## EXECUTIVE SUMMARY — Costa Rica (Second SBA Review)

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---

### Recent developments
- Economic activity:
  - Real GDP contracted by 1.5 percent in 2009 (base for the 2010 outlook).
  - Industrial production rose by 0.3 percent from the previous month (seasonally adjusted), constituting the seventh consecutive monthly increase.
  - Economic activity growing for several months on a seasonally adjusted basis but commerce, construction, and tourism-related industries remain lagging.
- Inflation and external conditions:
  - Headline inflation fell to 2.57 percent in November; headline and core inflation continued to fall in October, to 4.0 and 5.7 percent (12-month basis), respectively.
  - Annual inflation on track to fall to 5 percent (12-month basis) by end-2009 and remain within the central bank’s target band of 4–6 percent in 2010.
  - Average 12-month inflation expectations declined to 7.4 percent (November) and median 12-month inflation expectations were 7.3 percent (October).
  - No balance of payments pressures; net international reserves as of mid-November stood at about $4 billion (roughly the same amount as of end-2008, excluding the additional SDR allocation).
- Labor and social indicators:
  - Unemployment rose from 4.9 percent to 7.8 percent from mid-2008 to mid-2009.
  - Poverty (percent of households) rose from 17.7 percent to 18.5 percent over the same period; extreme poverty 4.2 percent (2009).
  - Income distribution worsened; income share of the lowest quintile fell by ½ of a percentage point.
  - Public sector hiring (mainly police officers and teachers) and higher government transfers mitigated the rise in unemployment and poverty.
- External sector:
  - In H1 2009 imports collapsed and exports experienced a significant contraction; external current account deficit turned into broad balance while capital account posted a modest surplus of 0.4 percent of GDP despite a significant slowdown in FDI.
  - In Q3 exports started to recover while import growth remained subdued; trade deficit through September substantially lower than in 2008.
- Financial sector:
  - Banks repaid external credit lines and strengthened net foreign asset positions.
  - Bank credit to the private sector grew by less than 1.5 percent during January–September (source text notes slower credit growth).
  - As of end-September 2009, banking system nonperforming loan ratio stood at 2.1 percent (about one percentage point higher than one year earlier).
  - Liquidity and solvency indicators remained adequate despite slight deterioration in credit quality.

### Boxed finding — Factors behind the sharp fall in tax revenue
- Import-related taxes were 30 percent lower in the first nine months of 2009 than in the same period of 2008.
- Two-thirds of the decline explained by a lower tax base: value of imports in colones (excluding free trade zones and petroleum) declined by 22 percent through September.
- One-third explained by decline in the implicit effective tax rate, driven by sharper contraction in highly taxed imported goods (e.g., durable goods fell by 38 percent during January–September).
- Revenues from car imports alone were down by 0.5 percent of GDP in the first nine months of the year versus the same period of 2008.
- Implementation of CAFTA-DR reduced import duties by about 0.2 percent of GDP.

### Outlook and risks
- Central scenario:
  - Real GDP growth expected to rise to 2.3 percent in 2010, following a 1.5 percent contraction in 2009.
  - External current account deficits projected at 3 percent of GDP in 2009 and 4.5 percent of GDP in 2010.
- Risks:
  - Program risks have declined and appear broadly balanced.
  - Main downside risk to growth: slower-than-expected global recovery of Costa Rica’s main trading partners.
  - Short-term balance of payments risks moderated due to strengthening of the colón, revised current account outlook, and seasonal pickup in FX inflows expected by year-end.
  - Weak revenue performance remains the main risk to the program (could lead to higher-than-projected fiscal deficits and domestic financing requirements).
  - Upside risks: opening of telecommunications and insurance sectors to private operators could attract additional FDI.

### Policy discussions — overall
- SBA reiterated as an appropriate precautionary framework to bolster confidence and support recovery.
- Main discussion topics:
  - Size and phasing of fiscal stimulus in 2010.
  - Appropriate monetary policy stance.
  - Next steps in transition to greater exchange rate flexibility and inflation targeting.
  - Health of the financial sector.
- Authorities reiterated intention to continue treating the SBA as precautionary.

---

### Fiscal policy: performance, targets, and 2010 stance

### Recent fiscal performance (through September)
- Central government revenues through September were 7.7 percent lower than during the same period of 2008, mainly due to sharp drop in import-related taxes.
- Central government noninterest spending rose 23.6 percent through September but remained below levels assumed in the program.
- Central government deficit in the first nine months was below program projections by 0.3 percent of GDP.
- Revenues for 2009 could fall short of projections by about 0.3 percent of GDP.

### Program targets and assumptions
- Fiscal deficit targets maintained despite lower-than-projected revenues.
- Program contemplates 0.3 percent of GDP of lower tax revenues in 2009 compared to earlier projections.
- End-year deficit targets cited in the text:
  - Central government end-year deficit target: 4.1 percent of GDP.
  - Combined public sector end-year deficit target: cited as 4.8 percent of GDP in one passage and 4.7 percent of GDP elsewhere; text notes the deficit targets remain the same as agreed during the first review (4.1 percent of GDP and 4.7 percent of GDP, respectively).
- Program expects slower pace of execution of budgeted spending (including public investment) to offset lower revenues and comply with end-year deficit targets without additional policy measures.

### 2010 fiscal stance
- Backloaded withdrawal of fiscal stimulus:
  - Positive fiscal impulse early in 2010 and withdrawal of stimulus in latter part of the year.
- Financing strategy for 2010:
  - Rely on external financing to cover significant share of government borrowing needs, contingent on parliamentary approval for external borrowing (including a US$500 million World Bank budget support loan submitted to the Assembly).
  - If parliamentary approval not forthcoming, authorities would meet financing needs in the domestic market.

---

### Monetary policy, exchange rate, and financial sector policy

### Monetary stance and guidance
- Consensus that a cautious easing bias for monetary policy remains appropriate in near term.
- Factors supporting easing:
  - Continued downward trend of core inflation and inflation expectations.
  - Presence of a negative output gap.
- Upside risks:
  - Stickiness of inflation and depreciation expectations (currently around 7 percent).
  - Dampening effects of the fall in commodity prices of early 2009 not expected to recur.
- Staff recommendation:
  - More aggressive interest rate easing should await firmer evidence of lower inflation and depreciation expectations.
  - Recent rise of the real policy rate increased scope for policy maneuver.

### Exchange rate policy and transition to inflation targeting
- Authorities intended to complete transition toward greater exchange rate flexibility and inflation targeting by end-2010.
- Specific policy intentions:
  - Maintain the annual rate of crawl for the ceiling of the currency band at 9 percent.
  - Review regulations for foreign currency derivatives to speed development of domestic hedging instruments.
- Mission recommendations reiterated:
  - Re-introduce a negative rate of crawl for the floor of the currency band.
  - Clarify the central bank’s role in the foreign exchange market and improve monetary operations (as advised in the 2009 Article IV consultation).
- Authorities' stance:
  - Concurred with recommendations on clarifying the central bank’s role and improving operations.
  - Preferred to maintain the current horizontal floor for the exchange rate band, citing concerns that too many parameter changes could unsettle expectations.
- Operational notes:
  - Inflation and depreciation expectations measured by the central bank through a monthly survey.
  - Exchange rate regime classified as “other managed” arrangements in the IMF classification.
  - Colón traded continuously below the ceiling of the currency band since mid-August.

### Financial sector resilience and reforms
- Financial sector weathered downturn relatively well; continued vigilance recommended.
- Key indicators and measures:
  - Nonperforming loan ratio: 2.1 percent as of end-September 2009 (about one percentage point higher than one year earlier).
  - Nonperforming loans expected to continue rising at a moderate rate.
  - Authorities on track to fulfill end-December structural benchmarks: submit legislation to create a limited deposit insurance scheme and strengthen bank resolution framework (first draft prepared and under revision).
  - Central bank hired an external auditor to conduct annual audits from 2008 onwards and to prepare analysis of gaps with IFRS.

---

### Program modalities, conditionality, and staff appraisal

### Program modality changes
- Given reduced uncertainty and lower program risks, frequency of program reviews modified from quarterly to biannual.
- Quantitative performance criteria and indicative targets maintained for end-December 2009 and end-March 2010.
- Calendar changes:
  - Eliminate the review originally scheduled for late March 2010; next and final review scheduled for late June 2010.
  - Move availability date of the fourth purchase forward to January 29, 2010.
- Technical Memorandum of Understandings (TMU) unchanged from the first review.

### Staff appraisal — macro outlook, risks, and policy advice
- Macroeconomic assessment:
  - Recovery taking hold but not yet broad-based; inflation moderated to historically low levels; no balance of payments pressures; financial sector stable.
  - Developments broadly consistent with staff projections at time of first program review.
- Program performance:
  - Performance under the precautionary SBA remained very strong; all quantitative performance criteria for end-September met.
  - Immediate risks to the program declined, especially likelihood of balance of payments and exchange rate pressures.
  - Weak revenue performance remains a key risk to fiscal outcomes.
- Policy guidance:
  - Fiscal policy should balance supporting domestic demand and keeping government borrowing in check.
  - Program for 2010 provides room for some additional fiscal stimulus early in the year.
  - Gradual easing bias for monetary policy remains adequate; maintain cautious approach given upside inflation risks.
  - Staff encouraged authorities to clarify central bank’s role in FX market and improve monetary operations.
  - Structural reform priorities include approval of legislation on central bank recapitalization, consolidated financial sector supervision, and foreign financing for the 2010 budget.
- Staff conclusion:
  - Authorities' policies and recent developments support recovery while maintaining financial and external stability, but fiscal and legislative risks warrant continued attention.

### Staff recommendation
- Staff recommends approval of the second review under the SBA.
- Assessment: "Performance under the program has been strong, and the authorities’ policies continue to be adequate to support economic recovery while maintaining internal and external stability."

---

### Key quantitative performance criteria and selected macro indicators (selected figures preserved exactly)

- Floor on cash balance of the Central Government (cumulative) (billion of colones):
  - 2009 Program End-March: -210
  - 2009 Program End-June: -106
  - 2009 Program End-September: -312
  - 2009 Program End-December: -206
  - 2010 Program End-March (Prog. 3/): -471
  - 2010 Program End-March (Actual): -377
  - 2010 Program End-June (Prog. 3/): -639
  - 2010 Program End-June (Actual): -639
  - 2010 Program End-September Proposed: -322

- Ceiling on the debt stock of the Central Government (billion of colones):
  - 2009 Program End-March: 4,303
  - 2009 Program End-June: 4,239
  - 2009 Program End-September: 4,356
  - 2009 Program End-December: 4,338
  - 2010 Program End-March (Prog. 3/): 4,753
  - 2010 Program End-March (Actual): 4,551
  - 2010 Program End-June (Prog. 4/): 4,871
  - 2010 Program End-June (Actual): 4,914
  - 2010 Program End-September Proposed: 5,286

- Ceiling on NDA of the Central Bank (billion of colones):
  - 2009 Program End-March: -915
  - 2009 Program End-June: -1,301
  - 2009 Program End-September: -786
  - 2009 Program End-December: -1,244
  - 2010 Program End-March (Prog. 3/): -970
  - 2010 Program End-March (Actual): -1,170
  - 2010 Program End-June (Prog. 4/): -896
  - 2010 Program End-June (Actual): -896
  - 2010 Program End-September Proposed: -800

- Floor on NIR of the Central Bank (million of US$):
  - 2009 Program End-March: 3,500
  - 2009 Program End-June: 4,167
  - 2009 Program End-September: 3,350
  - 2009 Program End-December: 3,936
  - 2010 Program End-March (Prog. 3/): 3,555
  - 2010 Program End-March (Actual): 4,059
  - 2010 Program End-June (Prog. 4/): 3,705
  - 2010 Program End-June (Actual): 3,705
  - 2010 Program End-September Proposed: 3,405

- Selected macro projections and indicators (exact values as presented):
  - Per capita income (2008, U.S. dollars): 6,544
  - Unemployment (2009, percent of labor force): 7.8
  - Population (July 2008, millions): 4.5
  - Poverty (2009, percent of households): 18.5
  - GDP at constant prices (annual percent change): 2009 Prog./Proj.: -1.5 / -1.5; 2010 Prog./Proj.: 2.3 / 2.3
  - Consumer prices (end of period): 2009 Prog./Proj.: 5.0 / 5.0; 2010 Prog./Proj.: 5.0 / 5.0
  - External current account (percent of GDP): 2009 Prog./Proj.: -3.6 / -3.0; 2010 Prog./Proj.: -4.8 / -4.5
  - Net international reserves (US$ million): 2009 Prog./Proj.: 4,004 / 4,004; 2010 Prog./Proj.: 4,104 / 4,104
  - Gross financing requirements (US$ million): 2009 Prog./Proj.: 5,860 / 5,664; 2010 Prog./Proj.: 5,415 / 5,300

---

### Structural benchmarks, disbursement schedule, and program monitoring

- Structural benchmarks (status as of November 18, 2009):
  - Establishment of a monthly monitoring report for the banking system — End-June 2009 — Met
  - Unification of the money market under a single platform — End-June 2009 — Met (by August 2009)
  - Establishment of a system of daily forecasting of systemic liquidity in the money market — End-June 2009 — Met
  - Submission to parliament of a draft law to strengthen the bank resolution framework — End-December 2009 — (underway)
  - Submission to parliament of a draft law to create a limited deposit guarantee scheme — End-December 2009 — (underway)

- Schedule of availability of disbursements (SDR):
  - SDR 328,200,000 — April 10, 2009 — Executive Board approval of the 18-month SBA.
  - SDR 41,025,000 — September 23, 2009 — Observance of end-June 2009 performance criteria and completion of first review.
  - SDR 41,025,000 — December 16, 2009 — Observance of end-September 2009 performance criteria and completion of second review.
  - SDR 41,025,000 — January 29, 2010 — Observance of end-December 2009 performance criteria.
  - SDR 41,025,000 — June 17, 2010 — Observance of end-March 2010 performance criteria and completion of third review.

---

*Source: EXECUTIVE SUMMARY and chapters/excerpts from IMF staff report and authorities (second program review) — _cr1002.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Recent developments
- Costa Rica’s economy is slowly emerging from recession: economic activity is expanding but commerce, construction, and tourism-related industries remain lagging.
- Real GDP contracted by 1.5 percent in 2009 (base for the 2010 outlook).
- Inflation and external conditions:
  - Inflation has fallen to historically low levels; headline and core inflation continued to fall in October, to 4.0 and 5.7 percent (12-month basis), respectively.
  - Inflation is on track to fall to 5 percent (12-month basis) by end-2009 and remain within the central bank’s target band of 4–6 percent in 2010.
  - There have been no balance of payments pressures; net international reserves as of mid-November stood at about $4 billion (roughly the same amount as of end-2008, excluding the additional SDR allocation).
- Stand-By Arrangement (SBA) performance:
  - Performance under the SBA has remained very strong; all quantitative performance criteria for end-September were met, most with considerable margins.
  - The authorities have continued to treat the SBA as precautionary.
  - The reduced uncertainty about the external environment and lower program risks justify modification of the frequency of program reviews from quarterly to biannual; with this modification, the third (and final) program review would take place in June 2010.
- Fiscal and financial sector developments:
  - Central government revenues through September were 7.7 percent lower than during the same period of 2008, mainly owing to a sharp drop in import-related taxes.
  - Central government noninterest spending rose 23.6 percent (through September) but remained below levels assumed in the program.
  - The deficit of the central government in the first nine months of the year was below program projections by 0.3 percent of GDP.
  - Interest rates on domestic debt have fallen by more than 200 bps since September (to about 9.9 percent for 3-year benchmark bonds).
  - Market interest rates (“tasa pasiva”) fell by 250 bps in October and have since remained on a downward trend.
  - The real effective exchange rate (REER) continued to depreciate during the third quarter, largely due to the fall in inflation; since mid-August the colón has remained continuously below the ceiling of the currency band.
  - Bank credit to the private sector grew by less than 1.5 percent during January–September.
  - Banks repaid external credit lines and strengthened net foreign asset positions; solvency and credit quality indicators deteriorated slightly in the third quarter but remain at comfortable levels.
- External sector:
  - In the first half of 2009 imports collapsed and exports experienced a significant contraction; the external current account deficit turned into broad balance, while the capital account posted a modest surplus of 0.4 percent of GDP despite a significant slowdown in FDI.
  - In the third quarter exports started to recover while import growth remained subdued; as of end-September the trade deficit was substantially lower than in 2008.
- Social indicators:
  - Unemployment rose from 4.9 percent to 7.8 percent from mid-2008 to mid-2009.
  - The share of poor households rose from 17.7 percent to 18.5 percent over the same period.
  - Income distribution worsened, with the income share of the lowest quintile falling by ½ of a percentage point.
  - Public sector hiring (mainly police officers and teachers) and higher government transfers mitigated the rise in unemployment and poverty.

### Boxed finding — Factors behind the sharp fall in tax revenue
- Import-related taxes were 30 percent lower in the first nine months of 2009 than in the same period of 2008.
- About two-thirds of the decline in import-related tax revenue is explained by a lower tax base: the value of imports in colones (excluding free trade zones and petroleum) declined by 22 percent through September.
- The remaining one-third is explained by a decline in the implicit effective tax rate, driven by a sharper contraction in highly taxed imported goods (e.g., durable goods fell by 38 percent during January–September).
- Revenues from car imports alone were down by 0.5 percent of GDP in the first nine months of the year versus the same period of 2008.
- Implementation of CAFTA-DR has reduced import duties by about 0.2 percent of GDP.

### Outlook and risks
- Central scenario:
  - Real GDP growth is expected to rise to 2.3 percent in 2010, following a 1.5 percent contraction in 2009.
  - Annual inflation is on track to fall to 5 percent by end-2009 and remain within the central bank’s target band of 4–6 percent in 2010.
  - External current account deficits are now projected at 3 percent of GDP in 2009 and 4.5 percent of GDP in 2010, somewhat lower than previously envisaged.
- Risks:
  - Program risks have declined further and now appear broadly balanced.
  - The main downside risk to growth is a slower-than-expected global recovery of Costa Rica’s main trading partners.
  - Short-term balance of payments risks have moderated due to the recent strengthening of the colón, the revised current account outlook, and seasonal pickup in foreign exchange inflows expected by year-end.
  - Weak revenue performance remains the main risk to the program, as it could lead to higher-than-projected fiscal deficits and domestic financing requirements.
  - There are upside risks from recent opening of telecommunications and insurance sectors to private operators, which could attract additional FDI.

### Policy discussions — Overall
- Agreement that the SBA continues to provide a sound framework to bolster confidence and support the recovery.
- Discussions focused on:
  - Size and phasing of fiscal stimulus in 2010.
  - Appropriate monetary policy stance.
  - Next steps in the transition to greater exchange rate flexibility and inflation targeting.
  - Health of the financial sector.
- Authorities reiterated intention to continue treating the SBA as precautionary.

### Fiscal policy
- The fiscal deficit targets agreed during the first review were maintained despite lower-than-projected revenues.
- The program contemplates 0.3 percent of GDP of lower tax revenues in 2009 compared to earlier projections.
- Revised program assumptions:
  - End-year deficit targets for the central government and the combined public sector were cited as 4.1 percent of GDP and 4.8 percent of GDP, respectively, in one passage.
  - Later, the text states the deficit targets for the central government and the combined public sector remain the same as those agreed during the first review (4.1 percent of GDP and 4.7 percent of GDP, respectively).
- The program expects a slower pace of execution of budgeted spending (including public investment) to offset lower revenues and allow compliance with end-year deficit targets without additional policy measures.
- For 2010 the fiscal program contemplates a backloaded withdrawal of fiscal stimulus:
  - The program provides for a positive fiscal impulse in the early part of the year and a withdrawal of stimulus in the latter part.
  - There was agreement on relying on external financing to cover a significant share of government borrowing needs in 2010, contingent on parliamentary approval for external borrowing (including a US$500 million World Bank budget support loan submitted to the Assembly).
  - If parliamentary approval is not forthcoming, the authorities would meet financing needs in the domestic market.

### Monetary, exchange rate, and financial sector policies
- Monetary stance:
  - Agreement that a cautious easing bias for monetary policy remains appropriate in the near term.
  - Continued downward trend of core inflation and inflation expectations, and the presence of a negative output gap, bode well for compliance with the 2010 inflation target (4–6 percent) with the present stance.
  - Upside risks: stickiness of inflation and depreciation expectations (currently around 7 percent) and the fact that the dampening effects of the fall in commodity prices of early 2009 will not recur.
  - Staff noted the recent rise of the real policy rate had increased scope for policy maneuver, but recommended that more aggressive interest rate easing await firmer evidence of lower inflation (and depreciation) expectations.
- Exchange rate and financial sector:
  - Transition to greater exchange rate flexibility and inflation targeting was discussed; no change in the precautionary treatment of the SBA.
  - Financial system remains stable; banks strengthened net foreign asset positions and repaid external lines, though credit quality and solvency indicators weakened slightly but remain comfortable.

*Source: EXECUTIVE SUMMARY (IMF staff and Costa Rica authorities, second program review).*

### 14.      The authorities reiterated their intention to complete the transition toward greater

### 14.      The authorities reiterated their intention to complete the transition toward greater exchange rate flexibility and inflation targeting by end-2010.

### Exchange rate policy and inflation targeting
- Authorities intended to complete the transition toward greater exchange rate flexibility and inflation targeting by end-2010.
- Recent fluctuation of the colón away from the ceiling of the currency band and the decline in inflation were seen as favorable conditions to advance in this direction.
- Specific policy intentions:
  - Maintain the annual rate of crawl for the ceiling of the currency band at 9 percent.
  - Review regulations for foreign currency derivatives to speed the development of domestic hedging instruments.
- Mission recommendations reiterated:
  - Re-introduce a negative rate of crawl for the floor of the currency band.
  - Clarify the central bank’s role in the foreign exchange market and improve monetary operations (as advised in the 2009 Article IV consultation).
- Authorities’ stance:
  - Concurred with recommendations on clarifying the central bank’s role and improving operations.
  - Preferred to maintain the current horizontal floor for the exchange rate band, citing concerns that too many parameter changes could unsettle expectations.
- Operational notes:
  - Inflation and depreciation expectations are measured by the central bank through a monthly survey.
  - The exchange rate regime of Costa Rica is classified in the category of “other managed” arrangements in the current IMF classification.

### Financial sector resilience and reforms
- Assessment of the financial sector:
  - The financial sector had weathered the downturn relatively well; continued vigilance was recommended.
  - Authorities and financial sector representatives expressed satisfaction about the resilience of the quality of credit portfolios.
- Key statistics:
  - As of end-September 2009, the banking system’s nonperforming loan ratio stood at 2.1 percent, about one percentage point higher than one year earlier.
  - Nonperforming loans were expected to continue rising, albeit at a moderate rate.
- Structural measures and benchmarks:
  - Authorities were on track to fulfill the end-December structural benchmarks on submitting legislation to create a limited deposit insurance scheme and strengthen the bank resolution framework.
  - A first draft of the law has been prepared and was under revision.
- Safeguards and central bank practices:
  - Central bank hired an external auditor to conduct annual audits of its financial statements from 2008 onwards.
  - External auditor to prepare an analysis of existing gaps between the central bank’s accounting practices and international financial reporting standards (IFRS).

### Program modalities and conditionality
- Given lower uncertainty about the external environment and lower program risks, parties agreed to modify the frequency of program reviews from quarterly to biannual.
- Program maintenance:
  - Quantitative performance criteria and indicative targets would be maintained for end-December 2009 and end-March 2010.
- Calendar changes:
  - Eliminate the review originally scheduled for late March 2010; the next (and final) program review to occur in late June 2010.
  - Move the availability date of the fourth purchase forward to January 29, 2010.
- Technical Memorandum:
  - The Technical Memorandum of Understandings (TMU) remained unchanged from the first review (IMF Country Report No. 09/303).

### Staff appraisal: macroeconomic outlook, risks, and policy advice
- Economic activity and inflation:
  - Costa Rican economy showing clearer signs of recovery; economic activity growing for several months on a seasonally adjusted basis, though not yet broad-based.
  - Inflation moderated to a historically low level.
  - No balance of payments pressures; financial sector remained stable.
  - These developments were broadly consistent with staff projections at the time of the first program review in September.
- Program performance and risks:
  - Performance under the precautionary SBA with the Fund had continued to be very strong; authorities met all quantitative performance criteria for end-September.
  - Immediate risks to the program had declined further, especially the likelihood of balance of payments and exchange rate pressures.
  - Weak revenue performance remained a risk, as it could lead to higher-than-projected fiscal deficits and domestic financing requirements.
- Fiscal policy guidance:
  - Fiscal policy should continue to strike a balance between supporting domestic demand and keeping government borrowing in check.
  - In the first three quarters of 2009, fiscal policy provided timely support to domestic demand, despite somewhat slower-than-projected execution of public spending.
  - The program for 2010 provides room for some additional fiscal stimulus in the early part of the year to allow more time for private demand to recover.
- Monetary policy guidance:
  - A gradual easing bias for monetary policy remains adequate for the near term.
  - Recent inflation and exchange rate developments increased the room for policy maneuver, but upside risks to the inflation outlook warranted maintaining a cautious approach to monetary easing.
  - Staff welcomed the authorities’ commitment to advance the transition toward inflation targeting and greater exchange rate flexibility.
  - Staff encouraged authorities to seize the opportunity to clarify the central bank’s role in the foreign exchange market and improve the framework to conduct monetary operations, in line with recommendations of the 2009 Article IV consultation.
- Structural reform priorities and concerns:
  - Progress being made on some structural reforms; continued delay in parliamentary approval of a number of important economic laws was described as disappointing.
  - Staff reiterated the importance of approving legislation on:
    - Central bank recapitalization.
    - Consolidated financial sector supervision.
    - Foreign financing for the 2010 budget.
- Staff appraisal summary:
  - The authorities’ policies and recent developments supported recovery while maintaining financial and external stability, but fiscal and legislative risks warranted continued attention.

*IMF staff report excerpt (chapter content provided).*

### 22.      Staff recommends the approval of the second review under the SBA. Performance

### 22.      Staff recommends the approval of the second review under the SBA. Performance

### Recommendation and overall assessment
- Staff recommends the approval of the second review under the SBA.
- "Performance under the program has been strong, and the authorities’ policies continue to be adequate to support economic recovery while maintaining internal and external stability."

### Quantitative performance criteria (Table 1)
- Units: In billion of colones, unless otherwise indicated.
- Floor on cash balance of the Central Government (cumulative):
  - 2009 Program End-March: -210
  - 2009 Program End-June: -106
  - 2009 Program End-September: -312
  - 2009 Program End-December: -206
  - 2010 Program End-March (Prog. 3/): -471
  - 2010 Program End-March (Actual): -377
  - 2010 Program End-June (Prog. 3/): -639
  - 2010 Program End-June (Actual): -639
  - 2010 Program End-September Proposed: -322
- Ceiling on the debt stock of the Central Government:
  - 2009 Program End-March: 4,303
  - 2009 Program End-June: 4,239
  - 2009 Program End-September: 4,356
  - 2009 Program End-December: 4,338
  - 2010 Program End-March (Prog. 3/): 4,753
  - 2010 Program End-March (Actual): 4,551
  - 2010 Program End-June (Prog. 4/): 4,871
  - 2010 Program End-June (Actual): 4,914
  - 2010 Program End-September Proposed: 5,286
- Ceiling on NDA of the Central Bank 5/:
  - 2009 Program End-March: -915
  - 2009 Program End-June: -1,301
  - 2009 Program End-September: -786
  - 2009 Program End-December: -1,244
  - 2010 Program End-March (Prog. 3/): -970
  - 2010 Program End-March (Actual): -1,170
  - 2010 Program End-June (Prog. 4/): -896
  - 2010 Program End-June (Actual): -896
  - 2010 Program End-September Proposed: -800
- Floor on NIR of the Central Bank (million of US$) 5/:
  - 2009 Program End-March: 3,500
  - 2009 Program End-June: 4,167
  - 2009 Program End-September: 3,350
  - 2009 Program End-December: 3,936
  - 2010 Program End-March (Prog. 3/): 3,555
  - 2010 Program End-March (Actual): 4,059
  - 2010 Program End-June (Prog. 4/): 3,705
  - 2010 Program End-June (Actual): 3,705
  - 2010 Program End-September Proposed: 3,405
- Continuous Performance Criteria:
  - Accumulation of external debt arrears: 0 (all periods listed)
- Indicative targets:
  - Floor on cash balance of the combined public sector (cumulative):
    - 2009 Program End-March: -146
    - 2009 Program End-June: -43
    - 2009 Program End-September: -325
    - 2009 Program End-December: -179
    - 2010 Program End-March (Prog. 3/): -524
    - 2010 Program End-March (Actual): -411
    - 2010 Program End-June (Prog. 4/): -774
    - 2010 Program End-June (Actual): -774
    - 2010 Program End-September Proposed: -352
- Memorandum item:
  - Base money:
    - 2009 Program End-March: 1,102
    - 2009 Program End-June: 1,101
    - 2009 Program End-September: 1,144
    - 2009 Program End-December: 1,024
    - 2010 Program End-March (Prog. 3/): 1,079
    - 2010 Program End-March (Actual): 1,170
    - 2010 Program End-June (Prog. 4/): 1,240
    - 2010 Program End-June (Actual): 1,240
    - 2010 Program End-September Proposed: 1,163
  - Program exchange rate (ask price, colones per U.S. dollar): 576 (repeated across listed periods)
- Notes included in source:
  - 1/ Projection only. Performance criteria were set from end-June onward.
  - 2/ The end-March 2010 quantitative PCs will be evaluated at the 2009 program exchange rates as defined in the TMU for the first review (IMF Country Report No. 09/303).
  - 3/ IMF Country Report No. 09/134.
  - 4/ IMF Country Report No. 09/303.
  - 5/ The floor on NIR and ceiling on NDA at end-September and end-December have been adjusted by $205 million compared to the levels set at program approval (IMF Country Report No. 09/134) to reflect the special and general SDRs allocations of 132.81 millions SDRs.

### Key macroeconomic indicators and projections (Table 2—Selected Economic Indicators 2006–10)
- Per capita income (2008, U.S. dollars): 6,544
- Unemployment (2009, percent of labor force): 7.8
- Population (July 2008, millions): 4.5
- Poverty (2009, percent of households): 18.5
- Life expectancy (2005, years): 79.1
- Extreme poverty (2009, percent of households): 4.2
- GDP at constant prices (annual percent change):
  - 2006: 8.8
  - 2007: 7.8
  - 2008: 2.6
  - 2009 Prog./Proj.: -1.5 / -1.5
  - 2010 Prog./Proj.: 2.3 / 2.3
- Implicit deflator (annual percent change):
  - 2006: 11.0
  - 2007: 9.3
  - 2008: 12.1
  - 2009 Prog./Proj.: 8.9 / 8.9
  - 2010 Prog./Proj.: 6.0 / 6.0
- Consumer prices (end of period):
  - 2006: 9.4
  - 2007: 10.8
  - 2008: 13.9
  - 2009 Prog./Proj.: 5.0 / 5.0
  - 2010 Prog./Proj.: 5.0 / 5.0
- Exports of goods (volume, f.o.b.) (annual percent change):
  - 2006: 10.6
  - 2007: 9.2
  - 2008: -3.4
  - 2009 Prog./Proj.: -6.9 / -8.2
  - 2010 Prog./Proj.: 2.5 / 3.1
- Imports of goods (volume, cif) (annual percent change):
  - 2006: 9.3
  - 2007: 4.1
  - 2008: 5.8
  - 2009 Prog./Proj.: -12.3 / -17.8
  - 2010 Prog./Proj.: 3.1 / 7.5
- Real Effective Exchange Rate (eop; depreciation -): 0.9 (2006), 2.8 (2007), 5.4 (2008)
- Base money (annual percent change): 26.9 (2006), 33.0 (2007), 11.9 (2008), 7.7 (2009 Prog.), 7.7 (2009 Proj.), 10.0 (2010 Prog.), 9.7 (2010 Proj.)
- Broad money (annual percent change): 25.3 (2006), 16.3 (2007), 17.3 (2008), 15.6 (2009 Prog.), 16.2 (2009 Proj.), 12.8 (2010 Prog.), 13.0 (2010 Proj.)
- Bank credit to private sector (annual percent change): 28.5 (2006), 38.3 (2007), 31.8 (2008), 4.7 (2009 Prog.), 5.6 (2009 Proj.), 12.7 (2010 Prog.), 13.1 (2010 Proj.)
- Combined public sector primary balance (percent of GDP):
  - 2006: 2.8
  - 2007: 4.1
  - 2008: 2.3
  - 2009 Prog./Proj.: -2.4 / -2.5
  - 2010 Prog./Proj.: -2.3 / -2.3
- Combined public sector overall balance (percent of GDP):
  - 2006: -0.7
  - 2007: 1.2
  - 2008: 0.1
  - 2009 Prog./Proj.: -4.8 / -4.8
  - 2010 Prog./Proj.: -4.7 / -4.7
- Combined public sector debt (gross, percent of GDP):
  - 2006: 47.8
  - 2007: 43.2
  - 2008: 35.8
  - 2009 Prog./Proj.: 39.9 / 39.9
  - 2010 Prog./Proj.: 41.6 / 41.6
- Gross domestic investment (percent of GDP):
  - 2006: 26.4
  - 2007: 24.6
  - 2008: 25.8
  - 2009 Prog./Proj.: 17.1 / 14.8
  - 2010 Prog./Proj.: 18.8 / 17.8
- Gross national savings (percent of GDP):
  - 2006: 21.9
  - 2007: 18.3
  - 2008: 16.6
  - 2009 Prog./Proj.: 13.5 / 11.8
  - 2010 Prog./Proj.: 13.9 / 13.3
- Current account balance (percent of GDP):
  - 2006: -4.5
  - 2007: -6.3
  - 2008: -9.2
  - 2009 Prog./Proj.: -3.6 / -3.0
  - 2010 Prog./Proj.: -4.8 / -4.5
- Foreign direct investment (percent of GDP):
  - 2006: 6.1
  - 2007: 6.2
  - 2008: 6.8
  - 2009 Prog./Proj.: 4.3 / 4.1
  - 2010 Prog./Proj.: 4.7 / 4.3
- Change in net international reserves (increase -) (US$ million): -802 (2006), -839 (2007), 315 (2008), 00 (2009 Prog.), -100 (2009 Proj.), -100 (2010 Prog.)
- Net international reserves (US$ million):
  - 2006: 3,115
  - 2007: 4,114
  - 2008: 3,799
  - 2009 Prog./Proj.: 4,004 / 4,004
  - 2010 Prog./Proj.: 4,104 / 4,104
  - In months of nonmaquila imports of G&S: 3.5 (2006), 3.8 (2007), 4.3 (2008), 4.1 (2009 Prog.), 4.2 (2009 Proj.), 4.0 (2010 Prog.), 4.0 (2010 Proj.)
- Gross Domestic Product (levels):
  - 2006: 22,528
  - 2007: 26,269
  - 2008: 29,664
  - 2009 Prog./Proj.: 29,291 / 29,291
  - 2010 Prog./Proj.: 30,433 / 30,429

### Balance of Payments highlights (Table 3)
- Current Account (US$ million):
  - 2006: -1,023
  - 2007: -1,646
  - 2008: -2,732
  - 2009 Prog./Proj.: -1,057 / -890
  - 2010 Prog./Proj.: -1,474 / -1,384
- Trade balance (US$ million):
  - 2006: -2,727
  - 2007: -2,985
  - 2008: -4,984
  - 2009 Prog./Proj.: -2,979 / -2,589
  - 2010 Prog./Proj.: -3,439 / -3,437
- Export of goods (f.o.b.) (US$ million):
  - 2006: 8,102
  - 2007: 9,299
  - 2008: 9,566
  - 2009 Prog./Proj.: 8,798 / 8,694
  - 2010 Prog./Proj.: 9,132 / 9,120
- Import of goods (f.o.b.) (US$ million):
  - 2006: 10,829
  - 2007: 12,285
  - 2008: 14,551
  - 2009 Prog./Proj.: 11,777 / 11,283
  - 2010 Prog./Proj.: 12,571 / 12,557
- Financial and Capital Account (US$ million):
  - 2006: 1,675
  - 2007: 2,315
  - 2008: 2,413
  - 2009 Prog./Proj.: 1,057 / 890
  - 2010 Prog./Proj.: 1,574 / 1,484
- Direct investment (US$ million):
  - 2006: 1,371
  - 2007: 1,634
  - 2008: 2,015
  - 2009 Prog./Proj.: 1,270 / 1,201
  - 2010 Prog./Proj.: 1,420 / 1,295
- Change in Net Reserves (increase -): -802 (2006), -839 (2007), 315 (2008), 00 (2009 Prog.), -100 (2009 Proj.), -100 (2010 Prog.)

### Public finances (Tables 4–7)
- Revenue (percent of GDP):
  - 2006: 14.2
  - 2007: 15.5
  - 2008: 15.9
  - 2009 Prog./Proj.: 14.5 / 14.2
  - 2010 Prog./Proj.: 15.2 / 15.0
- Expenditure (percent of GDP):
  - 2006: 15.7
  - 2007: 15.2
  - 2008: 16.2
  - 2009 Prog./Proj.: 18.6 / 18.2
  - 2010 Prog./Proj.: 19.4 / 19.1
- Primary balance (percent of GDP):
  - 2006: 2.7
  - 2007: 3.7
  - 2008: 2.4
  - 2009 Prog./Proj.: -1.5 / -1.6
  - 2010 Prog./Proj.: -1.2 / -1.2
- Structural primary balance (percent of GDP): 2.4 (2006), 2.7 (2007), 2.0 (2008), -1.3 (2009 Prog.), -1.5 (2009 Proj.), -0.8 (2010 Prog.), -0.8 (2010 Proj.)
- Central government debt (percent of GDP):
  - 2006: 33.3
  - 2007: 27.6
  - 2008: 24.9
  - 2009 Prog./Proj.: 28.9 / 28.9
  - 2010 Prog./Proj.: 31.0 / 31.0
- Central government debt (levels, in billions of colones) (Table 5 / Table 6 / Table 7 present detailed breakdowns):
  - Revenues and expenditure levels and components are presented in the source in both percent of GDP and in billions of colones across 2006–10, with detailed line items (Tax revenue, Direct taxes, Sales tax, Excise/customs, Nontax revenue, Contributions to social security, Wages and salaries, Pensions, Transfers, Interest including adjustment for TUDES, Capital, Net capital expenditure, Primary balance, Overall balance, Total Financing, External/Internal financing, Memorandum items on debt composition).

### Monetary and financial sector (Table 8)
- Net international reserves (US$ million):
  - 2006: 3,115
  - 2007: 4,114
  - 2008: 3,799
  - 2009 Prog./Proj.: 4,004 / 4,004
  - 2010 Prog./Proj.: 4,104 / 4,104
- Monetary base (levels and percent changes):
  - Monetary base percent changes: 26.9 (2006), 33.0 (2007), 11.9 (2008), 7.7 (2009 Prog.), 7.7 (2009 Proj.), 10.0 (2010 Prog.), 9.7 (2010 Proj.)
- Broad money (M4) percent changes: 25.3 (2006), 16.3 (2007), 17.3 (2008), 15.6 (2009 Prog.), 16.2 (2009 Proj.), 12.8 (2010 Prog.), 13.0 (2010 Proj.)
- Credit to the private sector (national currency) percent changes: 34.0 (2006), 45.2 (2007), 27.1 (2008), 3.4 (2009 Prog.), 4.8 (2009 Proj.), 12.4 (2010 Prog.), 12.2 (2010 Proj.)
- Broad money (M4) levels and other monetary balance-sheet aggregates are presented in detail in the source (tables show net foreign assets, net domestic assets, net domestic credit, credit to nonfinancial public sector, credit to private sector, capital account, other items, liabilities, currency, required reserves, etc., for 2006–10).

### Gross financing requirements (Table 9 / Memorandum)
- Gross Financing Requirements (US$ million):
  - 2006: 4,497
  - 2007: 5,324
  - 2008: 6,659
  - 2009 Prog./Proj.: 5,860 / 5,664
  - 2010 Prog./Proj.: 5,415 / 5,300
- Components:
  - Current account deficit (exc. official transfers): 1,023 (2006), 1,646 (2007), 2,732 (2008), 1,057 (2009 Prog.), 890 (2009 Proj.), 1,474 (2010 Prog.), 1,384 (2010 Proj.)
  - Debt amortization (total): 2,673 (2006), 2,838 (2007), 4,242 (2008), 4,803 (2009 Prog.), 4,774 (2009 Proj.), 3,841 (2010 Prog.), 3,817 (2010 Proj.)
  - Short-term debt: 2,095 (2006), 2,356 (2007), 3,224 (2008), 3,995 (2009 Prog.), 3,995 (2009 Proj.), 3,258 (2010 Prog.), 3,258 (2010 Proj.)
  - Gross reserves accumulation: 802 (2006), 839 (2007), -315 (2008), 00 (2009 Prog.), -100 (2009 Proj.), -100 (2010 Prog.)

*Sources: Central Bank of Costa Rica; Ministry of Finance; and Fund staff projections.*

### 2. Available Financing4,4975,3246,6595,8605,6645,4155,300

### _cr1002 - 2. Available Financing4,4975,3246,6595,8605,6645,4155,300

### Available financing (2006–2010; In millions of U.S. dollars)
- Foreign direct investment (net): 1,371 1,634 2,015 1,270 1,201 1,420 1,295
- Debt financing: 3,020 4,072 5,258 4,159 4,423 4,363 4,006
  - Medium and long-term financing: 664 848 1,263 901 1,165 1,037 802
    - Public sector: 199 236 737 577 547 673 655
    - Private sector: 466 612 526 324 618 364 147
  - Short-term financing: 2,356 3,224 3,995 3,258 3,258 3,326 3,204
- Other flows 4/: 107 -382 -614 431 39 -368 0

Memorandum item:
- Gross financing requirement (in percent of GDP): 20.0 20.3 22.4 20.0 19.3 17.8 17.4

Sources: Authorities; and Fund staff estimates.
Notes:
- 1/ IMF Country Report No. 09/303.
- 2/ Excluding the IMF.
- 3/ Original maturity of less than 1 year. Stock at the end of the previous period.
- 4/ Includes all other net financial flows, and errors and omissions.

### Indicators of external vulnerability (2006–2010)
- Merchandise exports (percent change) 1/: 11.3 12.8 14.1 -13.1 7.8
- Merchandise imports (percent change) 1/: 5.3 23.2 24.2 -21.1 10.0
- Terms of trade (percent change): -3.9 -3.7 -4.6 4.9 -1.8
- Current account balance (in percent of GDP): -4.5 -6.3 -9.2 -3.0 -4.5
- Central bank net international reserves (in US$ millions): 3,114.6 4,113.7 3,799.1 4,004.1 4,104.1
  - In months of next year's imports of nonmaquila goods and services: 3.5 3.8 4.3 4.2 4.0
  - In percent of base money: 208.6 199.3 183.3 190.1 182.8
  - In percent of M4: 25.3 27.6 24.2 23.3 21.7
  - In percent of deposits in foreign currency: 68.0 85.3 62.6 55.5 50.1
  - In percent of short-term external debt 2/: 109.7 97.0 79.6 104.9 103.2
- Public external debt service (in percent of GDP): 2.0 1.8 3.1 2.2 1.3
- External debt (in percent of GDP): 31.0 31.8 31.2 30.4 29.9
- External debt (in percent of exports): 63.2 64.9 67.7 70.4 68.7
- REER appreciation (+): 0.9 2.8 5.4 ......

Sources: Central Bank of Costa Rica; and Fund staff estimates.
Note:
- 1/ In value terms, excludes maquila.
- 2/ Public and private sector external debt on remaining maturity. Includes trade credits.

### Medium-term framework (2006–2014; selected indicators; annual percentage change unless otherwise indicated)
Key projections (2006–2014):
- Real GDP: 8.8 7.8 2.6 -1.5 2.3 3.5 4.5 5.2 5.2
- Consumption: 5.4 6.8 4.3 2.0 2.3 2.5 2.9 4.1 4.1
  - Private consumption: 5.7 7.4 4.5 1.7 2.2 2.5 3.0 4.3 4.3
  - Government consumption: 2.9 2.2 2.4 4.0 3.3 2.6 2.5 2.4 2.5
- Gross domestic investment: 13.9 -1.3 12.2 -30.0 11.5 7.7 9.8 8.7 8.3
  - Fixed capital formation: 10.8 18.0 11.9 -12.0 3.0 5.8 6.2 6.3 6.2
- Exports of goods and nonfactor services: 10.3 10.0 -1.8 -7.0 2.9 5.0 5.0 5.2 5.3
- Imports of goods and nonfactor services: 8.1 4.5 4.3 -16.3 6.7 5.4 4.9 5.1 5.2

Savings and investment (in percent of GDP):
- Savings: 26.4 24.6 25.8 14.8 17.8 19.2 20.7 21.6 22.3
- National savings: 21.9 18.3 16.6 11.8 13.3 14.4 15.9 16.6 17.2
- External savings 1/: 4.5 6.3 9.2 3.0 4.5 4.8 4.9 5.0 5.1
- Gross domestic investment: 26.4 24.6 25.8 14.8 17.8 19.2 20.7 21.6 22.3

Balance of payments (in percent of GDP):
- Current account balance: -4.5 -6.3 -9.2 -3.0 -4.5 -4.8 -4.9 -5.0 -5.1
- Trade balance: -12.1 -11.4 -16.8 -8.8 -11.3 -11.9 -12.4 -12.9 -13.4
- Services: 6.0 6.6 7.4 7.7 7.7 8.0 8.2 8.5 8.9
- Income: 0.0 -3.3 -1.3 -3.0 -2.1 -2.0 -1.8 -1.7 -1.7
- Current transfers: 1.6 1.8 1.5 1.1 1.2 1.1 1.1 1.1 1.1
- Financial and capital account: 7.4 8.7 8.1 3.0 4.9 5.5 5.8 6.0 6.2
- Direct investment: 6.1 6.2 6.8 4.1 4.3 4.2 4.2 4.2 4.2
- Change in Net Reserves (increase -): -3.6 -3.2 1.1 0.0 -0.3 -0.6 -0.9 -1.0 -1.0

Memorandum items:
- GDP deflator: 11.0 9.3 12.1 8.9 6.0 5.0 4.5 4.0 3.8
- CPI (avg): 11.5 9.4 13.4 8.4 5.0 4.7 4.5 4.5 4.2
- CPI (eop): 9.4 10.8 13.9 5.0 5.0 4.5 4.5 4.5 4.0
- Net international reserves (millions of US$): 3,115 4,114 3,799 4,004 4,104 4,304 4,604 4,954 5,354

Sources: Central Bank of Costa Rica; and Fund staff estimates.
Note:
- 1/ External current account deficit.

### Banking sector indicators (selected; in percent)
- Risk-adjusted capital ratio: 15.5 14.7 14.5 15.1 15.2 15.4 15.4 13.8 13.4 19.1
- Capital-to-assets ratio: 12.8 12.8 12.8 13.3 13.3 13.5 13.7 12.0 10.7 18.6
- Nonperforming loans to total loans: 1.2 1.1 1.2 1.5 1.8 2.0 2.1 2.8 1.5 1.0
- Non-income generating assets to total assets: 16.6 17.0 18.1 18.2 19.1 18.9 19.0 21.3 19.7 5.6
- Loan loss provisions to total loans: 1.8 1.7 1.7 1.8 1.9 1.9 2.0 2.3 1.6 2.9
- Administrative expenses to total assets: 4.8 4.6 4.5 4.4 4.3 4.3 4.2 4.6 3.6 4.2
- Return on assets (ROA): 1.5 1.6 1.7 1.8 1.7 1.6 1.5 1.3 1.2 1.8
- Return on equity (ROE): 11.8 12.2 13.4 14.3 14.3 12.4 11.5 11.6 12.7 9.5
- Liquid assets to total short-term liabilities: 87.5 84.6 80.1 83.0 94.9 101.2 99.6 88.7 91.2 57.4
- Loans to deposits: 103.1 107.3 109.8 109.7 101.9 98.6 98.4 79.1 118.6 151.0
- Net open FX position to capital: 19.0 21.7 19.5 20.4 22.8 22.9 26.4 11.7 7.2 1.1
- Credit growth (over a year ago): 38.3 40.0 33.5 27.8 20.6 13.1 10.4 9.8 14.8 3.6
Source: Superintendency of Banks.
Note:
- 1/ Difference between implicit loan and deposit rates.

### Letter of Intent (San José, November 18, 2009) — key points
- Purpose: Inform IMF about progress on the Stand-By Arrangement (SBA) program approved April 10, 2009; supplement to the MEFP summarizes developments since first program review (September 23, 2009) and describes program modifications.
- Macroeconomic developments:
  - Real GDP decline moderated in Q2 2009.
  - Inflation fell to 4 percent in October.
  - Inflation expectations approaching central bank’s target range for 2010.
  - External current account deficit likely smaller than projected.
  - Colón traded below the currency band ceiling in recent months.
  - Banking sector liquidity and solvency indicators remain adequate.
- Program performance:
  - All quantitative performance criteria for end-September met, most with significant margins.
  - Work underway toward two end-December structural benchmarks (deposit insurance draft law; strengthen bank resolution framework).
- Request:
  - Completion of the second review under the SBA.
  - Change frequency of program reviews from quarterly to biannual.
  - Bring forward availability date of the fourth purchase under the arrangement.
  - Third and final program review expected in late June 2010.
- Commitment: Authorities stand ready to take additional measures if needed and will maintain continuous communication with the Fund.

### Supplement to the Memorandum of Economic and Financial Policies (November 18, 2009) — highlights
- Recent developments:
  - Q2 2009: real GDP decline moderated to -2.4 percent y/y from -4.5 percent in Q1.
  - September: economic activity indicator rose 0.3 percent (seasonally adjusted).
  - October: headline inflation 4.0 percent (y/y); core inflation 5.7 percent (y/y); median 12-month inflation expectations 7.3 percent.
  - External current account broadly in balance in H1 2009; capital account modest surplus (0.4 percent of GDP) despite slowdown in FDI.
  - Colón traded below currency band ceiling since mid-August.
  - Banking sector: slight deterioration in aggregate nonperforming loan ratio and capital adequacy ratio; liquidity and solvency adequate.
- Macroeconomic framework:
  - Outlook for 2009–2010 broadly unchanged from first review.
  - Framework assumes gradual recovery with real GDP growth of around 2.5 percent in 2010 following a 1–1.5 percent contraction in 2009.
  - Inflation expected to fall to 5 percent (12-month basis) by end-2009 and remain within 4–6 percent in 2010.
  - External current account deficit expected at 3.0 percent and 4.5 percent of GDP in 2009 and 2010, respectively.
- Fiscal policy:
  - Central government revenues through September 7.7 percent lower than same period in 2008.
  - Revenues for 2009 could fall short of projections by about 0.3 percent of GDP.
  - Central government spending lower than projected; expect some underexecution to persist.
  - Program target for overall central government deficit for 2009 unchanged at 4.1 percent of GDP; 2010 deficit target remains 4.1 percent of GDP.
  - Quarterly fiscal program for 2010 envisages gradual withdrawal of fiscal stimulus with a small positive impulse in first half of the year.
- Monetary and exchange rate policies:
  - BCCR to maintain a cautious approach to monetary policy easing given upside risks.
  - Exchange rate policy guided by objective of gradually achieving greater flexibility of the colón.
- Safeguards assessment:
  - Recommendations from July 2009 safeguard assessment being implemented.
  - BCCR appointed external auditor to conduct annual audits from 2008 onward; audit scope includes gaps between BCCR accounting and IFRS with action plan to implement IFRS by 2011.
- Program monitoring:
  - Request change of program review frequency from quarterly to biannual; next and final review expected June 2010.
  - Quantitative performance criteria and indicative targets for end-December 2009 and end-March 2010 set out in Table 1 of the supplement.
  - Structural benchmarks and phasing of access set out in Tables 2 and 3.

### Quantitative performance measures (selected; In billion of colones, unless otherwise indicated)
- Ceiling on the debt stock of the Central Government (end-March to end-March): 4,303 4,239 4,356 4,338 4,753 4,551 4,871 4,914 5,286
- Floor on cash balance of the Central Government (cumulative): -210 -106 -312 -206 -471 -377 -639 -639 -322
- Ceiling on NDA of the Central Bank: -915 -1,301 -786 -1,244 -970 -1,170 -896 -896 -800
- Floor on NIR of the Central Bank (million of US$): 3,500 4,167 3,350 3,936 3,555 4,059 3,705 3,705 3,405
- Indicative targets (floor on cash balance of the combined public sector): -146 -43 -325 -179 -524 -411 -774 -774 -352
- Memorandum item: Base money: 1,102 1,101 1,144 1,024 1,079 1,170 1,240 1,240 1,163
- Program exchange rate (ask price, colones per U.S. dollar): 576 558 576 569 576 576 576 576 576

Notes:
- Footnotes reference IMF Country Report No. 09/134 and No. 09/303, and adjustments to NIR and NDA at end-September and end-December to reflect SDR allocations.

### Structural benchmarks and schedule of disbursements
- Structural benchmarks (status as of November 18, 2009):
  - Establishment of a monthly monitoring report for the banking system. — End-June 2009 — Met
  - Unification of the money market under a single platform. — End-June 2009 — Met (by August 2009)
  - Establishment of a system of daily forecasting of systemic liquidity in the money market. — End-June 2009 — Met
  - Submission to parliament of a draft law to strengthen the bank resolution framework. — End-December 2009 — (underway)
  - Submission to parliament of a draft law to create a limited deposit guarantee scheme. — End-December 2009 — (underway)
- Schedule of availability of disbursements:
  - SDR 328,200,000 — April 10, 2009 — Executive Board approval of the 18-month SBA.
  - SDR 41,025,000 — September 23, 2009 — Observance of end-June 2009 performance criteria and completion of first review.
  - SDR 41,025,000 — December 16, 2009 — Observance of end-September 2009 performance criteria and completion of second review.
  - SDR 41,025,000 — January 29, 2010 — Observance of end-December 2009 performance criteria.
  - SDR 41,025,000 — June 17, 2010 — Observance of end-March 2010 performance criteria and completion of third review.

### IMF Executive Board second review (Press Release No. 09/470; December 18, 2009) — main points
- Executive Board completed second review on December 16, 2009 of Costa Rica’s performance under the 15-month SBA.
- Authorities treating the arrangement as precautionary.
- SBA approved April 13, 2009 for SDR 492.3 million (about US$783.5 million).
- Completion of the review made additional SDR 41.025 million (about US$65.3 million) available; total currently available under the arrangement SDR 410.25 million (about US$652.9 million).
- Deputy Managing Director (Acting Chair) assessment:
  - Performance under the SBA is commendable.
  - Economic recovery gradually taking hold; inflation moderated to historically low level; financial sector remained sound.
  - Fiscal policy provided timely support in 2009; fiscal program for 2010 allows room for additional stimulus early in the year and gradual unwinding thereafter.
  - Monetary policy: cautious easing warranted given upside inflation risks; opportunity to modernize exchange rate and monetary operations and advance transition toward inflation targeting.
  - Financial sector reforms remain important, including recapitalization of the central bank and legislation for consolidated supervision.

*Sources: Authorities; and Fund staff estimates.*

### 0.3  percent from the previous month (seasonally adjusted), which constitutes the seventh

### _cr1002 - 0.3  percent from the previous month (seasonally adjusted), which constitutes the seventh

### Recent developments
- Industrial production rose by 0.3 percent from the previous month (seasonally adjusted), constituting the seventh consecutive monthly increase.
- In November:
  - Annual headline inflation fell to 2.57 percent.
  - Core inflation fell to 4.15 percent.
  - Average 12-month inflation expectations declined to 7.4 percent, gradually approaching the central bank’s inflation target range of 4–6 percent for end-2010.
- Balance of payments in the first half of 2009:
  - Current account was broadly in balance.
  - Capital account recorded a modest surplus of 0.4 percent of GDP despite an important slowdown in FDI.
- In the third quarter:
  - Exports showed signs of recovery.
  - Import growth remained subdued.
  - Trade deficit through September was substantially lower than during the same period last year.

### Economic outlook
- Macroeconomic framework assumptions:
  - Real GDP growth of around 2.5 percent in 2010, following a 1–1.5 percent contraction in 2009.
  - Annual inflation on track to fall to around 4 percent by end-2009.
  - Inflation expected to be within the central bank’s target band of 4–6 percent during 2010.
  - External current account deficit projected at 3.0 percent of GDP in 2009 and 4.5 percent of GDP in 2010, slightly smaller than previously projected.

### Fiscal policy
- Central government revenues through September were 7.7 percent lower than during the same period in 2008, mainly due to a sharp drop in import-related taxes (including sales and excise taxes collected at customs).
- Revenues for the whole year 2009 could fall short of program projections by about 0.3 percent of GDP.
- Central government spending has been lower than projected; under-execution is expected to persist through year-end.
- Program deficit targets:
  - Overall central government deficit target for 2009 unchanged at 4.1 percent of GDP.
  - Deficit target for 2010 remains unchanged at 4.1 percent of GDP, though with lower estimates for both revenues and expenditures in light of anticipated underperformance in 2009.
- Fiscal stance and program for 2010:
  - Authorities will continue to balance supporting domestic demand and keeping public debt dynamics manageable.
  - Quarterly fiscal program envisages a gradual withdrawal of fiscal stimulus while allowing a small positive fiscal impulse during the first half of the year to support domestic demand until private sector recovery strengthens.
- Policy position:
  - Authorities emphasize the importance of exchange of information between nations for optimal application of tax systems, in line with current international practices.

### Monetary policy
- Factors supporting the monetary stance:
  - Descending trend of core inflation and inflation expectations.
  - Persistence of a negative output gap.
- Assessment:
  - The inflation target for 2010 (4–6 percent) is feasible under the current monetary policy stance.
  - Some upside risks exist related to the dampening effect of the fall in commodity prices of early 2009 that is expected not to recur.
  - The Central Bank will continue to maintain a prudent approach to monetary policy easing.

### Exchange rate policy
- The colón has traded continuously below the ceiling of the currency band since mid-August.
- Authorities view the below-ceiling trading and the decline in inflation as providing some room for more flexibility in the exchange rate.
- Policy objective:
  - Exchange rate policy will remain guided by the objective of gradually increasing the flexibility of the colón.

### Banking sector
- Indicators through the period:
  - Aggregate nonperforming loan ratio and the capital adequacy ratio deteriorated slightly.
  - Liquidity and solvency indicators remained adequate.

### Conclusion and policy implications
- Authorities consider ongoing policies adequate to meet the objectives of their economic program, effectively supported by the Stand-By arrangement.
- The authorities will continue treating the Stand-By arrangement as precautionary.

*Source: _cr1002 - 0.3  percent from the previous month (seasonally adjusted), which constitutes the seventh*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1002.pdf_