## Costa Rica: Selected IMF Staff Report (2016) — Mission comprised L. Figliuoli (Head), V. Flamini, F. Lambert, D. Plotnikov, and J. Puig

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### Overview
- Growth rebounded quickly after the global crisis but has moderated below trend; structural impediments reduce potential growth.
- Counter-cyclical stimulus in 2009 pushed the deficit above 5 percent of GDP in 2010; the deficit crept up to 6 percent of GDP subsequently, placing public-debt-to-GDP on an unsustainable upward trajectory.
- Rapid expansion of dollar-denominated credit, facilitated by a stable exchange rate, increases financial sector vulnerabilities and underscores the need for improved regulation and supervision.
- Policy actions broadly consistent with past Fund advice:
  - Removal of the exchange rate (XR) band in early 2015 and continued reserve accumulation (¶5).
  - Reduction in the inflation target range in 2016 to 2–4 percent (¶4).
  - Tightening of prudential requirements to discourage dollarization (¶28).
- Additional progress needed to implement the 2008 FSAP recommendations (¶29).

### Recent economic developments
- Growth and potential
  - Real GDP growth: almost 5 percent annually in 2010–2012; 2½ percent in 2013–14; 3¾ percent in 2015.
  - Potential/trend growth: about 4 percent during 2013–15.
  - Output gap: about -1 percent of GDP.
  - Intel’s closure reduced both real GDP and potential output by ¾ percent of GDP in 2014–15.
- Labor market
  - Unemployment remained elevated since the crisis; slight decline in 2015 mainly due to lower participation from discouraged workers.
- Inflation and monetary policy
  - Inflation breached upper limit in 2014; moved into negative territory by the second half of 2015.
  - Central bank cut policy rate by 350 basis points to 1¾ percent.
  - Inflation target range lowered to 2–4 percent in 2016.
- Exchange rate, reserves, external position
  - XR stabilized about 6–7 percent above the floor of the XR band after early-2014 volatility and remained there after band removal in early 2015.
  - Current account deficit: 4 percent of GDP in 2015.
  - Reserves: $7.8 bn at end-2015 (above IMF adequacy metrics); reserves declined somewhat in Dec 2015 and early 2016 as FX demand increased and central bank accommodated it.
  - REER rose to about 5 percent above end-2013 level but consistent with changes in REER equilibrium estimates; competitiveness largely unchanged in 2014–15.
- Fiscal developments and debt
  - Central government primary deficit returned to around 3 percent of GDP in 2013.
  - Overall central government deficit: 6 percent of GDP in 2014-15.
  - Public debt exceeded 42 percent of GDP in 2015.
  - External bond issuance: $1 bn annually since 2012.
  - Sovereign ratings: Moody’s Ba1 (negative outlook) downgraded in 2014; S&P downgraded to BB- in 2016; Fitch BB+ with negative outlook since 2015.
- Financial sector
  - System appears sound: CAR 16.4–17.2; Tier 1 CAR 12.6–13.7 (sample quarters).
  - Profitability: ROA around 1.0–1.5 percent; ROE around 7.4–10.7 percent (sample quarters).
  - NPL ratio: 1.6–1.9 percent (sample quarters).
  - Dollarization: FX loans share ~37.2–37.9 percent; FX liabilities ~33.2–36.9 percent (sample quarters).
  - Credit to private sector below fundamentals; credit growth tilted toward FX amid renewed XR stability.

### Macroeconomic outlook and scenarios
- Staff and authorities joint baseline
  - Growth: Real GDP growth projected 3.7 (2015), 4.2 (2016), 4.3 (2017), 4.4 (2018), 4.3 (2019), 4.0 (2020), 4.0 (2021) (percent).
  - Output gap: -1.1 (2015), -0.9 (2016), -0.6 (2017), -0.3 (2018), 0.0 (2019–2021) (percent of potential GDP).
  - CPI (end-of-period): -0.8 (2015), 3.0 (2016–2021) (percent).
  - Current account balance: -4.0 (2015), -4.2 (2016), -4.3 (2017), -4.2 (2018), -4.3 (2019–2021) (percent of GDP).
  - Central government fiscal balance: -5.8 (2015), -5.8 (2016), -5.4 (2017), -5.5 (2018–2020), -5.3 (2021) (percent of GDP).
  - Central government debt: 42.4 (2015), 45.0 (2016), 47.3 (2017), 49.4 (2018), 51.3 (2019), 52.9 (2020), 54.4 (2021) (percent of GDP).
  - Structural primary balance: -2.9 (2015), -2.3 (2016), -1.4 (2017), -1.1 (2018), -1.2 (2019–2021) (percent of GDP).
  - Staff baseline incorporates fiscal consolidation measures of 2¼ percent of GDP over the medium term.
- Alternative full fiscal adjustment scenario (baseline + additional 1½ percent of GDP)
  - Staff analysis: total correction of about 3¾ percent of GDP would stabilize public debt in the medium term.
  - Under full adjustment:
    - Central government debt: 42.4 (2015), 44.9 (2016), 46.2 (2017), 46.1 (2018), 46.0 (2019), 45.7 (2020), 45.5 (2021) (percent of GDP).
    - Central government fiscal balance: -5.8 (2015), -5.7 (2016), -4.4 (2017), -3.6 (2018–2019), -3.3 (2020), -3.2 (2021) (percent of GDP).
    - Structural primary balance: -2.9 (2015), -2.3 (2016), -0.8 (2017), 0.1 (2018–2019), 0.2 (2020–2021) (percent of GDP).
    - Real GDP growth modestly higher in 2018–21 compared with baseline (e.g., 4.6 in 2018).
- Passive scenario (no fiscal consolidation)
  - Real GDP growth: 3.7 (2015), 4.2 (2016), 4.2 (2017), 4.0 (2018), 3.9 (2019), 3.6 (2020), 3.5 (2021) (percent).
  - CPI (end-of-period): -0.8 (2015), 3.3 (2016), 3.5 (2017–2021) (percent).
  - Current account balance: -4.0 (2015), -4.5 (2016), -5.0 (2017), -5.8 (2018), -6.5 (2019–2021) (percent of GDP).
  - Central government fiscal balance: -5.8 (2015), -6.7 (2016), -7.3 (2017), -7.8 (2018), -8.5 (2019), -9.2 (2020), -9.6 (2021) (percent of GDP).
  - Central government debt: 42.4 (2015), 45.9 (2016), 50.1 (2017), 54.4 (2018), 59.1 (2019), 64.0 (2020), 69.1 (2021) (percent of GDP).
- Risks
  - Overall tenor: risks are tilted to the downside.
  - External risks: disorderly U.S. monetary policy normalization, stresses in emerging markets, or geopolitical risks could inflict serious damage given weak fiscal position, bank reliance on foreign funding, and dollarization.
  - Domestic risks: persistence of large fiscal deficits could prompt abrupt shifts in investor sentiment; maintenance of excess bank liquidity is limiting pass-through of monetary easing; substantial currency depreciation could raise NPLs given heavy dollarization.

### Fiscal consolidation plans and measures
- Staff estimate: budget retrenchment measures amounting to 3¾ percent of GDP over the medium-term would stabilize public debt-to-GDP below levels that tend to weaken macro stability.
- Government-confirmed strategy:
  - Authorities’ strategy envisions about 2½ percent of GDP in higher taxes and 1¼ percent of GDP in cuts in current expenditures.
  - VAT reform:
    - Broadening base to include services.
    - Gradual increase in the rate from 13 to 15 percent, starting in 2017.
    - Radical narrowing of the basic goods basket, conditional on establishing a transfers system to make the reform broadly revenue-neutral for lower-income households.
    - Separate increases of taxes on sales of vehicles and real estate.
  - Income tax reform:
    - Introduces additional marginal rates of 20 and 25 percent on higher-income brackets.
    - Unifies the rate on capital income at 15 percent.
    - Subjects capital gains to tax.
  - Expenditure measures:
    - Legislative changes to curtail growth of pensions paid out of the budget and transfers to decentralized entities.
    - Administrative measures to yield 1¼ percent of GDP of cuts in current expenditures.
- Consolidation pacing (planned total adjustment, percent of GDP):
  - Total Adjustment: 2016: 0.8; 2017: 1.6; 2018: 1.0; 2019: 0.1; 2020: 0.1; 2021: 0.1; Total: 3.8.
  - Baseline: 2016: 0.8; 2017: 1.1; 2018: 0.4; Total: 2.3.
  - Revenue (submitted/conservative split): 2016: 0.4; 2017: 1.0; 2018: 0.3; Total: 1.7.
  - Expenditure: 2016: 0.4; 2017: 0.1; 2018: 0.0; Total: 0.6.
  - Additional Adjustment: 2016: -0.6; 2017: 0.7; 2018: 0.1; 2019: 0.1; 2020: 0.1; 2021: 1.5.
- Legislative/political context
  - Executive has minority representation in Congress; approval of most consolidation measures requires opposition cooperation.
  - Bills under discussion include public employment reform and a fiscal rule proposal.
- Pensions
  - Preliminary projection: an additional adjustment equivalent to about 1½ percent of GDP would be required at the general government level to ensure actuarial equilibrium of the CCSS for the next 50 years.
  - Authorities eliminated the early retirement option and consider increasing minimum contributions and gradually raising contribution rates.

### Financial stability, FSAP recommendations, and supervisory measures
- Key vulnerabilities
  - Currency mismatches in the private sector and large dollarization of bank loans are key risks.
  - High net foreign liabilities of banks and reliance on foreign bank funding raise rollover risk concerns.
  - Brisk accumulation of government debt holdings by banks raises hazard in an environment of likely higher medium-term interest rates.
- Stress tests (selected figures preserved exactly)
  - Solvency (Pre-shock CAR = percent of RWA): All Banks 17.0; State Owned 18.0; Domestic Private 12.2; Foreign 15.9.
  - Post-shock CAR (percent of post-shock RWA): All Banks 13.1; State Owned 13.9; Domestic Private 7.8; Foreign 12.2.
  - Change in CAR (all fundamental shocks): All Banks -4.0; State Owned -4.1; Domestic Private -4.4; Foreign -3.7.
  - Liquidity (Pre-shock liquid assets/total assets): All Banks 22.6; State Owned 22.3; Domestic Private 19.9; Foreign 23.4.
  - Liquidity (Post-shock after 5 days liquid assets/total assets): All Banks 4.0; State Owned 2.4; Domestic Private 4.8; Foreign 7.1.
- Supervisory and regulatory actions taken or proposed
  - Increase in capital risk-weightings on FX loans to unhedged borrowers (implemented August 2013 path to 125%).
  - Extension of reserve requirements to medium- and long-term foreign bank borrowing; 15 percent reserve requirement set for medium- and long-term new foreign bank borrowing.
  - Additional measures under consideration: stricter provisioning on FX loans to unhedged borrowers; counter-cyclical provisioning; higher risk-weightings for high LTV and high debt-service mortgages.
  - Staff recommended considering further tightening of provisioning on FX bank lending and reserve requirements on FX bank borrowing (the latter requiring Congressional action) if FX exposures do not reduce in reasonable time.
  - Extension of credit bureau coverage to loans to households by non-bank entities recommended.
- FSAP pending recommendations (2008) — priorities
  - Empower SUGEF to conduct consolidated supervision; provide legal protection to bank supervisors; strengthen bank resolution procedures; broaden supervisory perimeter to non-bank financial institutions (all require new legislation).
  - Staff commended progress toward risk-based supervision; further efforts needed. FSAP update tentatively planned for 2017.
  - Officials support gradual adoption of Basel III standards; recent enactment: Basel III Liquidity Coverage Ratio. Staff recommended introducing Basel III definitions of capital, a capital conservation buffer, and a leverage ratio.

### External assessment and reserves
- REER assessment
  - IMF staff concludes Costa Rica’s REER is broadly in line with fundamentals.
  - Macro-balance (EBA) CA norm: -4.7 percent of GDP (2015); actual cyclically-adjusted deficit: -3.9 percent of GDP (2015); implied REER undervaluation: 3.5 percent.
  - External sustainability approach finds moderate overvaluation of 6.8 percent; excluding FDI implies undervaluation of -7.1 percent.
  - Staff considers macro-balance approaches most reliable.
- Reserves and external metrics
  - Reserves amounted to 5.8 months of non-maquila imports of goods and services at end-2014 and are above the Fund’s composite reserve adequacy metric.
  - Net international reserves (millions of U.S. dollars): 2012: 6,857; 2013: 7,331; 2014: 7,211; 2015: 7,834; Projections: 2016: 8,334; 2017: 8,834 (and maintained at 8,834 through 2021 in baseline).
- External debt dynamics (baseline)
  - External debt (percent of GDP): 2013: 35.6; 2014: 38.8; 2015: 38.4; 2016: 36.5; 2017: 34.9; 2018: 32.6; 2019: 30.4; 2020: 28.3; 2021: 26.2.
  - Gross external financing need (percent of GDP): 2013: 13.8; 2014: 12.6; 2015: 10.9; 2016: 10.2; 2017: 9.5; 2018: 9.0; 2019: 8.4; 2020: 6.6; 2021: 6.3.

### Debt sustainability analysis (higher scrutiny) — key numeric outcomes
- Central government DSA (Nominal gross public debt, percent of GDP):
  - 2014: 30.6; 2015: 39.3; 2016: 42.4; 2017: 45.1; 2018: 47.6; 2019: 49.6; 2020: 51.6; 2021: 53.5; 2021 (alternate): 55.0.
- Central government public gross financing needs (percent of GDP):
  - 2014: 12.5; 2015: 10.3; 2016: 9.4; 2017: 9.5; 2018: 9.6; 2019: 9.0; 2020: 8.0; 2021: 8.2; 2021 (alternate): 7.4.
- Under baseline (fiscal adjustment of about 2¼ percent of GDP): debt stock projected to rise to 55 percent of GDP by 2021 (consolidated baseline shows similar upward trend).
- Under combined macro-fiscal shock, debt rises above 65 percent of GDP.

### Policy recommendations (staff appraisal)
- Fiscal
  - Immediate fiscal tightening to restore sustainability; total budgetary adjustment of 3¾ percent of GDP over the medium-term required to stabilize public debt at safe levels.
  - Rely mainly on tax increases (about 2½ percent of GDP) and contain expenditure growth, including administrative measures to yield 1¼ percent of GDP in cuts in current expenditures.
  - Phase consolidation gradually over 2016–2020 with significant front-loading.
  - Implement VAT base broadening and rate increase, income tax reform with new top brackets, reduction of exemptions, strengthening sanctions against evasion, and a refund system to protect lower-income households.
- Monetary and FX policy
  - Maintain accommodative monetary policy given negative output gap and low inflation; inflation targeting range lowered to 2–4 percent.
  - Gradual, contained increase in exchange rate flexibility to strengthen credibility of inflation-targeting and discourage dollarization; deepen FX market and improve transparency on FX intervention.
  - Foster development of secondary market for government securities with standardized instruments to enhance policy transmission.
- Financial regulation and supervision
  - Prioritize reducing financial dollarization; tighten provisioning and reserve requirements if FX exposures do not decline.
  - Strengthen cross-border supervision, implement pending 2008 FSAP recommendations (legal protection for supervisors, consolidated supervision, deposit insurance, resolution frameworks), and gradually adopt Basel III standards (definitions of capital, capital conservation buffer, leverage ratio).
  - Extend credit bureau coverage to non-bank household lenders.
- Structural reforms to support potential growth
  - Energy sector reforms: separate generation from transmission/distribution, enhance private participation, revise price-setting to improve cost discipline.
  - Infrastructure: address transportation bottlenecks; advance major projects (ports, highways).
  - Human capital: improve efficiency of education spending, expand child-care and early childhood education, improve IT infrastructure to increase female labor force participation.
  - Business regulation: streamline entry, protect investor rights, promote competition in banking to lower spreads.
- Consultation cycle
  - Recommendation that Costa Rica remain on the standard 12-month consultation cycle.

*Source: IMF staff report (2016), document identifier _cr16131.*

### 2016. The mission comprised L. Figliuoli (Head), V. Flamini, F.

### Costa Rica: Selected IMF Staff Report (2016) — Mission comprised L. Figliuoli (Head), V. Flamini, F. Lambert, D. Plotnikov, and J. Puig

### Overview
- Growth rebounded quickly after the global crisis but has moderated below trend, with structural impediments reducing potential growth.
- The counter-cyclical stimulus in 2009 pushed the deficit above 5 percent of GDP in 2010 and the deficit has crept up to 6 percent of GDP subsequently, putting public-debt-to-GDP on an unsustainable upward trajectory.
- Rapid expansion of dollar-denominated credit, facilitated by a stable exchange rate, increases financial sector vulnerabilities and underscores the need for improved regulation and supervision.
- Policy actions broadly consistent with past Fund advice:
  - Removal of the exchange rate (XR) band in early 2015 and continued reserve accumulation (¶5).
  - Reduction in the inflation target range in 2016 to 2–4 percent, in line with average inflation of trading partners (¶4).
  - Tightening of prudential requirements to discourage dollarization (¶28).
- Additional progress needed to implement the 2008 FSAP recommendations (¶29).

*Source: IMF staff report (2016).*

### Recent Economic Developments (A)
- Growth and potential
  - Real GDP surged almost 5 percent annually in 2010–2012, then slowed to 2½ percent in 2013–14.
  - Growth picked up to 3¾ percent in 2015.
  - Trend (potential) growth around 4 percent during 2013–15; a negative output gap of about 1 percent of GDP opened up (Analytical Note VIII).
  - Intel’s closure reduced both real GDP and potential output by ¾ percent of GDP in 2014–15 (footnote 1).
- Labor market
  - Unemployment remained elevated since the crisis; slight decline in 2015 mainly due to lower participation from discouraged workers.
- Inflation and monetary policy
  - Inflation breached upper limit in 2014 due to pass-through from XR depreciation; moved into negative territory by the second half of 2015.
  - Central bank cut policy rate by 350 basis points to 1¾ percent.
  - Inflation target range lowered to 2–4 percent in 2016.
- Exchange rate and reserves
  - XR stabilized about 6–7 percent above the floor of the XR band after early-2014 volatility and remained there after band removal in early 2015.
  - Current account deficit: 4 percent of GDP in 2015, driven by lower oil prices.
  - Reserves accumulated to $7.8 bn at end-2015, above IMF adequacy metrics; reserves declined somewhat in Dec 2015 and early 2016 as FX demand increased and central bank accommodated it.
- External position and competitiveness
  - REER rose to about 5 percent above end-2013 level but is consistent with changes in REER equilibrium estimates; competitiveness largely unchanged in 2014–15 (Box 1).
  - Staff notes need for productivity-enhancing reforms and wage restraint to maintain competitiveness; fiscal consolidation would support long-run external stability.
- Fiscal developments and debt
  - Failure to reverse counter-cyclical fiscal policies since the crisis put public debt on a rapid upward trend.
  - Central government primary deficit returned to around 3 percent of GDP in 2013.
  - Overall central government deficit reached 6 percent of GDP in 2014-15; debt exceeded 42 percent of GDP in 2015.
  - External bond issuance of $1 bn annually since 2012 helped mute domestic financing cost impact.
  - Sovereign rating actions: lost investment grade in 2014; Moody’s downgraded in 2014 (Ba1, negative outlook), S&P downgraded to BB- in 2016, Fitch has negative outlook on BB+ since 2015.
- Fiscal strategy
  - Authorities developed a consolidation strategy focused on strengthening revenue and tax base widening and higher rates (¶21).
- Financial sector
  - System appears sound: bank capital above regulatory requirements; liquidity robust; NPLs low.
  - Profitability declined and remains below regional peers (ROA around 1.0–1.5 percent across recent quarters; ROE around 7.4–10.7 percent in sample quarters).
  - Dollarization remains high: FX loans share ~37.3–37.9 percent; FX liabilities ~33.2–36.9 percent in sample quarters.
  - Credit to private sector remains below levels consistent with fundamentals; credit growth tilted toward FX amid renewed XR stability.

### Macroeconomic Outlook and Risks (B)
- Growth outlook
  - Recent monetary easing expected to support growth as pass-through to lending rates completes; however transmission hampered by high dollarization, banking segmentation, and limited capital market development (¶33 and AN V).
  - Financial Conditions Index (FCI) indicated slightly contractionary conditions in 2015 owing to higher real interest rates and real appreciation (AN III); expected to become more supportive as policy rate cuts pass through.
- Financial stability and credit
  - Real lending rates edged up since mid-2014; limited pass-through of policy cuts to lending rates so far due to fall in inflation expectations.
  - Credit growth moderated, but renewed demand for FX credit increased net foreign bank liabilities; staff analysis finds rollover risks manageable even under extreme international banking shocks.
  - Distributional staff forecast indicates downside risks tied to real private sector credit growth (figure: distribution of macro outcomes conditional on real private sector credit growth).
- Fiscal risks
  - Rising interest bill and persistent primary deficits present risks to fiscal sustainability; public debt trajectory is upward without consolidation.
  - Staff highlights need for comprehensive fiscal consolidation centered on revenue measures to reverse the upward debt trajectory and reduce risks of disorderly adjustment.
- External risks
  - External position close to equilibrium per staff estimates and EBA/regression approaches, but vulnerable to shifts in FDI, Eurobond markets, or terms of trade.
- Structural and policy reform needs
  - Structural impediments constrain potential growth; recommended reforms include productivity-enhancing reforms, wage restraint, and measures to reduce tax evasion and exemptions.
  - Further implementation of FSAP recommendations and strengthening of regulation and supervision to address dollarization and financial vulnerabilities (¶29).

### Key Statistics and Figures (preserved as reported)
- Real GDP growth: almost 5 percent annually in 2010–2012; 2½ percent in 2013–14; 3¾ percent in 2015.
- Potential/trend growth: about 4 percent during 2013–15.
- Output gap: about -1 percent of GDP (negative output gap).
- Central government overall deficit: 6 percent of GDP in 2014-15.
- Central government primary deficit: around 3 percent of GDP in 2013.
- Public debt: exceeding 42 percent of GDP in 2015.
- Inflation target range changed to 2–4 percent in 2016 (from 3–5 percent).
- Policy rate cut: 350 basis points to 1¾ percent.
- Reserves: $7.8 bn at end-2015.
- Current account deficit: 4 percent of GDP in 2015.
- Annual external bond issuance: $1 bn since 2012.
- FX loans share of total loans: ~37.2–37.9 percent (sample quarters).
- FX liabilities share of total liabilities: ~33.2–36.9 percent (sample quarters).
- Banking indicators (sample):
  - CAR (in %): 16.4–17.2 (sample quarters).
  - Tier 1 CAR (in %): 12.6–13.7 (sample quarters).
  - ROA: approx. 1.0–1.5 (sample quarters).
  - ROE: approx. 7.4–10.7 (sample quarters).
  - NPL ratio: 1.6–1.9 percent (sample quarters).

*Source: IMF staff report (2016).*

### 11. The joint view of staff and the authorities was that the economy will expand faster and

### 11. The joint view of staff and the authorities was that the economy will expand faster and inflation revert to the target range in 2016

### Growth and inflation outlook
- Growth is expected to accelerate to 4¼ percent in 2016, slightly above potential growth, supported by:
  - dissipation of the one-off effects of Intel’s manufacturing withdrawal,
  - further terms-of-trade improvement from the additional decline in international oil prices,
  - domestic monetary stimulus—model simulations suggest that the monetary easing implemented in 2015 would boost GDP growth by ½–¾ percent of GDP in 2016, assuming full though gradual transmission from policy to lending rates,
  - sustained real credit expansion (estimated by staff to be consistent with projected GDP growth based on historical precedent).
- The output gap is anticipated to stabilize in 2016, and then mostly close over the medium term.
- Model simulations suggest monetary stimulus, together with fading base effects from the oil price decline in 2015, would bring inflation back to the center of the new 2–4 percent target range by end-2016.
- Inflation is projected to hover around 2–4 percent throughout 2017–21, buttressed by continued prudent monetary policy, while allowing for continued monetary accommodation during the initial phase of the fiscal adjustment.

### External and current account outlook
- The current account deficit will widen slightly to 4¼ percent of GDP over the medium-term amid gradual recovery of international commodity prices.
- Staff baseline scenario incorporates fiscal consolidation measures of 2¼ percent of GDP over the medium term.
- Under the staff baseline:
  - Central government fiscal balance: -5.8 (2015), -5.8 (2016), -5.4 (2017), -5.5 (2018), -5.5 (2019), -5.5 (2020), -5.3 (2021) (percent of GDP)
  - Central government debt: 42.4 (2015), 45.0 (2016), 47.3 (2017), 49.4 (2018), 51.3 (2019), 52.9 (2020), 54.4 (2021) (percent of GDP)
  - Real GDP growth (percent): 3.7 (2015), 4.2 (2016), 4.3 (2017), 4.4 (2018), 4.3 (2019), 4.0 (2020), 4.0 (2021)
  - Output gap (percent of potential GDP): -1.1 (2015), -0.9 (2016), -0.6 (2017), -0.3 (2018), 0.0 (2019), 0.0 (2020), 0.0 (2021)
  - CPI (percent, end-of-period): -0.8 (2015), 3.0 (2016), 3.0 (2017), 3.0 (2018), 3.0 (2019), 3.0 (2020), 3.0 (2021)
  - Current account balance (percent of GDP): -4.0 (2015), -4.2 (2016), -4.3 (2017), -4.2 (2018), -4.3 (2019), -4.3 (2020), -4.3 (2021)
  - Structural primary balance (percent of GDP): -2.9 (2015), -2.3 (2016), -1.4 (2017), -1.1 (2018), -1.2 (2019), -1.2 (2020), -1.2 (2021)

### Alternative (full) fiscal adjustment scenario
- Authorities concurred that an alternative scenario incorporating the fiscal adjustment necessary to restore debt sustainability would yield a more favorable outlook.
- Staff analysis: a total correction of about 3¾ percent of GDP would stabilize public debt in the medium term within “safe levels,” with only moderate short-term output costs.
- Under the full fiscal adjustment (baseline plus additional 1½ percent of GDP measures):
  - Real GDP growth (percent): 3.7 (2015), 4.2 (2016), 4.2 (2017), 4.6 (2018), 4.5 (2019), 4.2 (2020), 4.3 (2021)
  - Output gap (percent of potential GDP): -1.1 (2015), -0.9 (2016), -0.7 (2017), -0.2 (2018), 0.2 (2019), 0.3 (2020), 0.4 (2021)
  - CPI (percent, end-of-period): -0.8 (2015), 3.0 (2016), 3.0 (2017), 3.0 (2018), 3.0 (2019), 3.0 (2020), 3.0 (2021)
  - Current account balance (percent of GDP): -4.0 (2015), -4.2 (2016), -4.2 (2017), -4.1 (2018), -4.0 (2019), -3.8 (2020), -3.7 (2021)
  - Central government fiscal balance (percent of GDP): -5.8 (2015), -5.7 (2016), -4.4 (2017), -3.6 (2018), -3.6 (2019), -3.3 (2020), -3.2 (2021)
  - Structural primary balance (percent of GDP): -2.9 (2015), -2.3 (2016), -0.8 (2017), 0.1 (2018), 0.1 (2019), 0.2 (2020), 0.2 (2021)
  - Central government debt (percent of GDP): 42.4 (2015), 44.9 (2016), 46.2 (2017), 46.1 (2018), 46.0 (2019), 45.7 (2020), 45.5 (2021)

### Risks to the outlook
- Overall tenor: risks are tilted to the downside.
- External risks:
  - Normalization of U.S. monetary policy presents moderately upside risks; absent pronounced increases in market volatility, faster U.S. growth would have a positive impact on Costa Rican GDP.
  - Extreme bouts of market volatility—from a disorderly U.S. monetary policy normalization, stresses in emerging markets with high corporate leverage (including in FX), or heightened global geopolitical risks—could inflict serious damage given Costa Rica’s weak fiscal position, bank reliance on foreign funding, and domestic credit dollarization, with associated exposures to interest rate and exchange rate risks (evident only in the event of a large depreciation).
  - If the nominal effective exchange rate of the colón continues to appreciate in line with the U.S. dollar, competitiveness vis-à-vis other trading partners would be negatively affected.
  - Model simulations indicate Costa Rica is less vulnerable to adverse developments in key emerging markets, including China and Brazil, than in the U.S., consistent with relative trade ties.
  - Risks from energy prices are balanced: increased volatility from geopolitical tensions weighs on the downside; lower-than-anticipated prices would have moderately positive effects.
- Domestic risks:
  - Persistence of large fiscal deficits and rapid rise in public debt in a passive scenario could render the economy vulnerable to sudden changes in financial market conditions.
  - Large government gross financing requirements could lift domestic interest rates, weighing on private investment and growth.
  - Expectations of a pick-up in interest rates from government short-term financing needs are encouraging maintenance of excess liquidity in banks, limiting transmission of monetary stimulus to lending rates—model simulations suggest if pass-through continues to be hindered, the short-term boost to growth from monetary stimulus would be reduced by half.
  - Given low profitability and heavy dollarization of the banking system, financial stability could be jeopardized by substantial currency depreciation, mainly through higher NPLs.

### Scenario results: passive scenario (no fiscal consolidation)
- This scenario does not include any fiscal consolidation measures, while reflecting the underlying deterioration in the primary balance mainly driven by the constitutionally mandated increase in education expenditure.
- Key projected indicators under the passive scenario:
  - Real GDP growth (percent): 3.7 (2015), 4.2 (2016), 4.2 (2017), 4.0 (2018), 3.9 (2019), 3.6 (2020), 3.5 (2021)
  - Output gap (percent of potential GDP): -1.1 (2015), -0.9 (2016), -0.6 (2017), -0.6 (2018), -0.7 (2019), -1.1 (2020), -1.6 (2021)
  - CPI (percent, end-of-period): -0.8 (2015), 3.3 (2016), 3.5 (2017), 3.5 (2018), 3.5 (2019), 3.5 (2020), 3.5 (2021)
  - Current account balance (percent of GDP): -4.0 (2015), -4.5 (2016), -5.0 (2017), -5.8 (2018), -6.5 (2019), -6.5 (2020), -6.5 (2021)
  - Central government fiscal balance (percent of GDP): -5.8 (2015), -6.7 (2016), -7.3 (2017), -7.8 (2018), -8.5 (2019), -9.2 (2020), -9.6 (2021)
  - Structural primary balance (percent of GDP): -2.9 (2015), -3.1 (2016), -3.3 (2017), -3.3 (2018), -3.4 (2019), -3.4 (2020), -3.4 (2021)
  - Central government debt (percent of GDP): 42.4 (2015), 45.9 (2016), 50.1 (2017), 54.4 (2018), 59.1 (2019), 64.0 (2020), 69.1 (2021)

### Risk Assessment Matrix — selected entries
- Slower growth in advanced and/or emerging economies:
  - Overall level of concern: Low/Medium/High (noted distinctions across time horizons).
  - Relative likelihood: Medium/High.
  - Impact if realized: Medium to High, with protracted U.S. slowdown having High impact.
- Tighter or more volatile global financial conditions:
  - Overall level of concern: Medium/High.
  - Relative likelihood: High/Medium.
  - Impact if realized: High; could increase cost of external and domestic financing, disrupt liquidity, and harm public debt dynamics and growth.
- Dislocation in capital and labor flows:
  - Overall level of concern: Medium/High.
  - Relative likelihood: Medium.
  - Impact if realized: Could curtail cross-border payments, trade finance, and remittances; volatile oil prices add risk.
- Sustained decline in energy prices:
  - Overall level of concern: High.
  - Relative likelihood: Low.
  - Impact if realized: Low; persistently low oil prices would improve terms of trade and yield a modest boost to growth prospects.
- Worse-than-anticipated impact from persistently high fiscal deficits:
  - Overall level of concern: High.
  - Relative likelihood: High.
  - Impact if realized: High; could raise domestic interest rates, reduce investment and growth, exacerbate fiscal sustainability risks.
- Larger than anticipated impact from INTEL withdrawal:
  - Overall level of concern: Low.
  - Relative likelihood: Low/Medium.
  - Impact if realized: Low to moderate short-term growth effects; limited impact on potential growth.

### Policy discussions and recommendations
- Overall policy focus: restore fiscal sustainability; improve monetary policy framework; enhance financial system supervision and regulation; boost potential and inclusive growth.
- Near-term policy mix:
  - Agreement that conditions call for start of fiscal tightening and continuation of supportive monetary policy.
  - Authorities intend to begin a gradual fiscal adjustment in 2016.
  - With output below potential and zero inflation, continued accommodative monetary policy consistent with bringing inflation back to target will help offset the small contractionary impact of tighter budgetary stance in the short term.
- Fiscal policy:
  - Authorities pursuing a sizable reduction in the deficit in 2016 as part of a gradual path toward fiscal sustainability.
  - The 2016 budget envisaged overall and primary deficits to edge up to 6½ and 3¼ percent of GDP respectively in a passive scenario, mainly due to constitutionally-mandated rises in education outlays and continued increases in interest payments.
  - Government has submitted to Congress bills that could result in a correction of about ¾ percent of GDP relative to the budget.
  - Officials stressed implementing these measures as part of a comprehensive package delivering total budgetary consolidation measures of 3¾ percent of GDP needed to stabilize debt over the medium-term.
- Monetary policy:
  - Authorities concurred that the current expansionary monetary stance is broadly adequate.
  - Headline inflation was negative and core inflation was below the lower bound of the 3-5 percent target range during most of 2015.
  - Monetary stance includes 350 basis points in cumulative policy rate cuts to 1¾ percent, well below the estimated neutral rate of 5 percent.
  - While transmission has been slow, domestic financial conditions are expected to gradually reflect easing; continued credit growth at a pace consistent with healthy financial deepening should support return to potential and inflation within target.
  - If price pressures threaten to drive inflation above the mid-point of the new target range, the central bank should start reversing the easing cycle, taking into account lags in transmission and prospective upward normalization of global interest rates which could induce depreciation pressures.

*Source: IMF staff and authorities discussions as presented in the chapter.*

### 18. The authorities viewed current fiscal trends as unsustainable in the long term. Staff

### _cr16131 - 18. The authorities viewed current fiscal trends as unsustainable in the long term. Staff

### Fiscal outlook and sustainability
- Without any policy action, the CG deficit would be above 9 percent of GDP and debt rise to almost 70 percent by 2021.
- Baseline scenario (incorporates a fiscal adjustment of 2¼ percent of GDP):
  - CG deficit would persist at about 5½ percent of GDP by 2021.
  - CG debt would grow to 55 percent of GDP by 2021 (from 42½ percent of GDP at end-2015).
- Staff stressed that further postponing fiscal retrenchment would be costly; the longer the delay, the larger the improvement in the primary balance required to stabilize the public debt ratio.
- Staff warned that failing to deliver on the fiscal consolidation plan would increase the risk of an abrupt shift in investor sentiment and acute financial market tensions, forcing a disorderly adjustment.

### Fiscal consolidation plans, scenarios, and key statistics
- Government-confirmed need:
  - A fiscal adjustment of almost 4 percent of GDP is needed to stabilize the public debt ratio.
  - Staff’s estimate: budget retrenchment measures amounting to 3¾ percent of GDP over the medium-term would suffice to steady the public debt-to-GDP share below levels that tend to weaken macro stability in emerging markets, while allowing some increases in growth-friendly capital spending.
- Pace of consolidation:
  - Front-loaded plan with somewhat less than two-thirds of the total adjustment in 2016–17 and smaller corrections in subsequent years.
  - Planned total adjustment shown in table (Percent of GDP):
    - Total Adjustment: 2016: 0.8; 2017: 1.6; 2018: 1.0; 2019: 0.1; 2020: 0.1; 2021: 0.1; Total: 3.8
    - Baseline: 2016: 0.8; 2017: 1.1; 2018: 0.4; 2019: -; 2020: -; 2021: -; Total: 2.3
    - Revenue (submitted/conservative split): 2016: 0.4; 2017: 1.0; 2018: 0.3; Total: 1.7
    - Expenditure: 2016: 0.4; 2017: 0.1; 2018: 0.0; Total: 0.6
    - Additional Adjustment: 2016: -0.6; 2017: 0.7; 2018: 0.1; 2019: 0.1; 2020: 0.1; 2021: 1.5
    - (Source: Fund staff estimates)
- Composition of adjustment and revenue measures:
  - Authorities’ strategy envisions about 2½ percent of GDP in higher taxes.
  - VAT and income tax reforms would boost collections by slightly more than 2 percent of GDP over the medium-term.
  - Other provisions—reduced exemptions, further amendments to the corporate income tax and anti-tax evasion measures—would generate almost ½ percent of GDP.
  - VAT reform details in plan:
    - Broadening the base to include services.
    - Gradual increase in the rate from 13 to 15 percent, starting in 2017.
    - Separate increases of taxes on sales of vehicles and real estate.
    - Radical narrowing of the basic goods basket, conditional on establishing a transfers system to make the reform broadly revenue-neutral for lower-income households.
  - Income tax reform details:
    - Introduces additional marginal rates of 20 and 25 percent on higher-income brackets.
    - Unifies the rate on capital income at 15 percent.
    - Subjects capital gains to tax.
- Expenditure-side measures:
  - Legislative changes to curtail growth of pensions paid out of the budget and transfers to decentralized entities.
  - Administrative measures to yield 1¼ percent of GDP of cuts in current expenditures required to fully close the sustainability gap.
- Scenarios and risks:
  - Staff view: only the full adjustment of 3¾ percent of GDP would be adequate from a macro-economic perspective.
  - Partial adjustment (baseline) risks: continued large fiscal deficits driven mainly by mounting interest bill, significant additional debt accumulation, and important downside risks under less favorable macroeconomic conditions.
  - Alternative full adjustment scenario assumes Congressional approval of all submitted measures, yielding 2¾ percent of GDP, plus administratively-determined spending cuts to contain growth of current spending.

### Legislative and political considerations
- Executive has minority representation in Congress; approval of most consolidation measures requires opposition cooperation.
- Bills under discussion include:
  - Reform of public employment conditions to prevent excessive automatic increases in current outlays.
  - A recently presented fiscal rule proposal aimed at preserving government debt sustainability, broadly in line with staff advice though still requiring greater specification.
- An agreement likely requires simultaneous advances on all aspects of the consolidation package; process could be derailed despite promising moves.

### Pension system long-run position
- Pension plans (CCSS and judiciary special regime) are actuarially imbalanced and projected to turn a cash deficit over the long term due to system maturation and population aging.
- Preliminary projection: an additional adjustment equivalent to about 1½ percent of GDP would be required at the general government level to ensure actuarial equilibrium of the CCSS for the next 50 years.
- Authorities’ measures and considerations:
  - Elimination of the early retirement option already taken.
  - Considering increasing minimum contributions and gradually raising contribution rates over the medium-term above scheduled increases stipulated in 2005.
  - Several legislative proposals in Congress contemplate parametric adjustments to the judiciary special regime.
- A study commissioned by the CCSS and the Superintendence of Pensions to be released in 2016 will determine the size of the imbalance more precisely.

### Monetary and exchange rate policy framework
- Staff endorsed central bank decision to further lower the inflation target range from 3–5 percent to 2–4 percent, in line with average inflation of trading partners.
- Progress toward full-fledged inflation targeting:
  - Removal in early 2015 of legal constraint to exchange rate flexibility posed by the XR band is a milestone.
  - Authorities prefer significant role for active XR management with an FX intervention rule to avert excessive volatility and counter unwarranted deviations from fundamentals, given large financial dollarization.
- Staff advice:
  - Gradual, contained increase in exchange rate flexibility to strengthen credibility of inflation-targeting framework, enhance exchange rate role as shock absorber, and discourage dollarization.
  - Transparency concerns: lack of transparency of triggers for FX-intervention-rule could undermine confidence in subordinating XR management to the inflation target under less favorable conditions.
  - Parallel transfer of all FX transactions to the open market and deepening of the FX market recommended to facilitate higher XR flexibility.
  - Foster growth of underdeveloped secondary market for government securities using standardized simple instruments with conventional maturities to reinforce monetary policy effectiveness and resilience to external shocks.

### Financial stability: vulnerabilities, stress tests, and policy recommendations
- Key risks identified:
  - Currency mismatches in the private sector pose the key risk to financial stability.
  - Large dollarization of bank loans is a serious and intensifying concern.
  - High net foreign liabilities of banks and reliance on foreign bank funding raise rollover risk concerns.
  - Growing household leverage, including credit by non-bank commercial entities, could endanger asset quality.
  - Brisk accumulation of government debt holdings by banks, boosted by large fiscal deficits, raises hazard in an environment of likely higher medium-term interest rates.
- Stress test and model findings:
  - Top-down stress test by staff depicts a sound banking sector that could absorb a range of sizable shocks (AN II), but dollarization exposure remains problematic.
  - Staff noted that deterioration of bank capitalization and related contingent sovereign liabilities could be substantial (AN II).
  - General equilibrium model simulations: loan impairment and lower credit growth from a twenty percent depreciation could reduce GDP growth by about 1½ percent over the medium-term (AN I).
  - Scenario charted effects on Real GDP:
    - 5% depreciation and 25bp increase in MRP: (figure shown in source).
    - 20% depreciation and 300bp increase in MRP: (figure shown in source).
- Supervisory and regulatory steps taken or proposed:
  - Recent increase in capital risk-weightings on FX loans to unhedged borrowers.
  - Extension of reserve requirements to medium- and long-term foreign bank borrowing (in addition to existing requirement on short-term foreign borrowing).
  - Additional measures under consideration:
    - Stricter provisioning on FX loans to unhedged borrowers and household debt with income-to-debt service ratios above 30 percent.
    - Counter-cyclical provisioning.
    - Higher risk-weightings for household mortgages with high loan-to-value and income-to-debt service ratios.
  - Staff recommended contemplating further tightening of provisioning on FX bank lending and of reserve requirements on FX bank borrowing (the latter requiring Congressional action) if banks’ FX exposures do not reduce within a reasonable time frame.
  - Extension of credit bureau coverage to loans to households granted by non-bank entities recommended to better assess household leverage and preserve asset quality.
- FSAP and supervisory reforms:
  - Staff urged speedier implementation of pending 2008 FSAP recommendations:
    - Empower Superintendence of Financial Institutions to conduct consolidated supervision.
    - Provide legal protection to bank supervisors in line with international best practice.
    - Strengthen bank resolution procedures.
    - Broaden supervisory perimeter to non-bank financial institutions (all require new legislation).
  - Authorities cited slow advances due to crowded legislative agenda and constitutional controversy over legal protections for bank supervisors.
  - Progress toward full implementation of risk-based supervision commended; further efforts needed.
  - FSAP update tentatively planned for 2017 to allow more thorough assessment.
- Basel III adoption:
  - Officials support gradual adoption of Basel III standards.
  - Recent enactment: Basel III Liquidity Coverage Ratio.
  - Staff recommended introducing Basel III definitions of capital, a capital conservation buffer, and a leverage ratio; analysis shows this could be accomplished without significant detrimental effects on growth.

*Source: IMF staff assessment as presented in the chapter.*

### 31. It was agreed that further improvements in the effective supervision of cross-border

### _cr16131 - 31. It was agreed that further improvements in the effective supervision of cross-border

### Cross-border supervision and AML/CFT
- Further improvements in the effective supervision of cross-border financial operations are critical for stability.
- Regional financial linkages have been growing but are not yet fully understood, owing in part to data limitations and legal restrictions on information sharing.
- Enhancing transnational monitoring is especially important for Costa Rica because conglomerate BCT operates in Panama and regional integration plays an important role in the transmission of financial shocks (AN I).
- Staff welcomed Costa Rica’s participation in:
  - the system of multilateral MoUs; and
  - the Central American Council of Banking Supervisors.
- Strengthening AML/CFT supervision of cross-border financial operations and implementing the recommendations of the GAFILAT mutual evaluation report would assist in safeguarding the financial sector against illicit financial flows, notably to and from higher-risk jurisdictions.
- Swift adoption at the national level of the relevant recommendations in the WHD Cluster Surveillance Report on Financial Integration in CAPDR (Annex II) and strengthening the national institutional framework in support of the medium-term Regional Macroprudential Policies Project for CAPDR would help identify likely spillovers and assess joint risks.
- Note: GAFILAT is the FATF-style regional body of which Costa Rica is a member.

### FSAP main pending recommendations (2008) — Prudential, crisis management, and supervision
- Prudential Supervision and Regulation:
  - Amend the legal framework to provide protection for supervisors while performing responsibilities in good faith.
  - Introduce laws for the Superintendency of Banks (SUGEF) to supervise banking groups (including offshore structures) on a consolidated basis, and upon approval issue operational regulations without delay.
  - Apply higher risk weight ratios to unhedged borrowers for capital adequacy purposes.
  - Modify funding arrangements for supervision in line with international best practices.
- Crisis Management and Bank Crisis Resolution Framework:
  - Amend article 155 of the Central Bank law to grant SUGEF an appropriate range of supervisory tools to require remedial action and to impose penalties.
  - Amend the rating system for prompt corrective actions to include new directives that allow SUGEF an appropriate range of remedial actions and supervisory decisions.
  - Improve the early warning system to allow timely remedial actions.
  - Eliminate the emergency loan window and improve design and operational arrangements of the ordinary rediscount window, including establishing prudential limits in terms of regulatory capital.
  - Establish a deposit insurance scheme in line with international best practices.
  - Amend the bank resolution legal framework to include purchase and assumption type techniques.
  - Enable voluntary, extra-judicial corporate restructuring agreements.

### Stress test summary — solvency and liquidity (selected figures preserved exactly)
- Solvency (Pre-shock CAR = percent of RWA):
  - All Banks: 17.0
  - State Owned: 18.0
  - Domestic Private: 12.2
  - Foreign: 15.9
- Impact of shocks (percentage points of the original RWA):
  - Increase in NPLs: All Banks -1.7; State Owned -1.7; Domestic Private -1.6; Foreign -1.8
  - Increase in interest rates: All Banks -0.1; State Owned -0.3; Domestic Private -0.5; Foreign 0.3
  - Exchange rate depreciation: All Banks -2.2; State Owned -2.2; Domestic Private -2.4; Foreign -2.2
- Post-shock CAR (percent of post-shock RWA):
  - All Banks: 13.1
  - State Owned: 13.9
  - Domestic Private: 7.8
  - Foreign: 12.2
- Change in CAR (all fundamental shocks): All Banks -4.0; State Owned -4.1; Domestic Private -4.4; Foreign -3.7
- Impact of interbank contagion:
  - Post-contagion CAR: All Banks 13.1; State Owned 13.9; Domestic Private 7.8; Foreign 12.2
  - Post-contagion CAR if profits used for defense: All Banks 13.5; State Owned 14.5; Domestic Private 8.1; Foreign 12.6

- Liquidity (assumptions noted in footnotes):
  - Liquid assets/total assets (Pre-shock): All Banks 22.6; State Owned 22.3; Domestic Private 19.9; Foreign 23.4
  - Liquid assets/total assets (Post-shock after 5 days): All Banks 4.0; State Owned 2.4; Domestic Private 4.8; Foreign 7.1
  - Liquid assets/short-term liabilities (Pre-shock): All Banks 0.0; State Owned 0.0; Domestic Private 0.0; Foreign 0.0
  - Liquid assets/short-term liabilities (Post-shock after 5 days): All Banks 69.9; State Owned 63.5; Domestic Private 80.7; Foreign 84.2
  - Liquid assets/short-term liabilities (Post-shock after 5 days) alternate figures: All Banks 36.3; State Owned 16.7; Domestic Private 106.9; Foreign 117.1
- Stress test shock assumptions (footnotes):
  - Credit shock: assumes an increase in NPLs of 8 percent of performing loans; and a 25 percent provisioning rate. The sectoral shock to NPL assumes that 6 and 10 percent of the loan portfolio to the construction and trade sectors respectively become non-performing.
  - Interest rate shock: assumes a 3.5 percentage points nominal interest rate increase.
  - FX shock: assumes a 14 percent depreciation of the FX rate, leading to 6 percent of FX loans becoming non-performing, and a 50 percent provisioning rate.
  - Liquidity shock: assumes a 10 and 8 percent per day withdrawal of demand deposits in domestic and foreign currency respectively; and a 5 and 3 percent per day withdrawal of time deposits in domestic and foreign currency respectively.
- Source for stress test figures: SUGEF; and IMF staff estimates.

### Structural reforms and financial sector development
- Key reform areas recommended:
  - Energy sector: better separation of electricity generation from transmission and distribution natural monopoly; allow private generators to compete more effectively with state-owned ICE; revise price-setting procedures to enhance cost discipline and reduce electricity tariffs, especially for the industrial sector.
  - Human capital: improve efficiency of public social and education spending without jeopardizing the budget; expand child-care provision and early childhood education; ameliorate infrastructure, including for IT, to increase female labor force participation (AN IX).
  - Infrastructure and business regulation: address infrastructure bottlenecks, especially in transportation; streamline business regulations to facilitate entry of new firms.
- Financial deepening measures:
  - Foster capital market development through more market-friendly debt management and issuance strategies to promote larger secondary markets for government securities (¶25).
  - Better protection of investor rights and development of a larger institutional investor base.
  - Step up competition among banks; refine loan-provisioning rules to avoid high collateral requirements substituting for proper credit-risk analysis.
  - Improve judicial enforcement of secured and unsecured claims.
  - Extend the credit bureau’s coverage.
  - Remove competition distortions between public and private banks to help lower interest rate spreads.

### Macroeconomic assessment and policy priorities (staff appraisal)
- Economic outlook and risks:
  - Macro prospects generally benign but downside risks mainly from weak fiscal position.
  - Economy expanding below trend for past three years; growth uptick in 2015; unemployment remained high; inflation sharply declined.
  - Currency stable and reserve accumulation resumed strongly in 2015; current account deficit narrowed; FDI inflows remained strong.
  - Growth expected to pick up in 2016; inflation expected to move to the middle of the new target range by end-year; output anticipated to return to potential over the medium term.
  - Real effective exchange rate broadly in line with fundamentals.
- Key vulnerabilities:
  - Persistence of large fiscal deficits and growing public debt; high credit dollarization increases vulnerability to financial shocks.
  - Without policy action, public debt could reach close to 70 percent of GDP by 2021.
  - Substantial currency depreciation would likely trigger an increase in non-performing loans given banks’ sizable foreign currency lending to non-hedged private borrowers.
  - External exposure due to reliance on agricultural products and tourism for a third of exports and importing all oil.
- Policy recommendations:
  - Immediate fiscal tightening combined with continuation of accommodative monetary policy given low inflation and negative output gap.
  - A total budgetary adjustment of 3¾ percent of GDP over the medium-term is required to stabilize the public debt ratio at a safe level.
  - The government’s plans are consistent with increasing revenues by about 2½ percent of GDP and decreasing expenditures by around 1¼ percent of GDP.
  - Phase consolidation gradually over 2016-2020 with significant front-loading to lend credibility.
  - Rely mainly on tax increases to close the fiscal gap while containing expenditure growth:
    - VAT base broadening and rate increase; introduction of two new brackets in personal income tax for high earners; reduction of tax exemptions; strengthening sanctions against evasion.
    - A refund system to compensate lower-income households for the VAT hike.
    - Reduce growth of current expenditures below nominal GDP growth, in particular public sector wages and transfers.
    - Legislative proposals for public employment reform and a fiscal rule are useful tools.
  - Monetary and FX policy:
    - Central bank strengthened inflation-targeting; maintain accommodative stance.
    - Greater exchange rate flexibility is desirable; deepening the FX market and improved communication about FX interventions recommended.
  - Regulatory and supervisory policy:
    - Prioritize reducing financial dollarization; strengthen cross-border supervision and creditworthiness scrutiny.
    - Implement pending 2008 FSAP recommendations and gradually adopt Basel III standards.
    - Extend credit bureau coverage.
- Structural priorities to boost potential:
  - Energy sector reform, infrastructure upgrades, and education reform.
  - Greater private participation in energy and tariff review to reduce electricity costs for firms.
  - Additional investment to address infrastructure bottlenecks, particularly transportation.
  - Reorient education expenditures toward early childhood and secondary level to reduce secondary-grade drop-outs.
- Consultation cycle recommendation:
  - It is recommended that Costa Rica remain on the standard 12-month consultation cycle.

*Italic: Source — _cr16131 - 31. It was agreed that further improvements in the effective supervision of cross-border (IMF staff report content as provided).*

### 5.8 months of non-maquila imports of goods and services at end-2014 and are above the Fund’s composite

### _cr16131 - 5.8 months of non-maquila imports of goods and services at end-2014 and are above the Fund’s composite reserve adequacy metric

### Key findings
- Reserves amounted to 5.8 months of non-maquila imports of goods and services at end-2014 and are above the Fund’s composite reserve adequacy metric.
- Sources reported: INS; St. Louis Fed; national authorities; and Fund staff calculations.

### Real exchange rate measures (chart elements)
- Heading shown: Real Exchange Rate Measures
- Series listed:
  - REER
  - REER adjusted for productivity differential
- Vertical axis tick values visible: 90, 100, 110, 120, 130, 140
- Horizontal axis years visible: 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

### Export performance (chart elements)
- Heading shown: Costa Rica's Export Share in World Exports
- Subheading shown: Adjusted for Intel
- Index base: Index (2000=100)
- Vertical axis tick values visible: 40, 50, 60, 70, 80, 90, 100, 110, 120
- Horizontal axis years visible: 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

### Page and document identifier
- Page number shown: 31
- Country label shown: COSTA RICA

*INTERNATIONAL MONETARY FUND*

### Box 1. Costa Rica: External Stability Assessment (concluded)

### Box 1. Costa Rica: External Stability Assessment (concluded)

### Main assessment of the REER
- IMF’s multilaterally consistent estimates suggest that Costa Rica’s REER is broadly in line with fundamentals and desirable policy settings both in the short term and relative to medium-term benchmarks.
- Staff concludes that Costa Rica’s REER is in line with fundamentals.

### Results from different methodologies
- Macro-balance approach (EBA, macro-balance):
  - Current account norm deficit: -4.7 percent of GDP in 2015.
  - Actual cyclically-adjusted deficit: -3.9 percent of GDP in 2015.
  - Implied REER undervaluation: 3.5 percent.
  - Identified policy gaps: -1.7 percent of GDP (negative and significant), suggesting further undervaluation if corrected.
  - Health expenditures and recommended fiscal adjustment explain 70 and 30 percent of the policy gap respectively.
- Macro-balance approach (CA panel regression, medium-term fundamentals):
  - Estimates REER overvaluation of 3.1 percent.
- External sustainability (ES) approach:
  - Finds a moderate overvaluation of 6.8 percent.
  - ES excluding FDI from total liabilities (taking into account favorable financial structure of external liabilities) implies an undervaluation of -7.1 percent.
- EBA (macroeconomic balance, reported in table):
  - CA norm: -4.7
  - CA projected/cyclically-adjusted: -3.9
  - REER gap (updated): -2.1
  - REER gap (2014 AIV): -4.7
  - REER gap (2012 AIV): 8.5
- Simple average across methodologies:
  - Average reported: -0.1 (CA norm), 0.5 (CA projected/cyclically-adjusted), 9.9 (REER gap column in table).
- Staff view:
  - Results based on the macro-balance approaches (which assess the external sector to be neither over- or undervalued) are viewed as the most reliable.

### Analysis of recent external developments and specific shocks
- Intel withdrawal:
  - The recent withdrawal of Intel operations does not reflect deterioration in external competitiveness.
  - Rationale:
    - The shut down operations had a very small value added.
    - Competitiveness should be assessed against other middle-income countries that operate in a different market segment with a higher value added.
    - While the withdrawal had a sizable effect on total exports, non-Intel exports gained market share in 2014 and are expected to improve further in 2015.
    - Intel research operations remained in Costa Rica, indicating stable demand for highly qualified labor.
- Terms of trade, exports, and reserves (context from figures and tables):
  - In 2015, lower current account deficit driven mainly by lower oil prices.
  - Resilient FDI, new government external bond issuance, and higher bank net foreign liabilities contributed to strong international reserve accumulation to levels above adequacy metrics.
  - Net international reserves (Table 2, memorandum):
    - 2012: 6,857 (millions of U.S. dollars)
    - 2013: 7,331
    - 2014: 7,211
    - 2015: 7,834
    - Projections: 2016: 8,334; 2017: 8,834 (and maintained at 8,834 through 2021 in baseline)

### Competitiveness, structural issues, and indicators
- Regulatory and business environment:
  - Costa Rica gained 21 positions in the 2016 Doing Business Survey by the World Bank driven by improved access to credit, introduction of an electronic tax payment system, and easier access to electricity.
  - According to the Global Competitiveness Index by the World Economic Forum, Costa Rica’s competitiveness has remained at the same level as last year.
- Persistent competitiveness constraints:
  - Unsatisfactory infrastructure.
  - Concerns over inefficient government spending.
  - Insufficient investor protection.
- Labor market and productivity signals:
  - A ULC-based REER including public wages highlights risks to competitiveness if public wage inflation were to spill over into the private sector, at a time when productivity growth appears to be slowing.
- Sectoral and other structural observations (from figures and tables):
  - Electricity tariffs are not very high by regional standards, but some Asian competitors with subsidy policies generally have lower tariffs.
  - Efficiency of (high) expenditure on education is low compared to Asia and also to Chile.
  - Female labor force participation remains an area where structural measures are needed to move Costa Rica past the low point of the typical U-shaped relationship between development and female participation.
  - Increasing competition in the banking sector could provide a significant boost to the economy (simulated effects shown for reductions in interest rate spreads and collateral requirements).

### Policy-relevant findings and implications
- Fiscal policy and external assessment:
  - Identified policy gaps of -1.7 percent of GDP (negative and significant) imply further undervaluation if corrected; health expenditures account for 70 percent of the policy gap and recommended fiscal adjustment for 30 percent.
- Monetary / exchange rate context:
  - The real effective depreciation of early 2014 has been reversed driven both by nominal appreciation and inflation differentials; overall assessment remains that the REER is in line with fundamentals.
- Structural reform priorities to preserve/improve competitiveness:
  - Improve infrastructure.
  - Enhance efficiency of government spending.
  - Strengthen investor protection.
  - Address labor market participation (including female participation).
  - Increase competition in the banking sector.

*Source: IMF staff estimates and analysis, "Box 1. Costa Rica: External Stability Assessment (concluded)".*

### Annex I. Costa Rica: Financial System Assessment Program (FSAP) Main

### Annex I. Costa Rica: Financial System Assessment Program (FSAP) Main

### Pending Recommendations (2008) — A. Prudential Supervision and Regulation
- Amend the legal framework in order to provide protection for supervisors while performing their responsibilities in good faith.
  - Art. 28 of Insurance Law 8653 of August 7, 2008, provides legal protection to insurance supervisors.
  - A draft bank resolution law contemplates protection for bank supervisors participating in the resolution process.
  - A constitutional reform is necessary to establish legal protection for bank supervisors.
  - CONASSIF has issued agreements to provide legal assistance to SUGEF senior personnel in case of judicial inquiries arising from the exercise of their functions.
- Introduce pertinent laws for the Superintendency of Banks (SUGEF) to be able to supervise banking groups (including offshore structures) on a consolidated basis. Upon the approval of such laws the SUGEF should issue without delay operational regulations to ensure their rapid implementation by the banking system.
  - The draft law that was submitted in the past has been archived by Congress.
  - SUGEF is in the process of re-drafting a new reform bill. The strategic orientations of this bill have been defined in 2015.
- Apply higher risk weight ratios to unhedged borrowers for capital adequacy purposes.
  - Amendment to capital adequacy regulation took effect in August 2013. This implemented gradual increases in the percentages over 18 months, to reach final levels of 125% for unhedged borrowers and 62.5% for those with residential mortgages by March 2015.
  - A normative reform that increases the generic provision for un-hedged borrowers from 0.5 to 1.5 percent is in process. Approval is expected by May 2016.
- Modify the funding arrangements for supervision, in line with international best practices.
  - A draft legislation to recapitalize the central bank also addresses the increase in the financing share of the industry.

### Pending Recommendations (2008) — B. Crisis Management and Bank Crisis Resolution Framework
- Amend article 155 of the Central Bank law in order to grant the SUGEF an appropriate range of supervisory tools to require a bank to take prompt remedial action and to impose penalties in accordance with the gravity of a situation.
  - With the IMF’s help, SUGEF is in the process of drafting a new reform bill. The strategic orientations of this project have been defined in 2015.
- Amend the rating system for prompt corrective actions, to include new directives that allow the SUGEF to take an appropriate range of remedial actions and supervisory decisions.
  - The authorities intend to amend the rating system once risk-based supervision is fully in place (currently expected in 2017, with major reforms to be conducted in 2015 and 2016).
  - SUGEF has been carrying pilot visits to various financial entities which will allow defining the focus of the rating system in the context of risk-based supervision.
- Improve the early warning system, to allow the adoption of remedial actions in a timely manner.
  - The authorities will review the possibility of taking a broader range of remedial actions within the scope of the existing law.
- Eliminate the emergency loan window and improve the design and operational arrangements of the ordinary rediscount window, including by establishing prudential limits in terms of regulatory capital.
  - The emergency line introduced during the 2008-09 crisis was discontinued and two high-access rediscount windows were created in 2011:
    - (i) using bonds already included in the money market collateral pool; and
    - (ii) using commercial credit portfolio as collateral (with strict rules on quality and haircuts).
  - Both lines are available in US dollars and in colones. However, the rediscount windows are activated only when a central bank committee considers that there is a systemic risk; operational procedures need to be further streamlined; and repo operations are still to be linked to prudential limits in terms of regulatory capital.
- Establish a deposit insurance scheme, in line with international best practices.
  - SUGEF is working on a draft law with the assistance of the IMF’s TA.
- Amend the bank resolution legal framework to include purchase and assumption type techniques.
  - Improvements to the bank resolution framework are being developed as a complement to the deposit guarantee scheme.
- Enable voluntary, extra-judicial corporate restructuring agreements.
  - Approval of the Law on Execution in October 2007 did not address the weaknesses of the current procedural rules.

*Staff’s preliminary assessment based on updated information provided by the authorities. Source: Superintendence of Financial Institutions.*

### Annex II. Summary of Recommendations in the WHD Cluster Surveillance Report on Financial Integration in CAPDR — Micro-prudential Regulation
- Regulatory Perimeter
  - Designate a Lead Supervisor in each country.
  - Adopt a broad definition of financial conglomerate and economic group.
  - Develop and periodically update a map of existing financial conglomerates. Empower supervisors to regulate holding corporations.
  - Agree on a common scope of supervision to minimize regulatory arbitrage.
- Capital Adequacy
  - Bridge existing different capital definitions across countries.
  - Adopt common definition of capital consistent with international best practice.
  - Harmonize the calculation of financial conglomerates’ capital on a consolidated basis.
  - Adopt common loan classification criteria, at least applicable to regional entities.
- Corporate Governance
  - Regulate the organization structure of conglomerates to facilitate their supervision.
  - Reinforce legal authorities for the identification of ultimate ownership of financial conglomerates and economic groups.
  - Harmonize regulations on market entry and participation.
  - Establish minimum regional standards on risk management systems.
- Credit Limits
  - Adopt common thresholds on credit concentration and exposures to related parties.
  - Empower supervisors to inquire about ultimate owners’ identities beyond financial corporations that are part of the financial conglomerates.
  - Grant sufficient legal protection to supervisors.

### Annex II. Summary of Recommendations in the WHD Cluster Surveillance Report on Financial Integration in CAPDR — Macro-financial Regulation and Instruments
- Regional Supervision
  - Implement a Regional Financial Stability Council with a broad mandate for regional financial stability, building from existing forums and Ministries of Finance.
  - Extend responsibility of supervising regional conglomerates to principal supervisors.
  - Harmonize financial data exchange in line with international accounting standards.
- Macro-prudential Regulation
  - Ensure full integration of systemic risk in the regulatory and supervisory frameworks.
  - Develop national and regional frameworks to identify SIFIs.
  - Calibrate micro-financial regulatory instruments to address macro-prudential risk.
  - Agree on a common set of macro-prudential instruments to be used to induce a reduction of systemic risk from financial conglomerates.
  - Reinforce regional macro-prudential surveillance, including by regional authorities.
- Lender of Last Resort
  - Adopt minimum country requirements on LOLR facilities.
  - Re-examine regulation for ring-fencing to ensure it addresses liquidity pressures transmitted across borders through financial conglomerates.
  - Develop macro-prudential metrics for liquidity in foreign exchange.
  - Reassess national frameworks on reserve requirements for foreign currency liabilities.
- Remedial Actions and Resolution
  - Extend legal regimes for corrective and remedial actions to non-bank financial institutions, and also specifically for SIFIs and financial conglomerates.
  - Adapt resolution frameworks to take into account regional implications.
- Deposit Insurance
  - Harmonize deposit insurance facilities.
  - Establish explicit coverage of deposits in off-shore banks with a specific regime.

*Source: WHD Cluster Surveillance Report on Financial Integration in CAPDR (Annex II).*

### Annex III. Costa Rica: Public Debt Sustainability Analysis

### Annex III. Costa Rica: Public Debt Sustainability Analysis (Higher Scrutiny Case)

### A. Key Assumptions
- Debt definition:
  - DSA focuses on the central government (public sector consolidated items noted separately).
  - The rest of the consolidated public sector has been broadly in balance; social security cash surplus broadly offsets a small central bank deficit; public enterprises broadly in balance.
  - An additional adjustment of about 1½ percent of GDP to close an actuarial deficit is estimated separately.
- Growth and fiscal policy:
  - Baseline reflects estimated growth potential of 4 percent.
  - Baseline assumes fiscal adjustment of about 2¼ of GDP based on staff assessment of measures submitted to Congress with higher probability of approval.
  - Improvement in primary balance is smaller due to projected deterioration under a passive scenario driven by increases in education expenditure to reach constitutionally defined targets.
- Debt target and operational guidance:
  - Operational guidance from the 2003 WEO: sustaining debt-to-GDP ratios above 50 percent may be difficult for emerging markets.
  - Empirical evidence suggests median public debt-to-GDP for emerging markets in the year before a default was about 50 percent of GDP.
  - Targeting an upper bound to public debt around or below 50 percent of GDP is considered justifiable for Costa Rica.

### B. Results and Assessment
- Baseline projections and fiscal outcomes:
  - Debt stock projected to rise to 55 percent of GDP by 2021 under the baseline scenario.
  - Headline deficit remains around 5½ percent of GDP in 2021.
  - Average gross financing needs would be almost 9 percent of GDP in 2016-21.
- Adjustment scenario:
  - Additional measures of 1½ of GDP, implemented as a gradual but frontloaded consolidation plan, suffice to stabilize debt by 2021 at a level below 50 percent of GDP.
  - This assumes tightening in credit spreads driven by favorable market reaction to a frontloaded plan with credible measures.
- Risk assessment:
  - Most standard indicators are not at “danger” levels, but debt and gross financing needs approach medium-risk benchmarks under stressed scenarios.
  - Under the combined macro-fiscal shock, debt rises above 65 percent of GDP (benchmark for medium risk on heat map is 70 percent).
  - Debt shows particularly high sensitivity to growth and fiscal shocks.
  - Debt profile indicators show medium risks from relatively high spreads on external bonds, with spreads approaching the 600 basis point benchmark for upper risk assessment.
- Mitigating factors:
  - External and FX debt are at the low end of reference ranges for moderate risk: external debt represents less than 25 percent of total debt; FX debt represents less than 35 percent of total debt.
  - About 60 percent of domestic debt is held by captive local institutional investors (social security system, nonfinancial public sector institutions, and banks).

### C. Key Baseline Numerical Indicators (selected, preserve values exactly)
- Central Government DSA (Nominal gross public debt, in percent of GDP):
  - 2014: 30.6
  - 2015: 39.3
  - 2016: 42.4
  - 2017: 45.1
  - 2018: 47.6
  - 2019: 49.6
  - 2020: 51.6
  - 2021: 53.5
  - 2021 (alternate row): 55.0
- Central Government public gross financing needs (in percent of GDP):
  - 2014: 12.5
  - 2015: 10.3
  - 2016: 9.4
  - 2017: 9.5
  - 2018: 9.6
  - 2019: 9.0
  - 2020: 8.0
  - 2021: 8.2
  - 2021 (alternate row): 7.4
- Real GDP growth (in percent):
  - 2014: 4.5
  - 2015: 3.0
  - 2016: 3.7
  - 2017: 4.2
  - 2018: 4.3
  - 2019: 4.4
  - 2020: 4.3
  - 2021: 4.0
- Inflation (GDP deflator, in percent):
  - 2014: 8.0
  - 2015: 4.7
  - 2016: 2.2
  - 2017: 3.4
  - 2018: 3.2
  - 2019: 3.5
  - 2020: 3.7
  - 2021: 3.4 / 3.3 (two table entries)
- Nominal GDP growth (in percent):
  - 2014: 12.9
  - 2015: 7.8
  - 2016: 5.9
  - 2017: 7.8
  - 2018: 7.6
  - 2019: 8.0
  - 2020: 8.1
  - 2021: 7.5
- Effective interest rate (in percent) (central government table):
  - 2014: 10.7
  - 2015: 8.7
  - 2016: 7.5
  - 2017: 8.6
  - 2018: 9.5
  - 2019: 9.7
  - 2020: 9.5
  - 2021: 9.0 / 8.2 (two table entries)
- Central government cumulative change in gross public sector debt (2014–2021): 12.7
- Identified debt-creating flows (2014–2021): 12.1
- Central government primary deficit (2014–2021 cumulative): 8.6
- Central government primary (noninterest) revenue and grants (2014–2021 cumulative): 93.6
- Central government primary (noninterest) expenditure (2014–2021 cumulative): 102.1
- Consolidated public sector (baseline) nominal gross public debt (in percent of GDP):
  - 2014: 34.4
  - 2015: 43.2
  - 2016: 46.0
  - 2017: 48.9
  - 2018: 51.4
  - 2019: 53.4
  - 2020: 55.3
  - 2021: 57.1
  - 2021 (alternate row): 58.5
- Consolidated public sector public gross financing needs (in percent of GDP):
  - 2014: 5.0
  - 2015: 10.0
  - 2016: 10.1
  - 2017: 10.0
  - 2018: 9.9
  - 2019: 9.3
  - 2020: 8.2
  - 2021: 8.4 / 7.6 (two table entries)
- Consolidated cumulative change in gross public sector debt (2014–2021): 12.6
- Consolidated identified debt-creating flows (2014–2021): 12.0
- Consolidated primary deficit (2014–2021 cumulative): 10.8
- Consolidated primary (noninterest) revenue and grants (2014–2021 cumulative): 146.1
- Consolidated primary (noninterest) expenditure (2014–2021 cumulative): 156.9

### D. Stress Tests and Scenarios (selected outcomes)
- Stress test scenarios:
  - Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Macro-Fiscal Shock.
- Selected scenario outcomes (indicative values in tables):
  - Real GDP growth under baseline: 4.2, 4.3, 4.4, 4.3, 4.0, 4.0 (2016–2021).
  - Real GDP growth under Real GDP Growth Shock: 4.2, 1.4, 1.5, 4.3, 4.0, 4.0 (2016–2021).
  - Effective interest rate under Combined Shock: 8.6, 9.9, 9.9, 10.0, 9.8, 9.2 (2016–2021).
  - Under the combined macro-fiscal shock, debt rises above 65 percent of GDP.
- Heat map and risk benchmarks:
  - EMBIG (3-month average 30-Dec-15 through 29-Mar-16): 527 basis points.
  - Benchmarks noted: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in share of short-term debt; 15 and 45 percent for public debt held by non-residents; 20 and 60 percent for foreign-currency denominated debt.
  - Debt profile vulnerabilities: gross financing needs near medium-risk benchmarks; EMBIG noted at 470–527 bp in tables and charts.

### E. Composition and Debt-Profile Observations
- Composition of debt and risk-reducing features:
  - External debt share: less than 25 percent of total debt.
  - Foreign-currency debt share: less than 35 percent of total debt.
  - About 60 percent of domestic debt is held by captive local institutional investors (social security system, nonfinancial public sector institutions, and banks).
- Maturity and currency composition charts (figures available in source):
  - Shows rising medium- and long-term share; short-term component and local vs foreign currency composition highlighted in charts.

*Annex III. Costa Rica: Public Debt Sustainability Analysis (Higher Scrutiny Case).*

### Annex IV. Costa Rica: External Debt Sustainability Analysis

### Annex IV. Costa Rica: External Debt Sustainability Analysis

### Baseline external debt dynamics
- External debt (percent of GDP):
  - 2013: 35.6
  - 2014: 38.8
  - 2015: 38.4
  - 2016: 36.5
  - 2017: 34.9
  - 2018: 32.6
  - 2019: 30.4
  - 2020: 28.3
  - 2021: 26.2
- Change in external debt (percent of GDP):
  - 2013: 3.7
  - 2014: 3.2
  - 2015: -0.4
  - 2016: -1.9
  - 2017: -1.5
  - 2018: -2.4
  - 2019: -2.2
  - 2020: -2.1
  - 2021: -2.1
  - Debt-stabilizing non-interest current account: 0.0
- Identified external debt-creating flows (percent of GDP):
  - 2013: -2.4
  - 2014: 0.3
  - 2015: -2.9
  - 2016: -3.2
  - 2017: -2.8
  - 2018: -2.8
  - 2019: -2.6
  - 2020: -2.5
  - 2021: -2.5
  - Debt-stabilizing non-interest current account: 0.0
- Residual, including change in gross foreign assets (percent of GDP):
  - 2013: 6.0
  - 2014: 2.9
  - 2015: 2.5
  - 2016: 1.3
  - 2017: 1.2
  - 2018: 0.4
  - 2019: 0.4
  - 2020: 0.4
  - 2021: 0.4
  - Debt-stabilizing non-interest current account: 0.0

### Current account, trade, and non-debt inflows
- Current account deficit, excluding interest payments (percent of GDP):
  - 2013: 4.2
  - 2014: 3.7
  - 2015: 3.0
  - 2016: 3.2
  - 2017: 3.2
  - 2018: 3.1
  - 2019: 3.2
  - 2020: 3.2
  - 2021: 3.3
  - Debt-stabilizing non-interest current account: 4.8
- Deficit in balance of goods and services (percent of GDP):
  - 2013: 3.2
  - 2014: 1.8
  - 2015: 0.0
  - 2016: 0.0
  - 2017: 0.0
  - 2018: -0.1
  - 2019: 0.0
  - 2020: 0.0
  - 2021: 0.0
- Exports (percent of GDP):
  - 2013: 35.5
  - 2014: 35.3
  - 2015: 32.2
  - 2016: 31.6
  - 2017: 31.7
  - 2018: 31.7
  - 2019: 31.8
  - 2020: 31.7
  - 2021: 31.5
- Imports (percent of GDP):
  - 2013: 38.7
  - 2014: 37.2
  - 2015: 32.2
  - 2016: 31.7
  - 2017: 31.7
  - 2018: 31.7
  - 2019: 31.8
  - 2020: 31.7
  - 2021: 31.5
- Net non-debt creating capital inflows (negative, percent of GDP):
  - 2013: -5.4
  - 2014: -4.4
  - 2015: -4.5
  - 2016: -4.7
  - 2017: -4.7
  - 2018: -4.7
  - 2019: -4.8
  - 2020: -4.8
  - 2021: -4.8
  - Debt-stabilizing non-interest current account: -4.8

### Automatic debt dynamics and contributions
- Automatic debt dynamics (percent of GDP):
  - 2013: -1.2
  - 2014: 1.0
  - 2015: -1.4
  - 2016: -1.7
  - 2017: -1.3
  - 2018: -1.2
  - 2019: -1.0
  - 2020: -0.9
  - 2021: -0.9
  - Debt-stabilizing non-interest current account: 0.0
- Contribution from nominal interest rate (percent of GDP):
  - 2013: 0.8
  - 2014: 1.0
  - 2015: 1.0
  - 2016: 1.0
  - 2017: 1.0
  - 2018: 1.1
  - 2019: 1.1
  - 2020: 1.1
  - 2021: 1.1
  - Debt-stabilizing non-interest current account: 1.0
- Contribution from real GDP growth (percent of GDP):
  - 2013: -0.5
  - 2014: -1.1
  - 2015: -1.3
  - 2016: -1.5
  - 2017: -1.5
  - 2018: -1.4
  - 2019: -1.3
  - 2020: -1.1
  - 2021: -1.1
  - Debt-stabilizing non-interest current account: -1.0
- Contribution from price and exchange rate changes (percent of GDP):
  - 2013: -1.5
  - 2014: ... (table continues)

### Debt and export ratios; external financing needs
- External debt-to-exports ratio (in percent):
  - 2013: 100.3
  - 2014: 109.8
  - 2015: 119.2
  - 2016: 115.4
  - 2017: 110.3
  - 2018: 102.6
  - 2019: 95.6
  - 2020: 89.3
  - 2021: 83.3
- Gross external financing need (in billions of US dollars):
  - 2013: 6.8
  - 2014: 6.3
  - 2015: 5.8
  - 2016: 5.8
  - 2017: 5.8
  - 2018: 5.8
  - 2019: 5.8
  - 2020: 4.9
  - 2021: 5.0
- Gross external financing need (in percent of GDP):
  - 2013: 13.8
  - 2014: 12.6
  - 2015: 10.9
  - 2016: 10.2
  - 2017: 9.5
  - 2018: 9.0
  - 2019: 8.4
  - 2020: 6.6
  - 2021: 6.3

### Scenario with key variables at historical averages
- External debt (percent of GDP) under historical-average scenario:
  - 2016: 34.9
  - 2017: 32.4
  - 2018: 29.4
  - 2019: 26.5
  - 2020: 23.8
  - 2021: 21.3
  - For debt stabilization: -6.6

### Key macroeconomic assumptions underlying the baseline projections
- Real GDP growth (in percent):
  - 2013: 1.8
  - 2014: 3.0
  - 2015: 3.7
  - 2016: 4.2
  - 2017: 4.3
  - 2018: 4.4
  - 2019: 4.3
  - 2020: 4.0
  - 2021: 4.0
  - Debt-stabilizing non-interest current account: 4.0
- GDP deflator in US dollars (change in percent):
  - 2013: 4.9
  - 2014: -2.8
  - 2015: 2.9
  - 2016: 3.2
  - 2017: 2.4
  - 2018: 2.5
  - 2019: 2.7
  - 2020: 2.9
  - 2021: 3.3
  - Debt-stabilizing non-interest current account: 3.3
- Nominal external interest rate (in percent):
  - 2013: 2.8
  - 2014: 2.8
  - 2015: 2.8
  - 2016: 2.8
  - 2017: 3.0
  - 2018: 3.4
  - 2019: 3.8
  - 2020: 3.9
  - 2021: 4.0
  - Debt-stabilizing non-interest current account: 4.0
- Growth of exports (US dollar terms, in percent):
  - 2013: 3.9
  - 2014: -0.5
  - 2015: -2.7
  - 2016: 5.6
  - 2017: 6.9
  - 2018: 7.2
  - 2019: 7.2
  - 2020: 6.8
  - 2021: 6.7
- Growth of imports (US dollar terms, in percent):
  - 2013: 1.7
  - 2014: -4.0
  - 2015: -7.7
  - 2016: 5.9
  - 2017: 6.7
  - 2018: 7.1
  - 2019: 7.4
  - 2020: 6.7
  - 2021: 6.8
- Current account balance, excluding interest payments (percent of GDP):
  - 2013: -4.2
  - 2014: -3.7
  - 2015: -3.0
  - 2016: -3.2
  - 2017: -3.2
  - 2018: -3.1
  - 2019: -3.2
  - 2020: -3.2
  - 2021: -3.3
- Net non-debt creating capital inflows (percent of GDP):
  - 2013: 5.4
  - 2014: 4.4
  - 2015: 4.5
  - 2016: 4.7
  - 2017: 4.7
  - 2018: 4.7
  - 2019: 4.8
  - 2020: 4.8
  - 2021: 4.8

### Bound tests and scenario shocks (illustrative outcomes)
- Baseline external debt (percent of GDP) in figure callouts:
  - Baseline (2016 projections): 26.2
  - Historical: 21
  - Interest rate shock result shown: 27.2
  - Non-interest current account shock result shown: 32.0
  - Growth shock result shown: 27.6
  - Combined shock 3/: 30.4
  - Combined shock 3/ with 30% depreciation (real depreciation shock 4/): 39.3
- Notes from figure captions and methodology:
  - Individual shocks are permanent one-half standard deviation shocks.
  - Ten-year historical average for the variable is shown in figures.
  - Historical scenarios use ten-year historical averages to project debt dynamics five years ahead.
  - A one-time real depreciation of 30 percent occurs in 2016 in the real depreciation shock.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance in combined scenarios.

### Definitions and computation notes (as provided)
- Automatic debt-dynamics formula: Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms; g = real GDP growth rate; e = nominal appreciation (increase in dollar value of domestic currency); and a = share of domestic-currency denominated debt in total external debt.
- Contribution from price and exchange rate changes: Defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).
- Residual line includes the impact of price and exchange rate changes for projections.
- Gross external financing need defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.
- Key variables for the historical-average scenario include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.
- Debt-stabilizing, long-run non-interest current account: defined as long-run, constant balance that stabilizes the debt ratio assuming key variables remain at their levels of the last projection year.

*Source: National authorities and Fund staff estimates.*

### 5.      The teams have the following requests for information from their counterparts:

### _cr16131 - 5.      The teams have the following requests for information from their counterparts:

### Requests for information between Fund and Bank teams
- The Fund team requests to be kept informed of progress in the above macro-critical structural reform areas. Timing: when milestones are reached (and at least semi-annually).
- The Bank team requests to be kept informed of the Fund’s assessments of macroeconomic policies and prospects. Timing: when milestones are reached (and at least semi-annually).

### World Bank and IMF planned activities in macro-critical structural reform areas (2015 / 2016)
- World Bank Work Program
  - Good Practices in Development Finance — Completed (final delivery March 2016).
  - Fiscal Management in Central America AAA (P151829) — Provisional timing: May 2016; Expected delivery date: December 2016.
- IMF Work Program
  - Staff visit — Provisional timing: November, 2016; Expected delivery date: November, 2016.
  - Regional Conference — Provisional timing: November, 2016; Expected delivery date: November, 2016.
  - Technical assistance: National Accounts and Price Statistics; Monetary and FX Operations; Banking Supervision and Regulation; Fiscal Revenue and Expenditure Management — 2016.

### Financial relations between Costa Rica and the World Bank (Table 2; in million U.S. dollars)
- Higher Education Improvement Project: Total loan 200; Undisbursed through FY16 171.5; Projected disbursements in FY17 10.
- Catastrophe Deferred Draw Down Option: Total loan 65; Undisbursed through FY16 31; Projected disbursements in FY17 0.
- Strengthening Universal Health Insurance: Total loan 420; Undisbursed through FY16 420; Projected disbursements in FY17 0.

### Relations with the Inter-American Development Bank (IDB) — key figures and plans
- IDB loan portfolio in Costa Rica: 11 sovereign guaranteed operations in execution and two programs pending ratification, with an approved amount of US$ 2.046,18 million.
- Available amount for disbursements: US$ 1.312,15 million (64% of the approved).
- Sector concentration of available amount: Transportation (44,5%), Energy (34,2%), Education (8,2%), Reform and Modernization of the State (6,5%).
- Average age of the operations: 2.1 years.
- Disbursements of sovereign guaranteed operations during 2016 expected: around US$146,9 million, concentrated in Transportation (27.4%), Energy (26,2%), Reform and Modernization of the State (23,8%).
- IDB plans for 2016: implement 2015-2018 Country Strategy focused on Infrastructure and Logistics, Innovation and Competitiveness, Energy, Education and Public Finances.
- IDB expected approvals in 2016: two Sovereign Guarantee loans totaling US$140 million for Integrated urban consolidation and the Cantonal road network.

### IDB loan disbursements and related figures (selected tables)
- Loan Disbursements (Sovereign Guaranteed Operations) 2009–2016* (In millions of U.S. dollars)
  - Disbursements: 2009 40,6; 2010 55,7; 2011 121,0; 2012 86,9; 2013 131,3; 2014 209.9; 2015 173.4; 2016* 146.9.
  - Amortization: 2009 45.1; 2010 44.6; 2011 46.6; 2012 44.7; 2013 36.2; 2014 31.9; 2015 38.5; 2016* 55.1.
  - Interest and charges: 2009 11.8; 2010 11.4; 2011 10.3; 2012 9.3; 2013 9.6; 2014 10.2; 2015 12.8; 2016* 19.7.
  - Net cash flow: 2009 -18.2; 2010 -0.3; 2011 62; 2012 31.0; 2013 84; 2014 165.7; 2015 120.4; 2016* 70.2.
  - *Projections (February 2016).
- Lending Program for 2016 (tentative) (In millions of U.S. dollars)
  - Integrated Urban Consolidation - Bonos Comunales: 50.
  - Cantonal Road Network Program: 90.
  - Total: 140.

### Sovereign Guaranteed Operations as of February 29, 2015 (In millions of U.S. dollars)
- Summary totals: Approved 2.046,2; Disbursed 734,0; Obligated 146.90; Available 1.312,15 (Loans in execution).
- Selected project lines (Approved / Disbursed / Obligated / Available):
  - Sustainable Development of the Binational Watershed Rio Sixaola: 9,22 / 9,22 / 0,0 / 0,0.
  - Tourism Program in Protected Areas: 19,0 / 11,36 / 7.64 / 7,64.
  - First Electric Power Sector Development Program 2008-2011: 250,0 / 232,54 / 17.46 / 17,46.
  - First Road Infrastructure Program: 300,0 / 286,67 / 13.32 / 13,32.
  - Cantonal Road Network Program: 60,0 / 25,86 / 15.00 / 34,14.
  - Water and Sanitation Program: 73,0 / 5,07 / 6.23 / 67,93.
  - Violence Prevention and Social Inclusion Promotion Program: 132,4 / 41,93 / 35.00 / 90,51.
  - Innovation and Human Capital for Competitiveness Program: 35,0 / 9,01 / 8.50 / 25,99.
  - Power Sector Development Program 2012–16 (Reventazon Hydroelectric Project): 250,0 / 97,23 / 21.00 / 152,77.
  - Education Infrastructure Construction and Equipment Program: 167,52 / 15,13 / 10.75 / 152,39.
  - Infrastructure Transport Program: 450 / 0,0 / 12.00 / 450.
  - Border Integration Program of Costa Rica*: 100 / 0,0 / 0,0 / 100.
  - First Renewable Energy, Transmission and Distribution of Electricity Program*: 200 / 0,0 / 0,0 / 200.
  - Nonreimbursable Technical Cooperations: 19,6 / 9,7 / 0,0 / 9,9.
  - Total: 2065,78 / 743,72 / 146,9 / 1322.05.
  - *Pending ratification.

### Statistical issues (As of April, 2016) — main findings
- General
  - Data provision is broadly adequate for surveillance.
  - Quality of macroeconomic data has continued to improve in recent years; Data Module ROSC reassessment published February 2010.
  - Further statistical improvements pursued in real, monetary, fiscal and balance of payments sectors.
  - Central Bank, Ministry of Finance, and National Institute of Statistics and Census make data available on their websites (www.bccr.fi.cr, www.hacienda.go.cr, and www.inec.go.cr).
- National accounts
  - Compiled generally in accordance with the System of National Accounts 2008 (SNA 2008).
  - Central Bank disseminated annual national accounts data for 2012-2015, with 2012 as new base year. Full transition including rebased historical data scheduled for completion by September 2016.
  - Improvements: housing stock estimated at detailed level per 2011 Census; rental CPI used as price indicator for subsequent years; accounting depreciation used instead of estimating consumption of fixed capital; double deflation for annual value added in constant prices; single extrapolation for quarterly volume estimates; proportional Denton method applied for benchmarking quarterly to annual series; informal household production included in GDP level (but not separately estimated).
- Price statistics
  - CPI uses concepts from latest international CPI manual; weights based on 2012/2013 Income and Expenditure Survey; covers national urban and mixed households (~73 percent of total population and 82 percent of total consumption expenditures).
  - PPI compiled based on concepts from 1993 SNA and international PPI Manual; base year 2012 for domestic manufacture, transportation, tourism services and professional services; PPI for electricity and sales hydrocarbons, and export and import price index use moving-base approach; export and import price index not yet available.
- Government Finance Statistics (GFS)
  - Concepts generally follow GFSM 1986.
  - Financing data and government debt use national concepts combining instruments and holders not in accordance with international standards.
  - Monthly fiscal statistics compiled only for budgetary central government; annual statistics compiled for entire public sector and subsectors.
  - Annual data for GFS Yearbook reported regularly, most recently for 2014.
  - Domestic/foreign debt classification follows place of issue (Costa Rica or abroad) rather than residency criterion.
  - Fiscal data discrepancies among national compilers not regularly reconciled; fiscal statistics not regularly reconciled with monetary statistics or other macroeconomic statistics.
- Monetary and Financial Statistics
  - Central Bank of Costa Rica (CBCR) reports SRFs 1SR (CBCR), 2SR (ODCs), and 5SR (monetary aggregates) monthly to IMF IFS with a lag of two months.
  - Reported monetary statistics broadly in line with MFSM methodology with some exceptions: accrued interest not classified together with underlying instruments as recommended.
  - CBCR working to expand coverage to include short term funds as ODCs and investment funds and pension funds as other financial corporations.
- Financial sector surveillance
  - Costa Rica reports all core FSIs and one of the 13 encouraged FSIs for deposit takers monthly with less than one quarter lag.
  - Authorities plan to expand reported FSIs of the encouraged set for deposit takers.
- External sector statistics
  - BCCR compiles and disseminates quarterly balance of payments and IIP statistics on BPM6 basis.
  - Work ongoing to improve coverage of financial transactions of nonfinancial private sector (trade credit and advances) and remuneration of employees.
  - Transfer prices in some cases are not converted to market prices.
  - BCCR compiles monthly Data Template on International Reserves and Foreign Currency Liquidity, reports semi-annual CPIS, annual CDIS, and submits quarterly external debt statistics to QEDS.
- Data Standards and Quality
  - Costa Rica is in observance with the Special Data Dissemination Standards (SDDS).
  - Data Module ROSC published in February 2010.

### Table of Common Indicators Required for Surveillance (As of March 24, 2016) — selected timing and quality flags
- Exchange Rates: Date of latest observation Mar 16; Date received Mar 16; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation Mar 16; Date received Mar 16; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- Reserve/Base Money: Date of latest observation Feb 16; Date received Feb 16; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D; Data Quality – Methodological soundness O, LO, LO, LO; Data Quality – Accuracy and reliability O, O, O, LO, O.
- Broad Money: Date of latest observation Feb 16; Date received Feb 16; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Central Bank Balance Sheet: Date of latest observation Feb 16; Date received Feb 16; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Consolidated Balance Sheet of the Banking System: Date of latest observation Feb 16; Date received Feb 16; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Interest Rates: Date of latest observation Mar 16; Date received Mar 16; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- Consumer Price Index: Date of latest observation Feb 16; Date received Mar 16; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Data Quality – Methodological soundness O, LO, O, O; Data Quality – Accuracy and reliability LO, O, LO, LO,O.
- Revenue, Expenditure, Balance, and Composition of Financing – Central Government: Date of latest observation Dec 15; Date received Feb 15; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Data Quality – Methodological soundness LO, LNO, LO, LO; Data Quality – Accuracy and reliability LO, O, O, LO, O.
- External Current Account Balance: Date of latest observation Sep 15; Date received Jan 16; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q; Data Quality – Methodological soundness O, LO, O, LO; Data Quality – Accuracy and reliability LO, O, LO, O, LNO.
- GDP/GNP: Date of latest observation Sep 15; Date received Jan 16; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q; Data Quality – Methodological soundness O, LO, LNO, O; Data Quality – Accuracy and reliability LO, O, LNO, O, LO.
- Gross External Debt: Date of latest observation Sep 15; Date received Jan 16; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- International Investment Position: Date of latest observation Sep 15; Date received Jan 16; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.

### Statement by Costa Rican authorities (May 16, 2016) — selected observations
- The Costa Rican authorities appreciate the constructive and transparent dialogue with staff and broadly concur with its assessment and key recommendations.
- Economic outlook (selected points)
  - Costa Rica has continued growing at an accelerating rate during the last three years.
  - As a small open economy, exposure includes commodity prices volatility, international financial conditions and main trade partners’ growth, and high exposure to natural disasters.
  - In 2015, adverse weather conditions for main agricultural exports were compensated by dynamic export of services and lower import commodity prices, especially oil.
  - Exports supply widened; medical devices—the main export product—continued to perform strongly.
  - Services grew 8.4 percent in 2015 reaching all-time records driven by tourism, IT, information, medical and other business services.
  - FDI grew in 2015 and is expected to continue financing a sustainable current account deficit.
  - The central bank’s growth projection for 2016 rose to 4.3 percent after closing at 3.7 percent in [text cut off].

*Document: _cr16131 - 5.      The teams have the following requests for information from their counterparts (IMF PDF).*

### 2015. The combined effect from improved external demand, stability in main macro variables

### 2015. The combined effect from improved external demand, stability in main macro variables

### Growth and outlook
- The rate of growth rose to 5.4 percent y-o-y as of February 2016, measured by the monthly index of economic activity (IMAE).
- Overall, the economy is expected to continue growing above 4 percent in the medium term in the midst of a fiscal consolidation process and propelled by a loose monetary policy stance, if price pressures do not arise.
- The financial sector has seen some risks build up but “remains sound and resilient”; authorities have implemented measures and stand ready to take further actions to keep strengthening the financial system and maintaining it in a growth-friendly development stage.

### Fiscal policy — revenue and spending developments
- Revenue management and tax administration:
  - A new virtual tax administration system was started up, easing administrative costs for taxpayers and digitalizing relevant information to tighten controls.
  - A special strategy to closely monitor large taxpayers was implemented.
  - Number of income tax files increased by 21 percent during 2015.
  - Income tax revenue increased by 14.3 percent during 2015.
  - Revenue effort climbed to 13.7 percent of GDP in 2015 from 13.2 percent in 2014.
- Spending restraint:
  - Q1 2016 wage bill grew 3.4 percent compared to the same period last year; the average growth rate on the first quarter of the last four years was 9.9 percent.
  - Purchases of goods and services decreased 28 percent during the first quarter compared to the same period last year.
  - Salary increases during the last semesters have been almost negligible for professional central government servants.
- Fiscal reform package (laws sent to congress):
  - The government sent to congress a comprehensive package composed of nine law proposals addressing revenue and expenditure sides.
  - The broad part of the adjustment is expected to come from reforms to VAT and income tax; under the current VAT setup, services are exempted and the proposal would amend these leaks while exonerating the population below the last 4 deciles of the income distribution.
  - The Anti-smuggling law was approved by congress and is already under execution.
  - The Anti-tax evasion initiative’s approval has taken longer because it includes the foundation of a business ownership registry with information on final beneficiaries to allow for future automatic exchange of information.
  - Corporate tax law is advancing properly in congress; its final approval is expected soon.
- Political developments affecting fiscal agenda:
  - On May 1, 2016 a coalition of parties that control congress directorate agreed on promoting a fiscal reform agenda tilted to the expenditure side, proposing to approve a comprehensive set of expenditure measures before approving VAT and income tax reforms.
  - Many coalition measures were already contemplated in the government package; authorities have taken this as an opportunity to speed up fiscal reform and negotiations are underway.

### Monetary policy, exchange rate policy, and financial sector measures
- Monetary policy framework:
  - The central bank strengthened its monetary policy framework to have inflation as the undisputable anchor, including the successful surrender of the XR band in early 2015.
  - The central bank has anchored inflation expectations, allowing a revision of the inflation target range to 2-4 percent (from 3-5 percent), in line with average inflation of main trading partners.
- Foreign exchange (FX) intervention rule characteristics and response:
  - Three characteristics shaped the FX intervention rule: high dollarization increasing vigilance on financial vulnerabilities; FX market competition lagging and dominated by few large players; and since the new XR regime inception the FX market has been largely on surplus which would have induced larger real exchange rate appreciation in the short run.
  - The central bank is working on rules to increase competition and deepen the FX market; more XR flexibility and communication on intervention policy would follow as these measures are put in place.
- Measures addressing dollar-denominated credit and FX borrowing:
  - Recognition that dollar-denominated credit has been growing faster than desirable.
  - Authorities increased capital risk-weightings for dollar denominated credit to unhedged borrowers.
  - A 15 percent reserve requirement was set for medium- and long-term new foreign bank borrowing (a requirement on short-term foreign borrowing was already in place).
  - Authorities are working on a new proposal to further increase capital provisions for dollar denominated credit and preparing a law proposal to allow increases above 15 percent to the reserve requirements on FX bank borrowing.
  - Authorities do not rule out additional measures if required.

### Structural reforms, competitiveness, and infrastructure
- Business climate reforms and outcomes:
  - Relevant reforms were approved on access to credit, easiness to pay taxes and access to electricity.
  - These reforms allowed the country to gain 21 positions in the 2016 World Bank Doing Business report.
  - Main reforms included: a new secured transaction law broadening collateral assets; implementation of an electronic filing system for income and sales taxes; and reduction of the time to get electricity.
- Infrastructure projects and financing:
  - Large projects are under execution and many more are in the pipeline with a wide variety of financing sources.
  - Construction of a mega-port in the Caribbean coast awarded to APM Terminals advances as programmed and is expected to be operational in 2018.
  - A new highway in the north part of the Inter-American highway is almost ready and will come into operation next month.
  - Major projects to revamp the capital beltway are under execution with some sections projected to open this year.
  - Other key routes, including connections to the new port, will begin major overhauling next year using already secured funding from China, multilaterals and a novel figure through bank trusts; one project using this financial model was already approved by congress where predefined future tolls would be securitized to finance road construction.

### Energy, environment, and social infrastructure
- Electricity generation and renewables:
  - During 2016 first quarter, 97 percent of electricity was produced from renewable sources, following the same pattern of 2015.
  - Composition of generation during 2016 first quarter: 65 percent hydroelectric, 16 percent wind, 14 percent geothermal, 2 percent biomass; solar energy represents a fraction but its participation would probably increase.
  - The system delivers high quality service and network coverage is very high compared to regional standards.
- Water and sanitation:
  - A wastewater treatment plant, financed through Japan’s cooperation agency, was inaugurated last year; it would duplicate the percentage of treated water in the short-run and, as the sewerage network is developed, would initially take the water treated percentage up to 27 percent of the population.

### Policy stance and commitments
- Authorities are committed to further strengthening the policy mix to preserve macroeconomic and financial stability to maintain Costa Rica’s structural features such as high income per capita, social development and governance indicators, and to support the process to become an OECD member.

*Source: _cr16131 - 2015. The combined effect from improved external demand, stability in main macro variables*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16131.pdf_