Press Release No. 11/134

Press Release No. 11/134
April 13, 2011

An IMF mission visited San José during March 28-April 12 as part of the 2011 Article IV consultation discussions with Costa Rica. The mission met with Vice President Luis Liberman, Minister of Finance Fernando Herrero, Central Bank President Rodrigo Bolaños, other senior officials, members of congress, academics and representatives of the private sector. At the end of the visit, Marco Piñón, chief of the IMF mission, issued the following statement:

“Economic activity in Costa Rica recovered in 2010 led by private consumption, while inflation remained within the official target range. With the normalization of external trade, the current account deficit widened, but was comfortably financed by large foreign direct investment (FDI) and other private capital inflows. Reflecting this, the exchange rate appreciated and moved to the limit of the exchange rate band, despite significant foreign exchange intervention. In addition, the deficit of the combined public sector increased to 5.5 percent of Gross Domestic Product (GDP), owing to subdued tax revenues and higher government expenditures.

“The medium term economic outlook for Costa Rica is broadly positive, underpinned by the global recovery and robust FDI inflows. Real GDP growth is expected to hover around
4–4.5 percent in 2011 and over the medium term, while inflation is projected to increase in 2011, pushed by higher global food and fuel prices, but to decline in subsequent years. FDI and other private capital flows are likely to remain strong.

“Near term risks are mainly related to a higher than expected impact of international food and fuel prices on inflation. In the medium and long term, the key challenge is to lower the fiscal deficit significantly. In this regard the mission considers that the draft tax reform recently sent to Congress is key to secure a higher revenue base that increases the country’s capacity to respond to adverse shocks. However, efforts on the revenue side will need to be supplemented by prudent expenditure policies, including through a medium-term framework to help reduce the share of current government spending over GDP.

“The mission encouraged the authorities to continue strengthening the monetary policy and financial supervision frameworks. Approval of bills before Congress aimed at enhancing consolidated supervision, establishing a deposit insurance system, and strengthening the banking resolution framework would help bring Costa Rica’s financial regulation in line with best international practices, and to protect the stability of the financial system.

"The IMF will continue its close policy dialogue with the authorities of Costa Rica. Upon its return to Washington, staff will prepare a report to the IMF’s Executive Board, which will serve as a basis for a Board discussion in late May.”