IMF Executive Board Concludes 2017 Article IV Consultation with Costa Rica
IMF News, June 27, 2017
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- Published: June 27, 2017
Recent developments and macroeconomic conditions
- The Article IV consultation was concluded on June 14, 2017; the Executive Board considered and endorsed the staff appraisal on a lapse-of-time basis.
- Economy growing at estimated trend rate of about 4¼ percent.
- Output gap is essentially closed.
- Headline inflation turned positive in the second half of 2016 and is rising moderately; both headline and core indicators remain below the 2-4 percent target range.
- The colón has been depreciating moderately since mid-2016.
- Reserves have declined despite narrowing in the current account deficit.
- Central bank increased its policy rate by 225 basis points since April 2017, to 4 percent.
- Financial conditions are now broadly neutral after gradual easing in 2016.
- Financial system appears sound; credit growth consistent with healthy financial deepening and macroeconomic trends.
- Fiscal deficit remains high and public debt continues to rise rapidly despite deepened consolidation efforts in 2016.
- Recent advances in fiscal consolidation have been partly reversed; political consensus on a comprehensive fiscal package remains elusive.
Near-term outlook and projections (baseline)
- 2017 growth is anticipated to slow marginally to 4 percent, driven by weaker terms-of-trade and more stringent financial conditions.
- Inflation expected to return to the middle of the 2-4 percent target range by end-2017 due to past monetary stimulus, fading base effects from past oil price declines, and continued moderate depreciation since mid-2016.
- Financial conditions anticipated to gradually tighten amid monetary policy normalization, persistently high public sector financial needs, and rising international rates.
- Potential growth expected to decelerate as rising interest rates weigh on private investment.
- Current account deficit projected to widen marginally to about 4 percent of GDP as oil prices recover, despite a modest positive effect of recent depreciation on exports.
- Key downside risks: persistently high fiscal deficits and rising public debt; heavy dollarization of bank assets and liabilities; a less favorable external environment, including tighter-than-expected global financial conditions, a retreat in cross-border integration, and weaker-than-projected global growth.
Executive Board assessment and policy recommendations
- Risks to the outlook are rising, increasing urgency to address mounting macro vulnerabilities.
- Near-term policy mix: gradual budgetary adjustment and unwinding of monetary easing.
- Administratively contain expenditure and mobilize revenue to minimize short-term deterioration from recent constitutional court rulings expanding revenue earmarking.
- Central bank should continue tightening monetary stance to maintain inflation around the mid-point of the target range and anchor inflation expectations.
- A comprehensive reform strategy is needed for long-term fiscal sustainability.
- Authorities’ main proposal: broaden bases of the VAT and income tax and increase their rates, accompanied by sustained administrative steps to contain the wage bill — would be sufficient to stabilize public debt within safe levels in the medium term.
- Congressional approval before the elections of a balanced package—including tax reforms, public employment law, and fiscal responsibility law—would be important.
- Parametric reforms needed to shore up the pension system over the long term.
- Exchange rate and financial sector recommendations:
- Greater exchange rate flexibility would strengthen credibility of the IT framework, enhance resilience to external shocks, reinforce the exchange rate as a shock absorber, ease pressure on international reserves, help internalize exchange rate risks, and reduce FX mismatches and dollarization.
- Enhance transparency of triggers for the FX-intervention rule to reinforce subordination of exchange rate management to inflation objectives.
- Micro- and macro-prudential tools introduction is welcomed; further tightening of regulatory requirements should be considered if banks’ FX exposures do not decline or if deceleration of FX credit is temporary.
- Additional measures could include higher reserve and liquidity requirements on FX liabilities, increases in capital buffers and provisioning, and stricter controls on FX loans.
- Implement pending 2008 FSAP recommendations and adopt Basel III standards to improve financial system resilience.
- Structural reforms advised to maintain competitiveness: address transport infrastructure weaknesses, improve education expenditure efficiency, support financial deepening, and provide a legal/regulatory environment that stimulates sectors resilient to climate change.
Selected findings and key statistics (baseline scenario and projections)
- Population (2016, millions): 4.9
- Human Development Index Rank (2016): 66 (out of 188)
- Per capita GDP (2016, U.S. dollars): 11,888
- Life expectancy (2015, years): 79.6
- Unemployment (2016, percent of labor force): 9.5
- Literacy rate (2015, percent of people ages > 15): 97.6
- Poverty (2016, percent of population): 20.5
- Ratio of girls to boys in primary and secondary education (2014, percent): 102.0
- Income share held by highest 10 percent of households: 36.9
- Income share held by lowest 10 percent of households: 1.5
- Gini coefficient (2014): 48.5
- Real GDP growth (annual percent): 2013: 2.3; 2014: 3.7; 2015: 4.7; 2016: 4.3; 2017 (Proj.): 4.0
- Output gap (percent of potential GDP): 2013: -0.4; 2014: -0.6; 2015: 0.0; 2016: 0.1; 2017 (Proj.): -0.1
- GDP deflator (annual percent): 2013: 5.8; 2014: 2.7; 2015: 1.5; 2016: 3.2; 2017 (Proj.): …
- Consumer prices (end of period, annual percent): 2013: 5.1; 2014: -0.8; 2015: 0.8; 2016: 3.0; 2017 (Proj.): …
- Monetary base (annual percent change): 2013: 10.2; 2014: 10.4; 2015: 9.2; 2016: 6.4; 2017 (Proj.): 2.8; 2018 (Proj.): 6.5
- Broad money (annual percent change): 2013: 7.7; 2014: 15.4; 2015: 6.3; 2016: 7.5; 2017 (Proj.): …
- Credit to private sector (annual percent change): 2013: 12.2; 2014: 17.5; 2015: 11.8; 2016: 12.8; 2017 (Proj.): 11.1; 2018 (Proj.): 10.9
- Monetary policy rate (percent; end of period) — 2017 data as of April 2017: 2013: 3.8; 2014: 5.3; 2015: 1.8; 2016: 2.5; 2017: …
- Gross domestic investment (percent of GDP): 2013: 19.0; 2014: 18.8; 2015: 20.2; 2016: 19.7; 2017 (Proj.): 19.6; 2018 (Proj.): 19.5
- Gross domestic savings (percent of GDP): 2013: 14.1; 2014: 13.9; 2015: 15.9; 2016: 16.5; 2017 (Proj.): 15.6
- Current account balance (percent of GDP): 2013: -4.8; 2014: -4.9; 2015: -4.3; 2016: -3.2; 2017 (Proj.): -4.0
- Of which: Trade balance (percent of GDP): 2013: -11.0; 2014: -10.4; 2015: -9.0; 2016: -7.8; 2017 (Proj.): -8.5
- Change in net international reserves (increase +, millions of U.S. dollars): 2013: 474; 2014: -119; 2015: 622; 2016: -260; 2017 (Proj.): -325; 2018 (Proj.): 0
- Net international reserves (millions of U.S. dollars): 2013: 7,331; 2014: 7,211; 2015: 7,834; 2016: 7,574; 2017 (Proj.): 7,249
- Central government primary balance (percent of GDP): 2013: -2.8; 2014: -3.0; 2015: -2.4
- Central government overall balance (percent of GDP): 2013: -5.9; 2014: -5.3; 2015: -6.5
- Central government debt (percent of GDP): 2013: 35.8; 2014: 38.3; 2015: 40.8; 2016: 44.7; 2017 (Proj.): 48.4; 2018 (Proj.): 51.7
- Consolidated public sector overall balance (percent of GDP): 2013: -5.4; 2014: -5.5; 2015: -5.8
- Consolidated public sector debt (percent of GDP): 2013: 41.8; 2014: 42.8; 2015: 45.4; 2016: 49.2; 2017 (Proj.): 51.9; 2018 (Proj.): 54.1
- Of which: External public debt (percent of GDP): 2013: 8.7; 2014: 11.3; 2015: 10.6
- Memorandum: GDP (US$ billions): 2013: 50.3; 2014: 51.3; 2015: 55.5; 2016: 58.1; 2017 (Proj.): 60.0; 2018 (Proj.): 63.7
Notes:
- Baseline scenario includes additional consolidation from already adopted legislative measures (combat tax evasion, curtail unspent budgetary allocations of decentralized government entities), increases in education and social expenditures consistent with constitutional mandates, and limited increases in investments.
- Consolidated public sector balance comprises central government, decentralized government entities, public enterprises, and the central bank, but excludes the Instituto Costarricense de Electricidad (ICE).
- Consolidated public debt nets out central government and central bank debt held by the Caja Costarricense del Seguro Social and other nonfinancial public sector entities.
- The 2017 monetary policy rate data is as of April 2017.
Press Release No. 17/251 — IMF Communications Department, June 27, 2017.