechanisms to reduce healthcare costs. - Resolve social security system’s claims on the central government, clarify scope and nature of benefits financed by the central government, and improve legal framework governing these arrangements. - Central bank communication: Fund TA to help reinforce the central bank communication framework. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 43. Monetary policy should stand ready to support a return of inflation and inflation ### 43. Monetary policy should stand ready to support a return of inflation and inflation ### Monetary policy stance and recommendations - A pause in monetary easing is warranted at the current juncture to allow for greater clarity on the magnitude, persistence and impact of the commodity price shock. - Once the oil price pass-through effects diminish, a resumption of policy rate cuts would: - stimulate domestic demand, and - prevent below-target inflation and inflation expectations becoming entrenched. - Reduce dollarization to strengthen monetary policy transmission. - Modernize central bank communications to strengthen monetary policy transmission. - The BCCR’s review of the inflation targeting framework is an opportunity to: - engage in public consultations on potential changes to the framework, and - draw on international experience to inform reforms. - Approve reforms to strengthen the BCCR’s autonomy and governance to reinforce monetary policy credibility and effectiveness. ### Financial sector stability and policy actions - Systemic financial stability risks are contained and financial institutions maintain comfortable capital and liquidity buffers. - Policy and regulatory priorities: - Full implementation of risk-based and consolidated supervision to strengthen financial sector oversight. - Swift approval of the new bank resolution and deposit insurance framework to enhance crisis management and depositor protection. - Reinforce macroprudential tools to address pockets of potential financial vulnerability, including those arising from further monetary easing and exchange rate volatility. - Adopt a clear regulatory framework for fintech firms and digital assets in line with international best practices to: - build on recent gains in financial inclusion and innovation, - increase competition, - enhance consumer protections, and - ensure innovations do not create new financial stability risks. ### Pension system recommendations - Reforms to the defined-contribution pension funds would improve their rates of return. - Gradually relax regulatory limits on pension funds’ foreign investments to diversify pension funds’ assets. - Avoid legislative proposals that permit early withdrawals from the pension system, given their potential adverse macroeconomic and financial effects. ### Supply-side reforms to boost growth and competitiveness - Increase labor force participation by alleviating child and elder care burdens. - Better target the dual vocational education and training program to market needs to reduce skills gaps. - Invest in law enforcement, improve inter-agency cooperation, and expand programs to divert young people from criminal activities to: - reduce the homicide rate, and - mitigate impacts on tourism and domestic demand. - Approve the proposed public-private partnership law to support higher private investment and close infrastructure gaps. - Create closer R&D linkages between domestic firms and multinational corporations and continue removing regulatory bottlenecks to raise productivity. - Build on Costa Rica’s relative strength in AI preparedness to expand AI use across the public and private sector. ### IMF procedural recommendation - Staff recommends that the next Article IV consultation take place on the standard 12-month cycle. *Source: IMF staff text.* ### Annex I. Capacity Development Integration: Updated Country ### Annex I. Capacity Development Integration: Updated Country Strategy Note ### Context - Costa Rica completed reform programs under the EFF and RSF in June 2024 and entered into a precautionary arrangement in June 2025. - The Executive Board approved the country's request for access to the FCL on June 2, 2025. - CD has helped implement equitable fiscal reforms, maintain monetary and financial stability, strengthen central bank autonomy and governance, address structural financial vulnerabilities, and advance structural reforms supporting inclusion and labor productivity. - The authorities remain strongly engaged and continue heavy use of CD from the Fund and other partners. ### Engagement strategy and coordination - CD delivery is closely integrated with surveillance priorities from Article IV Consultations and follows recommendations from the 2018 Financial Sector Stability Review and the 2022 World Bank FSAP Development Module. - Sequencing of CD across reform streams is coordinated by the country team in consultation with the authorities and CD providers. - Collaboration with other partners remains strong, with regular joint meetings and/or missions to align policy advice and create synergies in public financial management and pension sustainability. - The note and attached matrices illustrate integration of CD and program objectives guided by the 2018 Review of the Fund’s Capacity Development Strategy. ### CD priorities and areas of Fund support - Main objective: consolidate achievements under the EFF and RSF and advance macro-critical reforms to ensure debt sustainability, boost investment and inclusive growth, and maintain monetary and financial stability. - Implement fiscal reforms to widen the tax base and support inclusive growth while ensuring debt sustainability: - Support for revenue administration and tax policy (FAD/CAPTAC-DR) including Tax Compliance Improvement Plans, roll-out of the Hacienda Digital, and review of the suite of tax exemptions. - FAD has helped propose legislative reforms such as redesigning personal income tax and feebates to support emissions reduction. - Public financial management (FAD/CAPTAC-DR): development of a comprehensive Medium-Term Fiscal Framework covering the entire NFPS and improvement of Treasury cash management. - Debt management (MCM, in coordination with the WB): deepening the domestic debt market, enhancing debt management, and unifying existing debt functions within the same agency. - Government finance statistics (STA/CAPTAC-DR/ICD): transition from GFSM 1986 to GFSM 2014, expand coverage beyond the central government, improve quality and timeliness of fiscal reporting, and communicate impacts of methodological changes. - Macroeconomic frameworks (ICD/FAD): enhance MoF analytical and forecasting capacity, align frameworks with best practice and GFSM 2014, and deliver customized training. - Further strengthen the autonomy and governance of the BCCR and the supervisory and crisis management framework: - Central bank operations (LEG/MCM/CAPTAC-DR): support to strengthen BCCR operational autonomy and governance consistent with the 2020 Safeguards Assessment; draft amendments to the BCCR Law prepared in August 2021, revised in 2022 and most recently in 2025; support to enhance central bank communication and transparency and improve the monetary policy framework. - Financial crisis management (LEG/MCM): align legal framework on bank resolution and deposit insurance with international best practices, including institutional arrangements for deposit insurance and resolution authority, safeguards for resolution, public backstop schemes, and clear resolution triggers. - Financial supervision and regulation (CAPTAC-DR/MCM): strengthen consolidated and risk-based supervision, gradual adoption of Basel III, enhance FinTech regulation and cybersecurity, and develop derivatives markets. - Macroeconomic frameworks at BCCR (ICD): further development of macro frameworks, training on semi-structural gap models, and alignment of forecasting and policy analysis with international best practices. ### Implementation and sequencing - CD activities have supported specific reforms such as the single wage spline under the Public Employment Law, improvements in tax administration and arrears management, enhancement of deposit insurance quality, and introduction of a new bank resolution framework with law proposals submitted to the Legislative Assembly. - Appropriate sequencing is coordinated by the country team with authorities and CD providers to match reform priorities and capacity needs. - Costa Rica is expected to remain a heavy user of CD as it institutionalizes progress achieved under the EFF and RSF arrangements. *Source: Annex I. Capacity Development Integration: Updated Country Strategy Note (Costa Rica).* ### Annex II. Implementation of Past Fund Policy Advice ### Annex II. Implementation of Past Fund Policy Advice ### Fiscal policy: Rebuilding fiscal buffers and spending quality - Recommendation: Rebuild fiscal space to respond to negative shocks and allow for higher human capital, infrastructure and social assistance spending through a revenue-enhancing tax reform which increases equity and efficiency. - Implementation and outcomes: - The primary balance declined to 0.9 percent of GDP in 2025, in part due to the effects of a gradual reduction in the rates of the selective consumption tax charged on several goods and lower VAT collections. - Improved revenue administration yielded an additional 0.3 percent of GDP in tax collections in 2025. - Improve the quality of spending: The Public Employment Law has been implemented by all institutions under MIDEPLAN’s purview except for the CCSS. Full implementation is expected by end-2026. - Resolve the disputed claim with the social security system: Negotiations continue between the Ministry of Finance and the CCSS to verify the size of the disputed claims. The 2026 budget allocates additional funding for the state’s pension contributions to slow the increase in pension-related claims. - Enhance public debt management and increase flexibility in external debt issuance to reduce borrowing costs: General Directorate of Public Debt Management was established, and plans were developed to enhance the operations of the front, middle and back offices. - Bond issuance: Three euro-denominated bonds were successfully issued in the domestic market in November 2025, and January and April 2026. ### Monetary and financial stability - Recommendation: Loosen monetary policy further if convergence to the 3 percent inflation target weakens. - Implementation and outcomes: - The BCCR lowered its policy rate three times in 2025, in July, September and December, by 25 basis points each. - Institutionalize the BCCR’s de facto autonomy: Approval of the proposed legislative amendments to enhance autonomy and governance is expected to continue under the new Legislative Assembly. - FX market developments: With the support of the IFC, the BCCR has developed a new standardized contract for financial derivatives, which could foster FX hedging. - Bank resolution and deposit insurance legislation: The bill to amend the bank resolution and deposit insurance law is expected to be resubmitted to the new Legislative Assembly. - Oversight and guarantees: Improve oversight of nonbanks. Eliminate the blanket deposit guarantee for state-owned banks (bill pending resubmission). ### Structural reforms to promote inclusive growth - Recommendation: Address skills and infrastructure gaps and foster a more competitive business environment to support private sector-led growth. - Implementation and outcomes: - Education and skills: The authorities have expanded the number of STEM-focused colleges across the country and have supported efforts to increase access to higher education for those in rural communities. - Labor market and formal employment: Remove barriers to formal employment to strengthen long-term growth. Through its “We Let You Work” initiative, the authorities have identified and eliminated several bottlenecks (186 as of end-February 2026) which constrain economic development, investment, and job creation. ### External Sector Assessment — Overall assessment and outlook - Overall assessment: The external position of Costa Rica in 2025 was stronger than the level implied by medium-term fundamentals and desirable policies. - Key indicators and projections: - The current account (CA) deficit narrowed to 0.7 percent of GDP in 2025 (from 0.9 percent of GDP in 2024). - The CA deficit is projected to widen to 1.5 percent of GDP on average in 2026–27, as the trade balance weakens once tariff effects fully materialize, compounded by spillovers from the conflict in the Middle East. - Policy responses recommended: - Continue fiscal consolidation and the BCCR’s forward-looking, data-dependent monetary policy approach to support external stability. - Exchange rate flexibility should act as the main shock absorber, with intervention limited to episodes of disorderly market conditions. - Continue trade policies to resolve trade tensions, deepen integration into global value chains, and attract FDI. - Structural reforms to boost private investment beyond free trade zones, close the infrastructure gap, and enhance productivity and competitiveness. ### Foreign assets and liabilities: position and trajectory - Background and levels: - NIIP improved to -45.9 percent of GDP in 2025, up from -48.2 percent in 2024 and well above the -59.3 percent average recorded during 2019–23. - Foreign assets in 2025: 59.9 percent of GDP, mostly portfolio and non-portfolio assets (35 percent of GDP) and international reserves (17 percent of GDP). - Foreign liabilities in 2025: 105.8 percent of GDP, primarily FDI (74.5 percent of GDP) and other investment (20 percent of GDP). - External debt: 42.0 percent of GDP in 2025 and projected to increase to 46 percent of GDP in the medium term. - About 11.4 percent of external debt is at short-term maturity; nearly all external debt is denominated in foreign currency. - Assessment: - Significant gross external liabilities are mitigated by the substantial share of FDI. - FDI inflows in Costa Rica remain robust, exceeding 70 percent of GDP in the last two years, particularly in advanced manufacturing and technology industries. - External Sustainability (ES) model results indicate a positive CA gap, meaning the CA balance is higher than the level required to stabilize the NIIP. - 2025 snapshot (percent of GDP): - NIIP: -47.2 - Gross Assets: 59.9 - Debt Assets: 26.9 - Gross Liabilities: 105.8 - Debt Liabilities: 30.2 ### Current account — background, projection, and assessment - 2025 outcomes: - CA deficit narrowed to 0.7 percent of GDP in 2025, from 0.9 percent of GDP in 2024, primarily reflecting a significant decrease in the goods trade deficit. - Secondary income surplus remained stable. - Primary income deficit deteriorated owing to increased retained earnings paid to foreign firms. - Service balance deteriorated due to a decline in services exports, reflecting weaker tourism performance amid a stronger colón and security concerns. - Medium-term projection: - CA deficit projected to widen to about 1.5 percent of GDP in 2026–27 due to tariff effects, spillovers from the conflict in the Middle East, weaker external demand, and higher oil import bills. - EBA model estimates and gaps (2025): - Cyclically adjusted CA balance: -0.6 percent of GDP. - Cyclically adjusted CA norm: -3.4 percent of GDP. - CA gap: 2.8 percent of GDP in 2025. - Overall contribution from identified policy gaps: 1.4 percent of GDP (fiscal balance gap: 0.7 percent of GDP; health expenditure: 0.6 percent of GDP). - Large residual: 1.3 percent of GDP. ### Real exchange rate (REER): developments and assessment - Exchange rate movements: - The colón appreciated by 2.2 percent on average against the U.S. dollar in 2025 compared to 2024 and by an additional 9 percent for the year-to-date through end-April 2026. - As of end-2025, the REER stood about 1 percent lower than its 2024 average. - Assessment: - The EBA CA model implies a REER undervaluation of 8.9 percent, with an estimated semi-elasticity of 0.27. - The EBA REER index and level models suggest an overvaluation of 8.1 and 28.5 percent, respectively. - Staff’s overall assessment, based on the CA model, is a REER undervaluation of 8.9 percent. - EBA/ES model table highlights (2025): - CA-Actual: -0.7 (both CA and ES model) - Cyclical Contributions (from model): -0.1 - Adjusted CA: -0.6 - CA Norm (from model) 1/: -3.5 (CA model) and -2.9 (ES model) - Adjusted CA Norm: -3.4 (CA model) and -2.9 (ES model) - CA Gap: 2.8 (CA model) and 2.3 (ES model) - o/w Policy gap: 1.4 - Elasticity: -0.26 - REER Gap (in percent): -10.8 (CA model) and -8.8 (ES model) - 1/ Cyclically adjusted, including multilateral consistency adjustments. ### Capital and financial accounts: flows and policy measures - Flows and composition: - Net FDI inflows remained broadly stable at around 5 percent of GDP in 2025. - Inward FDI represented 62.0 percent of inward capital flows (debits) in 2025. - Net FDI (debit and credit) accounted for 746 percent of the CA. - Portfolio investments outflows increased to 3.6 percent of GDP in 2025 from 3.2 percent of GDP in 2024. - Other investments increased to 1.4 percent of GDP in 2025, after a significant drop to 0.4 percent of GDP in 2024. - Assessment and reforms: - Robust external financing structure with strong FDI inflows adequately covering the CA balance. - Portfolio investments abroad by pension funds have stopped since 2022H2 as domestic financial assets’ yields increased. - Reform to restructure existing Operadoras de Pensiones Complementarias (OPCs) into generational funds was suspended in March 2025 to conduct studies on replacement rate, investment limits, and impact. When implemented, this reform may further promote international diversification and potentially trigger the restart of those capital flows. ### FX intervention and reserves level - Gross international reserves (GIR) and interventions: - GIR reached US$17.1 billion in 2025, up from US$14.2 billion in 2024. - Following net FX purchases averaging US$2.7 billion during 2022–24, the BCCR reduced net FX purchases for reserve accumulation to US$0.9 billion in 2025. - In 2025, BCCR’s FX operations on behalf of the NFPS amounted to US$4.7 billion in net sales, up from US$0.1 billion in 2024. - Since the beginning of 2026, the BCCR stepped up FX intervention to further build up reserves and address elevated exchange rate volatility. So far in 2026, net FX purchases (excluding transactions conducted on behalf of SOEs) have already surpassed the total for the whole of 2025. - Exchange rate volatility: the colón/USD variation remained within a 2 percent band over the last two years. - De facto exchange rate regime classification: reclassified from floating to crawl-like arrangement for 2023–24 and from crawl-like to stabilized arrangement in 2025. - Reserve adequacy and metrics (end-2025): - GIR: 17,086.4 Million of U.S. dollars (2025). - Million of U.S. dollars (2024): 14,177.3. - ARA metric: 103.8 (benchmark: 100-150). - ARA metric (floating) 1/: 162.4 (benchmark: 100-150). - Short-term debt at remaining maturity: 249.8 (benchmark: 100). - Broad money: 32.5 (benchmark: 20). - Months of next year's imports: 5.8. - Assessment: At end-2025, Costa Rica’s GIR was adequate for precautionary purposes, amounting to 104 percent of the ARA metric, representing about 250 percent of short-term debt (on residual maturity), and 5.8 months of import coverage. The FCL arrangement provides an additional buffer against global tail risks. - Policy recommendations: - Accelerate reforms to strengthen FX market functioning, including measures to reduce market concentration, remove impediments to price discovery (bid rate caps and restrictions on daily rate adjustments), and clear interbank backlogs. - Align FX purchases by the central bank on behalf of the NFPS with FX sales to these entities to minimize market impact. - NFPS should enhance its ability to manage currency risks and reduce reliance on the BCCR as an intermediary for FX transactions by undertaking a greater share of FX transactions directly in the FX market. ### Risk Assessment Matrix — key risks and policy responses - External risks and responses: - Geopolitical Tensions and Intensification of Conflicts - Likelihood: High - Impact: Medium - Policy response: Allow the exchange rate to flexibly adjust; limit FX intervention to disorderly conditions; tighten monetary policy if inflation or inflation expectations exceed the target; increase fiscal space to protect social goals and provide targeted fiscal support to the most vulnerable, if needed. - Protectionism and Trade Disruptions - Likelihood: High - Impact: Medium - Policy response: Strengthen and diversify trade, investment, and financial linkages; improve business environment; close infrastructure gaps; eliminate barriers to labor force entry; implement new trade and investment agreements; tighten monetary policy if inflation or inflation expectations exceed the target. - Commodity Price Volatility - Likelihood: High - Impact: Medium - Policy response: Allow exchange rate flexibility; limit FX intervention to disorderly conditions; tighten monetary policy if inflation or inflation expectations exceed the target; increase fiscal space to protect social goals. - Disorderly AI Correction - Likelihood: High - Impact: High - Policy response: Allow the exchange rate to flexibly adjust to capital outflows; limit FX intervention to disorderly conditions; grant the executive branch more flexibility to borrow externally according to market conditions while deepening domestic debt markets; build additional fiscal space to support recovery without compromising long-run fiscal targets; monitor financial conditions and stand ready to deploy macroprudential tools. - Fiscal Vulnerabilities and Higher Interest Rates - Likelihood: High - Impact: Medium - Policy response: Allow exchange rate flexibility; limit FX intervention to disorderly conditions; grant the executive branch more flexibility to borrow externally while pursuing reforms to deepen domestic debt markets and build fiscal space. - New Trade Agreements - Likelihood: Low - Impact: Medium - Policy response: Improve business environment, close infrastructure gaps, and eliminate barriers to labor force entry to take advantage of new trade opportunities. - Structural risks and responses: - Climate Change - Likelihood: Medium - Impact: Medium - Policy response: Build on reforms implemented under the RSF arrangement and public investment in adaptation and mitigation; create enabling environment for private-sector climate financing (e.g., PPPs and full implementation of the Sustainable Financing Framework). - AI Acceleration - Likelihood: Medium - Impact: Medium - Policy response: Accelerate digital skills development and productive adoption of new technologies; leverage existing strengths and the economy’s readiness for AI. - Domestic risks and responses: - Crime - Likelihood: Medium - Impact: Medium - Policy response: Increase investment in education and crime prevention; implement targeted measures to support vulnerable households. *Source: Annex II. Implementation of Past Fund Policy Advice (1criea2026001).* ### Annex V. Sovereign Risk and Debt Sustainability Assessment ### Annex V. Sovereign Risk and Debt Sustainability Assessment ### Overall Risk Assessment - Overall risk of sovereign stress: Low. - Near term: Not published/applicable (note on IMF arrangements). - Medium term: Low. - Long term: Low. - Mechanical signal: (deleted before publication in surveillance-only cases as noted). - Comment: Costa Rica's overall risk of sovereign stress is assessed as low, reflecting low risks in the medium and long term. Central government debt and gross financing needs are expected to decline, in line with a strong track record and underpinned by the parameters under the fiscal rule. *DSA Summary Assessment* - Baseline sustainability: Sustainable with high probability. - Central government debt projected to decline to 58.4 percent of GDP by 2031. - Gross financing needs (GFNs) estimated at 7.2 percent of GDP in 2026; expected to remain modest over the medium-term. - Primary sources of financing: multilateral creditors, domestic markets, and annual Eurobond issuances (once approved by the legislative assembly). - Mitigants: strong appetite for Costa Rican debt, a fiscal rule that responds to the debt ratio, and authorities' track record in taking corrective action. - Caveat: Broader coverage beyond the central government would aid a more comprehensive assessment. ### Baseline Projections and Key Fiscal Numbers (Medium-Term and Extended) - Public debt (percent of GDP): Actual 2025: 60.4; Projection 2026: 61.1; 2027: 61.4; 2028: 61.3; 2029: 60.7; 2030: 59.7; 2031: 58.4; 2032: 57.2; 2033: 56.0; 2034: 54.8; 2035: 53.8. - Change in public debt (percent of GDP): 2026: 0.7; 2027: 0.3; 2028: -0.1; 2029: -0.6; 2030: -1.0; 2031: -1.3; 2032: -1.2; 2033: -1.2; 2034: -1.1; 2035: -1.1. - Contribution of identified flows mirrors Change in public debt series above (2026: 0.8; 2027: 0.3; 2028: -0.2; 2029: -0.6; 2030: -1.0; 2031: -1.3; 2032: -1.2; 2033: -1.2; 2034: -1.1; 2035: -1.1). - Primary deficit (percent of GDP): Actual 2025: -0.9; Projection 2026: -0.9; 2027: -0.9; 2028: -1.1; 2029: -1.3; 2030: -1.4; 2031: -1.5; 2032: -1.5; 2033: -1.5; 2034: -1.5; 2035: -1.4. - Noninterest revenues (percent of GDP): 2025: 14.4; 2026: 14.2; 2027: 14.1; 2028: 14.0; 2029: 13.8; 2030: 13.7; 2031: 13.5; 2032: 13.5; 2033: 13.5; 2034: 13.5; 2035: 13.5. - Noninterest expenditures (percent of GDP): 2025: 13.5; 2026: 13.4; 2027: 13.2; 2028: 12.8; 2029: 12.5; 2030: 12.2; 2031: 11.9; 2032: 11.9; 2033: 11.9; 2034: 12.0; 2035: 12.0. - Automatic debt dynamics (percent of GDP): 2025: 1.6; 2026: 1.7; 2027: 1.2; 2028: 1.0; 2029: 0.7; 2030: 0.5; 2031: 0.3; 2032: 0.3; 2033: 0.4; 2034: 0.4; 2035: 0.4. - Real interest rate and relative inflation (percent): 2025: 4.1; 2026: 3.7; 2027: 3.3; 2028: 3.1; 2029: 2.8; 2030: 2.5; 2031: 2.3; 2032: 2.2; 2033: 2.2; 2034: 2.1; 2035: 2.1. - Real growth rate (percent): 2025: -2.6; 2026: -2.1; 2027: -2.1; 2028: -2.1; 2029: -2.1; 2030: -2.0; 2031: -2.0; 2032: -1.9; 2033: -1.8; 2034: -1.8; 2035: -1.7. - Gross financing needs (GFN, percent of GDP): 2025: 8.2; 2026: 7.2; 2027: 6.9; 2028: 8.0; 2029: 8.1; 2030: 8.2; 2031: 8.0; 2032: 6.5; 2033: 6.9; 2034: 7.3; 2035: 7.2. - GFN composition (percent of GDP): Local currency and foreign currency series for selected years: Local currency 2025: 5.9; 2026: 5.8; 2027: 5.3; Foreign currency 2025: 3.2; 2026: 2.2; 2027: 2.5. - Memo: Real GDP growth (percent): 2025: 4.6; 2026: 3.6; 2027: 3.6; 2028: 3.6; 2029: 3.5; 2030: 3.5; 2031: 3.5; 2032: 3.3; 2033: 3.3; 2034: 3.2; 2035: 3.2. - Inflation (GDP deflator; percent): 2025: -0.5; 2026: 1.1; 2027: 1.8; 2028: 2.1; 2029: 2.4; 2030: 2.7; 2031: 3.0; 2032: 3.0; 2033: 3.0; 2034: 3.0; 2035: 3.0. - Effective interest rate (percent): 2025: 7.6; 2026: 7.8; 2027: 7.6; 2028: 7.4; 2029: 7.1; 2030: 6.9; 2031: 6.7; 2032: 6.7; 2033: 6.6; 2034: 6.6; 2035: 6.5. ### Debt Coverage and Disclosure - Debt coverage used in DSA: Central government (CG). - Question: If central government, are non-central government entities insignificant? Yes. - Subsectors included in coverage: - 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: Coverage is of the central government due to data timeliness and quality concerns for the broader public sector. 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 by adopting GFSM2014 standards and accrual methods to the general government. ### Public Debt Structure (selected indicators) - Debt by currency (percent of GDP): projection charts show foreign currency and local currency composition over 2016–2034 (perimeter shown is central government). - Public debt by holder (percent of GDP) and governing law, 2025: categories shown include External private creditors, External official creditors, Domestic other creditors, Domestic commercial banks, Domestic law, Foreign law ex. multilateral, Multilateral. - Debt by instruments (percent of GDP) and public debt by maturity (percent of GDP): residual maturity reported as 8.1 years. - Commentary: Authorities expected to fund modest GFNs largely from domestic and multilateral sources. Legislative approval of a bill permitting issuance of up to US$13.5 billion in nine annual tranches of up to US$1.5 billion each would provide additional external financing. ### Medium-Term Risk Analysis and Stress Tests - Debt fanchart module: - Fanchart width: 50.1 0.7 (percent of GDP). - Probability of debt non-stabilization (percent): 1.1 0.3 0.1 (format per figure). - Terminal debt-to-GDP x: 29.9 0.7. - Debt fanchart index (DFI): 1.47. - Risk signal: Moderate (DFI threshold: low if below 1.13; high if above 2.08). - Gross Financing Needs (GFN) module: - Average baseline GFN: 7.7 2.6 (percent of GDP). - Initial Banks' claims on the general government (pct bank assets): 9.9 3.2. - Change in banks' claims in stress (pct banks' assets): 11.5 3.8. - GFN financeability index (GFI): 9.7. - Risk signal: Moderate (GFI thresholds: low if below 7.6; high if above 17.9). - Medium-term index: combination of module indices; final assessment: - Prob. of missed crisis, 2026-2031, if stress not predicted: 18.2 pct. - Prob. of false alarms, 2026-2031, if stress predicted: 42.0 pct. - Commentary: Medium-term risks remain slightly below the low-risk threshold, supported by low GFNs and a decline in the debt-to-GDP ratio by 2031. Both fanchart and GFN modules estimate risks to be moderate, although only marginally above the low-risk threshold. The contingent liability stress test assumes central government liability for all contingent liabilities (about 10 percent of GDP), including the entire 8.6 percent of GDP disputed claim by the CCSS, with equal annual payments beginning in 2026. The natural disaster shock triggered in 2026 assumes temporary slowdown in growth and higher debt to finance recovery. Under these shocks, GFN does not exceed 10 percent of GDP. ### Long-Term Risk Analysis and Custom Scenarios - Staff custom scenario (long-term): - Real GDP growth: 2031: 3.5%; 2035 to 2039 average: 3.1%; Custom scenario long-run: 2.9%. - Primary Balance-to-GDP ratio: 2031: 1.5%; 2035–2039 average: 1.2%; Custom: 1.3%. - Real depreciation: -2.2% (consistent across scenarios). - Inflation (GDP deflator): 3.0% (consistent across scenarios). - Commentary: Even under staff's custom scenario—where long-term primary balance declines to 1.2 percent of GDP and GDP growth slows because of lower fertility, aging population, and declining labor force—gross financing needs and public debt are expected to remain manageable, consistent with a low overall long-term risk. ### Demographics, Pensions, and Health Risks - Pensions module (old age, death, and disability pension focus): - Permanent adjustment needed in the pension system to keep pension assets positive for: 30 years, 50 years, or until 2100 scenarios yield increases in pension financing needs of 1.1% (30 years), 2.7% (50 years), and 4.3% (until 2100) of GDP per year respectively (pp of GDP per year). - Commentary: Staff estimates suggest demographic pressures will likely exhaust reserves in the mid-2030s, creating fiscal pressures and debt risks. Results illustrate the need for parametric changes to minimize long-term fiscal costs. - Health module: - Scenario: per capita healthcare spending increases by 0.6 percent per year (demographics-driven). - Commentary: Population aging is expected to increase fiscal pressures from the healthcare system managed by the CCSS. Absent additional reforms, contingent fiscal pressures could curtail the projected decline in the debt-to-GDP ratio. ### Climate Change: Adaptation and Mitigation Scenarios - Adaptation standardized scenario: - Authorities borrow to fund annual investments equivalent to 0.3 percent of GDP in 2030-2034 and 0.1 percent of GDP in the long term. - Commentary: Under this scenario, GFN and central government debt are not expected to deviate materially from baseline paths. - Mitigation customized scenario for Costa Rica: - Based on costing of the National Decarbonization Plan: 0.3 percent of GDP per year for a decade. - Fuel revenue losses: permanent 0.1 percent of GDP per year. - Commentary: Costa Rica's near complete use of renewable sources for electricity generation reduces transition risks relative to many peers. Under the customized mitigation scenario, investments have only modest effects on GFN and debt. ### Contingent Liabilities and Debt Composition (Selected 2025–2027 Figures) - Total public debt (US$): 62,593.88 (100.0% of total debt; 60.4% of GDP in 2025). - Debt service (US$, percent of GDP in 2025): 9,417.09 (9% of total debt; 9% of ??? — table format retained). - External debt (US$): 15,497.44 (24.8% of total debt; 15.0% of GDP in 2025). - Multilateral creditors (US$): 7,769.86 (12.4% of total debt; 7.5% of GDP in 2025). - IMF: 2,453.58 (3.9% of total debt; 2.4% of GDP). - World Bank: 1,953.90 (3.1% of total debt; 1.9% of GDP). - ADB/AfDB/IADB: 1,981.29 (3.2% of total debt; 1.9% of GDP). - Other Multilaterals: 1,381.09 (2.2% of total debt; 1.3% of GDP). - Bonds / Other international creditors (US$): 7,000.00 (11.2% of total debt; 6.8% of GDP). - Domestic debt (US$): 47,096.44 (75.2% of total debt; 45.5% of GDP in 2025). - Held by residents, total: 46,987.71 (75.1% of total debt; 45.3% of GDP). - Held by non-residents, total: 108.73 (0.2% of total debt; 0.1% of GDP). - T-Bills / Bonds (US$): 47,003.72 (75.1% of total debt; 45.4% of GDP). - Loans (US$): 92.72 (0.1% of total debt; 0.1% of GDP). - Contingent liabilities (US$): 10,091.37 (16.1% of total debt; 9.7% of GDP). - Public guarantees (US$): 785.71 (1.3% of total debt; 0.8% of GDP). - Other explicit contingent liabilities (US$): 9,305.66 (14.9% of total debt; 9.0% of GDP). - Nominal GDP (US$): 103,612.17 (100.0%). - Debt stock (end of period) and debt service figures are presented by creditor for 2025–2027 in the original table; debt service figures reflect budgetary execution and are not forecast beyond the current year at the creditor level. *Source: Fund staff.* ### Annex VI. External Debt Sustainability Assessment ### Annex VI. External Debt Sustainability Assessment ### Key findings - External debt increased to 42.0 percent of GDP in 2025, from 40.6 percent of GDP in 2024. - External debt is projected to rise to 46.0 percent of GDP by 2031 under the baseline. - External debt could reach between 46.9 and 49.8 percent of GDP over the medium term under shocks to growth, interest rates, and the current account. - A one-time real depreciation of 30 percent could raise external debt to 67.6 percent of GDP. ### Baseline projections and dynamics - Baseline external debt path (in percent of GDP): - 2021: 48.3 - 2022: 47.5 - 2023: 43.0 - 2024: 40.6 - 2025: 42.0 - 2026: 43.3 - 2027: 44.2 - 2028: 45.0 - 2029: 45.5 - 2030: 45.8 - 2031: 46.0 - Change in external debt (year-on-year, percent of GDP): -1.1; -0.8; -4.6; -2.3; 1.3; 1.4; 0.9; 0.8; 0.5; 0.4; 0.2 for 2021–2031 respectively. - Identified external debt-creating flows (percent of GDP): -3.9; -7.2; -12.7; -8.6; -6.9; -5.2; -5.0; -5.2; -5.3; -5.3; -5.4 for 2021–2031 respectively. - Current account deficit, excluding interest payments (percent of GDP): 1.7; 0.7; -0.7; -1.2; -0.8; 0.1; 0.0; -0.3; -0.4; -0.5; -0.5 for 2021–2031 respectively. - Deficit in balance of goods and services (percent of GDP): -2.5; -4.0; -6.3; -7.1; -8.3; -7.2; -7.1; -7.2; -7.5; -7.5; -6.3 for 2021–2031 respectively. - Net non-debt creating capital inflows (negative, percent of GDP): -4.9; -6.1; -5.1; -5.4; -5.1; -5.3; -5.2; -5.1; -5.1; -5.1; -5.2 for 2021–2031 respectively. - Automatic debt dynamics (percent of GDP): -0.6; -1.8; -6.9; -2.0; -1.0; 0.0; 0.1; 0.2; 0.3; 0.3; 0.4 for 2021–2031 respectively. - Contribution from nominal interest rate (percent of GDP): 1.5; 1.9; 2.1; 2.0; 1.5; 1.4; 1.6; 1.7; 1.8; 1.8; 1.9 for 2021–2031 respectively. - Contribution from real GDP growth (percent of GDP): -3.9; -2.4; -1.8; -1.6; -1.7; -1.4; -1.5; -1.5; -1.5; -1.5; -1.5 for 2021–2031 respectively. - Contribution from price and exchange rate changes (percent of GDP): 1.8; -1.2; -7.1; -2.5; -0.7 for 2021–2025 (table shows .................. thereafter). - Residual, including change in gross foreign assets (percent of GDP): 2.8; 6.4; 8.1; 6.3; 8.2; 6.6; 5.9; 6.0; 5.7; 5.6; 5.5 for 2021–2031 respectively. - External debt-to-exports ratio (in percent): 134.2; 112.9; 109.1; 104.2; 103.8; 109.5; 111.4; 110.9; 109.7; 108.7; 110.1 for 2021–2031 respectively. ### Gross external financing needs - Gross external financing need (in billions of US dollars), 2021–2031: 7.3; 6.6; 7.4; 8.0; 7.5; 8.5; 8.9; 9.2; 9.8; 10.5; 11.2. - Gross external financing need (in percent of GDP): 11.1; 9.2; 8.4; 8.3; 7.3; 10-Year; 10-Year; 7.7; 7.6; 7.5; 7.6; 7.6; 7.7 (table formatting presents "10-Year" labels in place of certain entries). ### Scenario and bound-test outcomes - Scenario central outcomes (external debt in percent of GDP): - Interest rate shock: 46.9 (versus baseline 46.0). - Growth shock: 49.8 (versus baseline 46.0). - Current account (Non-interest) shock: 49.0 (versus baseline 46.0). - Combined shock (permanent ¼ standard deviation shocks to real interest rate, growth rate, and current account balance): 49.8 (versus baseline 46.0). - Real depreciation shock (one-time real depreciation of 30 percent occurring in 2026): 67.6 (versus baseline 46.0). - Baseline and historical comparisons noted in figures: - Historical (ten-year average) external debt shown as 50.6 (in figure context) versus Baseline 46.0. ### Key macroeconomic assumptions underlying the baseline - Real GDP growth (in percent): Historical/Average/Deviation/Projections: 8.2; 5.5; 4.8; 4.1; 4.6; 3.7; 3.1; 3.6; 3.6; 3.6; 3.5; 3.5; 3.5 (table shows a contiguous series across years including historical and projections). - GDP deflator in US dollars (change in percent): -3.5; 2.6; 17.6; 6.2; 1.7; 2.6; 5.9; 3.2; 2.1; 2.0; 1.9; 2.0; 2.2. - Nominal external interest rate (in percent): 3.1; 4.3; 5.5; 5.2; 3.8; 3.9; 0.8; 3.6; 3.9; 4.1; 4.1; 4.2; 4.3. - Growth of exports (US dollar terms, in percent): 18.2; 26.6; 15.2; 9.5; 10.3; 9.7; 9.9; 4.7; 6.0; 8.0; 7.8; 7.3; 4.9. - Growth of imports (US dollar terms, in percent): 25.2; 23.3; 7.0; 6.6; 7.2; 7.3; 11.1; 7.8; 6.1; 8.5; 7.3; 7.5; 8.4. - Current account balance, excluding interest payments (percent of GDP): -1.7; -0.7; 0.7; 1.2; 0.8; -0.4; 1.3; -0.1; 0.0; 0.3; 0.4; 0.5; 0.5. - Net non-debt creating capital inflows (percent of GDP): 4.9; 6.1; 5.1; 5.4; 5.1; 4.4; 0.8; 5.3; 5.2; 5.1; 5.1; 5.1; 5.2. ### Interpretation of drivers - The 2025 increase in external debt to 42.0 percent of GDP reflects that a narrower noninterest current account deficit, strong real growth, and currency appreciation only partially offset: - the effects from interest payments and valuation effects on the outstanding stock of debt. - Over the medium term, rising nominal interest rates more than offset a positive trade balance, contributing to the projected rise in external debt to 46.0 percent of GDP by 2031. - Shocks to growth, interest rates, and the current account raise external debt further; an exchange rate depreciation shock is especially large, pushing the ratio to 67.6 percent of GDP under a 30 percent depreciation. *International Monetary Fund — Annex VI. External Debt Sustainability Assessment* ### 2. Costa Rica: Data Standards Initiatives ### 2. Costa Rica: Data Standards Initiatives ### Table of Common Indicators Required for Surveillance — key dissemination metadata - Exchange Rates - Date of Latest Observation: 2026-04-30 - Date Received: 2026-04-30 - Frequency: DDD - International Reserve Assets and Reserve Liabilities of the Monetary Authorities - Date of Latest Observation: 2026-04 - Date Received: 2026-04 - Frequency: MMMM - Expected Frequency: 1W - Committed Frequency: 3W - Reserve/Base Money - Date of Latest Observation: 2026-03 - Date Received: 2026-04 - Frequency: MMMM - Expected Frequency: 2W - Committed Frequency: 1W - Broad Money - Date of Latest Observation: 2025-12 - Date Received: 2026-04 - Frequency: MMMM - Expected Frequency: 1M - Committed Frequency: 2W - Central Bank Balance Sheet - Date of Latest Observation: 2026-03 - Date Received: 2026-04 - Frequency: MMMM - Expected Frequency: 2W - Committed Frequency: 1W - Consolidated Balance Sheet of the Banking System - Date of Latest Observation: 2025-12 - Date Received: 2026-04 - Frequency: MMMM - Expected Frequency: 1M - Committed Frequency: 2W - Banks' Financial Soundness Indicators - Date of Latest Observation: 2025-12 - Date Received: 2026-02 - Frequency: QQQ - Committed Timeliness: 1Q2W - Consumer Price Index - Date of Latest Observation: 2026-03 - Date Received: 2026-04 - Frequency: MMMM - Expected Frequency: 1M - Committed Timeliness: 3D - Revenue, Expenditure, Balance and Composition of Financing — General Government - Date of Latest Observation: 2025-12 - Date Received: 2026-03 - Frequency: AAAA - Frequency of Reporting: 2Q - Expected Timeliness: 6M - Revenue, Expenditure, Balance and Composition of Financing — Central Government - Date of Latest Observation: 2026-01 - Date Received: 2026-03 - Frequency: MMMM - Expected Frequency: 1M - Committed Timeliness: 20D - Stocks of Central Government and Central Government-Guaranteed Debt - Date of Latest Observation: 2026-02 - Date Received: 2026-03 - Frequency: MMQM - Expected Frequency: 1Q - Committed Timeliness: 3W - Total stock of General Government Debt - Date of Latest Observation: 2025-12 - Date Received: 2026-03 - Frequency: AAQ - Expected Timeliness: 4M - External Current Account Balance - Date of Latest Observation: 2025-12 - Date Received: 2026-03 - Frequency: QQQQ - Expected Frequency: 1Q - Committed Timeliness: 3M - Exports and Imports of Goods and Services - Date of Latest Observation: 2025-12 - Date Received: 2026-03 - Frequency: QQMM - Expected Timeliness: 8W - Committed Timeliness: 3W - GDP/GNP - Date of Latest Observation: 2025-12 - Date Received: 2026-03 - Frequency: QQQQ - Expected Frequency: 1Q - Committed Timeliness: 3M - Gross External Debt - Date of Latest Observation: 2026-02 - Date Received: 2026-03 - Frequency: MMQQ - Expected Frequency: 1Q - Committed Timeliness: 1Q - International Investment Position - Date of Latest Observation: 2025-12 - Date Received: 2026-03 - Frequency: QQQQ - Expected Frequency: 1Q - Committed Timeliness: 1Q Notes from table: - Frequency and timeliness codes: (“D”) daily; (“W”) weekly or with a lag of no more than one week after the reference date; (“M”) monthly or with lag of no more than one month after the reference date; (“Q”) quarterly or with a lag of no more than one quarter after the reference date; (“A”) annual; (“SA”) semi-annual; (“I”) irregular; (“NA”) not available or not applicable; and (“NLT”) not later than. - For definitions: 1 Includes net market value of derivative positions. 2 Other depository corporations include all deposit-taking corporations (except for the central bank) and money market funds. 3 Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. 4 Foreign, domestic bank, and domestic non-bank financing. 5 The general government consists of the central government (budgetary funds, extra-budgetary funds, and social security funds) and state and local governments. 6 Including currency and maturity composition. 7 Frequency and timeliness definitions as above. 8 Encouraged frequency of data and timeliness of reporting under the e-GDDS and required frequency of data and timeliness of reporting under the SDDS and SDDS Plus. 9 Based on information from the Summary of Observance for SDDS and SDDS Plus participants, and the Summary of Dissemination Practices for e-GDDS participants, available from the IMF Dissemination Standards Bulletin Board. ### Macroeconomic developments, outlook, and policy settings (selected findings and projections) - Growth and outlook - GDP growth in 2025: 4.6 percent - GDP growth in Q1 2026: 4.6 percent - Outlook for 2026–2027 biennium: average growth of 3.5 percent - External sector - Current account deficit estimated for 2025: 0.7 percent of GDP - Current account deficit projected to average over 2026–2027: 1.5 percent of GDP - Trade in Q1 2026: exports grew 7.8 percent; imports grew 1.7 percent - Cumulative FX surplus through April 22, 2026: USD 2,417 million - Net international reserves: USD 19,645 million (up USD 2,564 million year-to-date) - Nominal exchange rate appreciation: 9.9 percent year-on-year - Inflation and monetary policy - Monetary Policy Rate (MPR) as of latest BCCR decision: 3.25 percent - Cumulative reduction in policy rate between March 2023 and April 2026: 525 basis points - Headline inflation (Q1 2026 average): –2.5 percent - Headline inflation (April 2026): -1.64 percent - Core inflation (Q4 2025): 0.4 percent - Inflation expectations: 12-month expectations below the lower bound of tolerance range; 24-month expectations slightly above the reference - BCCR stance: maintain MPR at 3.25 percent; policy described as data-dependent and forward-looking - Fiscal policy - Primary surplus projected in 2026: around 0.9 percent of GDP - Fiscal stance: expected to remain broadly neutral while preserving space for priority spending on security, infrastructure, and social programs - Risk and buffers - Authorities note elevated oil prices and weaker external demand could widen the current account deficit - Global shock from the Middle East war identified as an additional external uncertainty - FCL recognized as instrumental; Costa Rica continues to meet qualification criteria for the FCL ### Institutional, legal, and capacity-development items - Exchange rate regime classification - De jure: “managed floating” - De facto: classified as “stabilized” due to BCCR FX interventions that kept exchange rate fluctuations within a 2 percent band against the U.S. dollar for more than 6 months since mid-2024; greater flexibility observed so far in 2026 but more observations needed before reclassification - Costa Rica has accepted the obligations under Article VIII - Safeguards assessment and legal framework for the central bank (BCCR) - Updated safeguards assessment of the BCCR in 2020: most recommendations implemented; residual areas in legal framework and governance remain - Authorities have submitted a proposal for legal amendments; proposal most recently revised in 2025 and pending consideration by the Legislative Assembly - Note: a bill to improve BCCR transparency and accountability was submitted in June 2024; a separate constitutional amendment to grant autonomy to the BCCR was submitted in August 2024 - Capacity Development (CD) priorities - Consolidate achievements under previous EFF and RSF arrangements - Further improve fiscal institutions and implement fiscal reforms to widen the tax base, boost investment and support inclusive growth while ensuring debt sustainability - Strengthen central bank autonomy and governance and the supervisory and crisis management framework - Emphasis on integration between CD activities and surveillance priorities and coordination with partners *Prepared by: The Western Hemisphere Department (in consultation with other departments); As of April 30, 2026.* ### 60.4 percent of GDP at end-2025, reflecting the deliberate accumulation of cash buffers to ### 60.4 percent of GDP at end-2025, reflecting the deliberate accumulation of cash buffers to ### Fiscal policy and public debt - Public debt projected at 60.4 percent of GDP at end-2025, reflecting the deliberate accumulation of cash buffers to meet upcoming debt obligations. - Authorities remain committed to the fiscal rule, which has played a critical role in strengthening fiscal discipline and placing public debt on a downward trajectory. - Recent policy changes have weakened the tax base and could constrain spending capacity over the medium term. - Authorities broadly agree that a broad-based tax reform—focused on: - rationalizing tax expenditures, - strengthening income taxation, and - removing certain tax exemptions —would help create additional fiscal space to advance both fiscal and social objectives. ### Revenue administration and fiscal institutions - Ongoing improvements in revenue administration are already yielding positive results, including: - successful implementation of Hacienda Digital, - enhanced tax compliance measures, and - stronger institutional coordination. - Authorities committed to advancing broader fiscal and debt management reforms, including: - operationalizing the Fiscal Council, - strengthening the macro-fiscal unit within the Ministry of Finance, and - modernizing fiscal reporting in line with GFSM 2014 to enhance transparency and institutional capacity. ### Financing strategy and market confidence - Government financing plans: - rely on international budget support loans (nearly USD 1 billion over the biennium), and - assume annual international bond placements of USD 1,500 million starting in 2027 over a ten-year horizon. - Costa Rica intends to advance reforms to facilitate more flexible external debt issuance to support more efficient debt management and help reduce financing costs. - Market indicators: - Emerging Market Bond Index (EMBI) stood at 148 basispoints, as of April 11, below both EMBI LATAM and EMBI GLOBAL averages, reflecting strengthened confidence in the central government's capacity to meet financial obligations. ### Pension, healthcare, and social sustainability - The Ministry of Finance and the Caja Costarricense de Seguro Social are working closely to: - resolve outstanding claims, and - strengthen the long-term sustainability of the pension and healthcare systems. - Authorities recognize progress in these areas is essential to preserving fiscal sustainability and safeguarding social cohesion over the medium term. ### Financial sector oversight and reforms - Financial system remains well capitalized and liquid, with low levels of nonperforming loans. - Staff and authorities assess systemic risks as contained but stress continued vigilance and faster progress on key reforms. - Priorities and ongoing actions: - Passage of the new bank resolution and deposit insurance law remains a priority for the new legislature. - Authorities proceeding carefully on pension fund reform and remain mindful of risks associated with early withdrawals. - Progress toward fully implementing risk-based and consolidated supervision, consistent with the 2022 World Bank FSAP recommendations, with emphasis on operational resilience and cybersecurity. - Need to establish a regulatory framework for fintech firms aligned with international best practices to safeguard financial stability. ### Structural reform agenda and growth constraints - Government committed to a broad structural reform agenda to unlock long-term growth potential and ensure inclusive benefits. - Persistent bottlenecks identified: high informality, low female labor force participation, skills mismatches, and infrastructure gaps. - Concrete steps taken: - Expanding child and elder care services to reduce barriers to female labor force participation. - Strengthening the dual vocational training program to better align workforce skills with private sector needs. - “We Let You Work” initiative has removed 186 regulatory bottlenecks, improving the business environment. - Leveraging Costa Rica’s leading position in AI preparedness—ranking first among Central American peers on the IMF’s AI Preparedness Index—through targeted digital skills training and broader adoption of AI across public and private sectors. - Addressing elevated crime rates with a comprehensive approach combining stronger law enforcement and education and sports programs for at-risk youth. - Addressing infrastructure gaps via ongoing road and transport investments, including an electric train connecting the Greater Metropolitan Area. - Passage of the proposed PPP law and legislative approval of USD 800 million in financing for the Metropolitan Area Rapid Passenger Train (TRP), with the PPP Framework Law advanced in its first reading and the TRP financing bill passing unanimously in its second reading before being signed into law. ### Flexible Credit Line (FCL) review and external position - Costa Rica continues to treat the Flexible Credit Line as precautionary and values it for supporting favorable financing conditions and policy implementation. - The country continues to meet all nine qualification criteria. - External position described as strong, with international reserves above the desired level. - Public finances continue to perform well, and public debt is assessed as sustainable. - Authorities and staff view the FCL as an important precautionary buffer against a volatile and uncertain global environment. ### Final observations and policy priorities - Costa Rica’s performance reflects institutional commitment to macroeconomic stability, fiscal discipline, and forward-looking policymaking despite a challenging global environment. - Preserving gains will require sustained reform efforts, including: - tax policy modernization, - pension and healthcare sustainability measures, - financial sector strengthening, and - advancement of structural reforms to unlock inclusive and sustainable growth. - Early legislative achievements signal a constructive political environment and shared urgency in addressing development priorities. - Authorities reaffirm commitment to policy principles guiding Costa Rica's economic model and to maintaining close engagement with the Fund; the Flexible Credit Line remains a valued component of the precautionary toolkit. *Source: Content unit 1criea2026001.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1criea2026001.pdf_