IMF Mission Concludes Visit to Costa Rica

IMF News, December 16, 2016

Source details

IMF team led by Mr. Lorenzo Figliuoli visited Costa Rica from December 12-15 to discuss recent economic developments and the outlook.
End-of-mission view: statements reflect IMF staff team preliminary findings and do not necessarily represent the views of the IMF’s Executive Board.

Real GDP is anticipated to expand in 2016 by 4.25 percent, up from 3.75 percent in 2015.
Annual inflation reached 0.6 percent in November 2016 and is anticipated to return to the 2-4 percent central bank target range in the first half of 2017.
External current account deficit is forecasted to narrow further to about 3.5 percent of GDP.
Recent economic performance has been aided by:
- Very favorable global conditions (continuing low commodity prices and ample liquidity).
- Monetary stimulus by the central bank, allowing domestic financing of the deficit without upward pressure on interest rates.

Government efforts welcomed by the team include raising revenue and containing expenditure growth through administrative measures.
Specific contributors to fiscal improvement:
- Significant contribution from lower wage spending and from higher income tax collections, likely reducing the primary deficit by 0.5-1 percent of GDP in 2016.
- Approval of laws to combat tax evasion, reform pensions paid out of the budget, and curtail unspent budgetary allocations of decentralized government entities—combined expected to lower the deficit by an additional 0.5 percent of GDP in 2017 and beyond.
- A law re-introducing a corporate levy, under fast-track consideration in Congress, would provide a small contribution to fiscal consolidation.

The above measures are judged insufficient to place the fiscal position on a sustainable path.
Additional fiscal adjustment needed to stabilize the public-debt-to-GDP ratio over the medium-term, while allowing for higher public investment, is estimated at around 2.5-3 percent of GDP.

Persistence of large fiscal deficits and continued increases in the public-debt-to-GDP ratio make Costa Rica very vulnerable to sudden changes in international financial conditions.
Recent rise in such risks could be triggered by:
- Shifts in the policy mix in advanced economies toward greater fiscal expansion and a less accommodative monetary stance.
- Other external shocks, including reversal of recent terms-of-trade gains or possible revisions in trade policies of key trading partners.
Overall judgment: the global environment is turning less favorable and more uncertain for Costa Rica’s economy.

It is crucial to address fiscal unsustainability expeditiously.
The team stresses the importance that the government and political forces in Congress reach consensus on rapid approval of VAT and income tax reform proposals currently under consideration.
Suggested complementary measures:
- A public employment law to limit current expenditure growth.
- A fiscal rule to enhance budget discipline over the long-term.
Political note: the window to approve these reforms is closing fast given the approaching electoral season; rapid resolution of the fiscal question cannot be postponed to avoid exposing Costa Rica to severe risks.

IMF Mission Concluding Statement, December 15, 2016.