Press Release No. 95/59

The International Monetary Fund (IMF) today approved a 15-month stand-by credit for Costa Rica totaling the equivalent of SDR 52 million (about $78 million) in support of the Government's economic program for 1995/96.

Background

After strong growth in 1991-92, the Costa Rican economy began to slow in the second half of 1993 as fiscal imbalances re-emerged. A large expansion in public expenditure, together with a rollback in taxes, led to a sharp increase in the overall deficit of the public sector in 1994. Losses incurred by a state bank--which eventually was closed--increased the strains on the public finances. These developments, coupled with negative net external financing, led to substantial pressures on international reserves and interest rates. Real GDP growth slowed and the inflation rate more than doubled. In response to these imbalances, the authorities began to implement a corrective program earlier this year, which has been strengthened in recent months following an agreement between the Government and the main opposition party.

The Program for 1995-96

The economic program for 1995-96 aims to establish the basis for sustained economic growth by increasing domestic savings, improving efficiency in the public sector, increasing the role of the private sector, and enhancing competition, efficiency, and soundness in the financial system. The program aims at achieving a real GDP growth rate of 2.5 percent in 1995 and 3 percent in 1996, lowering inflation to about 18 percent in 1995, and under 10 percent in 1996, reducing the external current account deficit from 5.5 percent of GDP in 1994 to 3.4 percent in 1996, and increasing net international reserves by $280 million (to reach the equivalent of 2.9 months of imports of goods and services by the end of 1996).

To these ends, the overall public sector deficit is programmed to decline to 3.5 percent of GDP in 1995 and to 0.5 percent in 1996. As a result, domestic borrowing requirements would be reduced from 8.4 percent of GDP in 1994 to 5.1 percent in 1995 and 1.3 percent in 1996, easing pressures on interest rates and international reserves. To support the objectives of the program, monetary policy will aim to reduce net domestic assets of the Central Bank by 25 percent in 1995 and by a further 50 percent in 1996.

Structural Reforms

Under the program, reductions in financial imbalances are being complemented by structural reforms in the public sector and the financial system. The legal framework on tax administration has already been strengthened through the reform of the tax code approved last July, and in the area of wage policy changes are being introduced to delink adjustments from past inflation. Reforms in the pension system already approved have raised the minimum retirement age from 50 to 55 years, and the minimum contribution period to 30 years. Reducing the scope of the public sector while improving its efficiency is being achieved through scaling-down operations, mergers, and transfer of functions. Private sector participation in areas previously reserved for the public sector is being increased, and legal changes are under way that would allow a far greater role by foreign investors in areas such as electricity generation, insurance and banking. The program also addresses weaknesses in the banking system, particularly in the state commercial banks, and strengthens the enforcement capacity of the Superintendency of Banks while increasing the autonomy of the Central Bank.

Social and Environmental Issues

Costa Rica has achieved social indicators that compare favorably with those of countries with higher per capita incomes, nevertheless, measures will be taken to improve the efficiency of social expenditures and strengthen the social safety net. The Government's efforts to improve the environment have been wide-ranging: they include energy-saving projects, rehabilitation of forests, increased use of unleaded gasoline, and involvement of the private sector in reducing pollution of rivers.

The Challenge Ahead

In order to utilize its potential and place its economy firmly on the path of sustainable development, Costa Rica must consolidate the fiscal position over the medium term, and implement the programmed structural reforms. Costa Rica joined the IMF on January 8, 1946. Its quota¹ is SDR 119.0 million (about $178 million) and its outstanding use of IMF financing currently totals SDR 17 (about $25 million).

Costa Rica: Selected Economic Indicators   1992 1993 1994 1995* 1996*   (percent change) Real GDP 7.7 6.4 4.5 2.5 3.0 Consumer price (end of period) 17.0 9.0 19.9 18.5 9.5     (percent of GDP) Overall public sector balance (deficit–) –0.7 –0.9 –8.0 –3.5 –0.5 External current account balance (deficit–) –5.7 –9.0 –5.5 –3.6 –3.4 Sources: Costa Rican authorities; and IMF estimates. * Program. 1. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.