IMF Executive Board Concludes 2011 Article IV Consultation with Costa Rica and Ex-Post Evaluation of Exceptional Access under the 2009 Stand-By Arrangement

Public Information Notice (PIN) No. 11/69
May 31, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 25, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation and Ex-Post Evaluation of Exceptional Access under the 2009 Stand-By Arrangement with Costa Rica.1


Costa Rica’s economy weathered the global crisis well and its recovery is firmly underway. Following a 1.3 percent decline in 2009, real Gross Domestic Product (GDP) grew by 4.2 percent in 2010, initially led by a recovery in inventories and public consumption and later by private consumption. Annual inflation increased from 4 percent in 2009 to 4.6 percent at end-March 2011 (well within the 4-6 percent official target range).

Although the external current account deficit widened in 2010, the surplus in the capital account increased by more, as the private sector deleveraging observed in 2009 ended and net public sector inflows increased. As a result, the overall balance of payments recorded a surplus of 1.5 percent of GDP during the year. This surplus, together with some portfolio rebalancing toward local currency-denominated assets, pushed the colón to the appreciated end of the exchange rate band in late 2010. In response, the central bank lowered the policy interest rate and launched a program of foreign exchange purchases.

The fiscal deficit continued to widen during 2010. Tax revenues did not recover the levels observed prior to the crisis, and government spending, especially wages and current transfers, continued to increase. As a result, the consolidated public sector deficit rose to 5.5 percent of GDP, from 4 percent in 2009. Public sector debt at end-2010 reached 39.4 percent of GDP.

Financial sector indicators are strong, with adequate levels of liquidity and capitalization. Credit to the private sector remained sluggish in 2010 but began to pick up in 2011. Financial dollarization has resumed a declining trend.

Supported by the global economic recovery and strong inflows of foreign direct investment (FDI), real GDP is projected to grow by 4.3 percent in 2011 and stabilize at 4.5 percent over the medium term. Inflation is projected to rise above 7 percent in 2011 pushed by higher world commodity prices and a one-off impact from the tax reform (assumed to be approved in the second half of 2011), but is expected to fall gradually thereafter. The external current account deficit would increase to 4.8 percent of GDP in 2011 and stabilize at about 5.2 percent of GDP over the medium term, and is expected to be fully financed by FDI and other capital flows.

While the economic outlook is generally positive, some downside risks remain. These stem from the rise in commodity prices and abundant global liquidity, which pose risks for the inflation outlook and for macroeconomic policy more generally, particularly if the exchange rate band is maintained. Risks to the outlook could also arise from a weaker fiscal position, as the authorities’ fiscal program would result in a gradual decline in the fiscal deficit and a moderate but steady rise in the public debt ratio.

Executive Board Assessment

Executive Directors welcomed Costa Rica’s economic recovery and its favorable outlook, and stressed the importance of gearing macroeconomic policies toward containing domestic demand pressures. Given the challenges presented by high world commodity prices and significant capital inflows, Directors encouraged the authorities to tighten fiscal policy, move toward a more flexible exchange rate, and pursue a vigilant monetary policy.

Directors stressed the importance of safeguarding fiscal sustainability. They welcomed the tax reform proposal submitted to the Legislative Assembly, underscoring that its approval will be key. Directors supported the authorities’ efforts to broaden the tax base and improve the equity of the tax system, as well as the planned actions to strengthen tax administration. Looking ahead, they advised the authorities to pursue a more ambitious medium-term fiscal consolidation strategy to help rebuild fiscal buffers. Directors pointed out that the authorities’ fiscal program could result in a gradual rise in the public debt ratio, and stressed the need to exercise further expenditure restraint, particularly on current spending.

Directors noted the staff’s assessment that the exchange rate appears to be broadly in line with fundamentals. They considered that upgrading the monetary policy framework and completing the transition to an inflation targeting regime should be key priorities. They welcomed the authorities’ plans to narrow the corridor for short-term interest rates, and encouraged them to develop an effective communications strategy to address a move away from the exchange rate band and make the inflation target the centerpiece of the monetary policy framework. Directors agreed that recapitalizing the Central Bank is essential to bolstering its credibility.

Directors concurred that the banking system remains sound, and encouraged the authorities to continue strengthening supervision and prudential regulations. They stressed the importance of securing approval of the legislation to enhance consolidated supervision, establish a deposit insurance system, and strengthen the resolution framework. Directors encouraged the authorities to press ahead with implementing the remaining Financial Sector Assessment Program recommendations.

Directors welcomed that the authorities’ economic program, supported by the precautionary Stand-By Arrangement of 2009-10, had successfully met its immediate objective of supporting macroeconomic stability at a time of global financial turmoil. At the same time, they noted that the fiscal position had deteriorated, particularly through the enactment of permanent, rather than temporary measures, and that progress in advancing structural reforms was slow during the program period.

Costa Rica: Selected Economic Indicator

Per capita GDP (2010, U.S. dollars)


Unemployment (2010, percent of labor force)


Population (July 2010, millions)


Poverty (2009, percent of households)


Life expectancy (2009, years)

79.1   Extreme poverty (2009, percent of households) 4.2
  2006 2007 2008 2009 Est.
  (Annual percentage change, unless otherwise indicated)

National Income and Prices


Real GDP growth

8.8 7.9 2.7 -1.3 4.2 4.3

GDP deflator

11.0 9.4 12.4 8.2 7.8 5.8

Consumer prices (end of period) 1/

9.4 10.8 13.9 4.0 5.8 7.5

External Sector


Terms of trade (deterioration -)

-3.1 -2.8 -1.1 4.9 0.8 -3.1

Real effective exchange rate (eop; depreciation -)

0.8 1.5 3.8 2.1 12.3

Money and Credit


Monetary base

26.9 33.0 11.9 5.1 11.2 9.7

Broad money

23.2 17.9 16.1 9.6 1.3 12.6

Bank credit to private sector

28.5 38.3 31.8 4.5 4.4 11.7
  (In percent of GDP)

Public Finances


Combined public sector primary balance 2/

4.4 5.0 2.8 -0.9 -2.7 -2.4

Combined public sector overall balance 2/

-0.7 1.2 0.2 -4.0 -5.5 -5.6

  Central government

-1.4 0.3 -0.3 -3.6 -5.5 -5.2

  Decentralized government entities

2.1 1.3 0.6 0.4 0.3 0.0

  Public enterprises (excluding ICE)

-0.1 0.3 0.0 0.0 0.2 0.0

  Central Bank

-1.1 -0.7 -0.2 -0.8 -0.5 -0.5

Combined public sector debt (excluding ICE) 2/

47.3 42.5 36.0 38.4 39.4 41.8

  Of which: External public debt

12.0 9.7 8.6 7.2 7.1 6.7

Combined public sector debt (including ICE) 3/

50.7 45.3 39.5 42.5 42.8 45.3

Savings and Investment


Gross domestic investment

26.4 24.7 27.6 15.9 20.0 20.2

Gross national savings

21.9 18.4 18.2 13.9 16.3 15.4

External Sector


Trade balance

-12.1 -11.3 -16.8 -7.0 -10.0 -11.6

Current account balance

-4.5 -6.3 -9.3 -2.0 -3.6 -4.8

Foreign direct investment

6.1 6.2 6.9 4.6 4.1 4.6
  (In millions of U.S. dollars, unless otherwise indicated)

Change in net international reserves (increase -)

-802 -999 315 -268 -561 -400

Net international reserves

3,115 4,114 3,799 4,066 4,627 5,027

  In months of nonmaquila imports of G&S

3.5 3.8 4.7 4.0 4.2 4.1

Gross domestic product

22,526 26,322 29,838 29,241 35,780 40,167

Sources: Central Bank of Costa Rica; Ministry of Finance; and IMF staff projections.

1/ The projection for 2011 includes a one-off impact from the tax reform (assumed to be approved later in 2011).

2/Combined public sector comprises: the central government, the central bank, decentralized government entities, public enterprises, excluding the Instituto de Electricidad (ICE).

3/ Includes the debt by the Instituto de Electricidad (ICE) guaranteed by the government.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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