Costa Rica: Technical Assistance Report-Upgrading the Rule-Based Fiscal Framework

IMF Staff Country Reports, February 22, 2023

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Canonical URL: Costa Rica: Technical Assistance Report-Upgrading the Rule-Based Fiscal Framework

This technical assistance report on Costa Rica discusses upgrading the rule-based fiscal framework.
A principles-based classification would allay political pressure for ad-hoc exclusions.
The criteria should follow the statistical principles of the Government Finance Statistics Manual: entities under government control and classified as a non-market producer should be included in the fiscal rule.
Compliance with the fiscal rule should be assessed at the aggregate level, at least for the central government statistical concept.
Ex-post compliance of the expenditure rule could be verified based on the fiscal outturn relative to the initial budget of the previous year to avoid unintended effects from an underexecuted budget.
A risk-based approach in determining the debt anchor would consider the macroeconomic shocks and debt composition in Costa Rica, alongside with the sizable development needs.
Integrating the debt anchor in the medium-term fiscal framework would reinforce consistency.
The fiscal council can strengthen oversight.

Principles-based classification reduces scope for politically motivated ad-hoc exclusions.
Entities under government control and classified as non-market producers (per the Government Finance Statistics Manual) should be inside the fiscal rule perimeter.
Aggregate-level compliance assessment is recommended, at minimum for the central government statistical concept.
Verifying ex-post compliance of the expenditure rule against the fiscal outturn relative to the initial budget of the previous year helps avoid incentives created by underexecution.
A risk-based debt anchor should reflect macroeconomic shocks, debt composition, and sizable development needs in Costa Rica.
Embedding the debt anchor in the medium-term fiscal framework increases policy consistency.
Strengthening the fiscal council enhances oversight and credibility of the framework.

Adopt a principles-based perimeter for the fiscal rule, aligned with the Government Finance Statistics Manual, to include entities under government control and classified as non-market producers.
Assess fiscal-rule compliance at the aggregate level (at least for the central government statistical concept).
Implement ex-post verification of the expenditure rule using fiscal outturn relative to the initial budget of the previous year.
Design a risk-based approach to set the debt anchor that accounts for macroeconomic shocks, debt composition, and development needs.
Integrate the debt anchor into the medium-term fiscal framework to reinforce consistency between short-term rules and medium-term planning.
Empower and resource the fiscal council to strengthen independent oversight.

Statistical alignment: apply Government Finance Statistics Manual principles to determine institutional coverage and classification of entities.
Measurement and timing: use initial-budget comparisons for ex-post expenditure-rule verification to mitigate effects of underexecution.
Risk assessment: incorporate macroeconomic shock scenarios and debt-composition analysis into the debt-anchor calibration.
Institutional coordination: ensure the medium-term fiscal framework formally integrates the debt anchor and that the fiscal council has mandate and capacity to monitor compliance.

Subject: Budget planning and preparation, Current spending, Expenditure, Fiscal policy, Fiscal rules, International organization, Monetary policy, Public debt, Public financial management (PFM)
Keywords: Budget planning and preparation, Caribbean, Central America, Current spending, expenditure ceiling, expenditure growth, expenditure rule, fiscal rule, Fiscal rules, Global, government expenditure growth, IMF's Fiscal Affairs Department

Source: Costa Rica: Technical Assistance Report-Upgrading the Rule-Based Fiscal Framework, February 22, 2023.