Wednesday 3 March 2021

Distrust of sectors complicate signing an agreement with the IMF this year

Multisectoral dialogue kicked off the weekend to propose alternatives to the fiscal deficit and debt burden; President did not mention negotiations with the IMF since his initial proposal failed.

QCOSTARICA – Reaching a structural adjustment agreement with the International Monetary Fund (IMF) this year seems like an impossible mission for President Carlos Alvarado, according to analysts consulted by La Republica.

Signs that an approach to the IMF would cause discontent among specialists and the political circle were ignored by Carlos Alvarado.  La Republica

This, regardless of the fact that it is one of the few options the country has due to the high fiscal deficit that is estimated to be more than 10% for this year.

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The mistrust of political, business, union and other sectors has made the president not mention the IMF again for the time being.

After the failure of his initial proposal to cut spending and generate new taxes, Alvarado has avoided mentioning the IMF again. Instead, it has opted for a multisectoral dialogue that has no guarantee of success either.

In this sense, the agreement with the IMF seems more distant than ever at the moment, according to specialists such as Rodrigo Chaves, former Minister of Finance or the British multinational investment bank and financial services company, Barclays.

Others, such as Gerardo Corrales, an economist of Economía Hoy (Economics Today), say that, if the agreement with the IMF is to be for this year, there must be a proposal already in November, something that will not be easy, taking into account all the actors involved and the complexity in the Legislative Assembly.

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“The deadlines do not concern me so much because the intention with the IMF was always more to show a willingness to change, to reform, but clearly the government wants to remove the IMF label from the process,” said Álvaro Ramos, economist Academic Director of LEAD University.

The challenge has been the same for a long time: find a middle ground, since the government has proclaimed that new taxes must be.

The process of “Costa Rica Escucha, Propone y Dialoga” (Costa Rica listens, proposes and dialogues), launched in August and which had several forums in September, had exactly the same purpose: to give space for multiple sectors to give their recommendations on fiscal issues, economic reactivation, according to the IMF, etc.

“That process was more like a public consultation than a dialogue; I felt that it lacked that type of neutral moderator to summarize what was agreed upon,” added Ramos.

Therefore, there were signs of the need for real dialogue, since, for example, before September 17 (date of announcement of the measures that would be proposed), the possibility of a tax on bank transactions was known, and the same sector financial warned that it would be an unpopular measure.

“It causes concern and would cause financial exclusion,” was the warning from Annabelle Ortega, executive director of the Chamber of Banks.

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Currently, Costa Rica has a 30% corporate tax rate (excluding dividend taxes), 0% of lowest marginal and 25% highest marginal tax on income, and a Value Added Tax (VAT) of 13% (standard rate), 4% on private healthcare and plane tickets, 2% on medicines and private education and 1% on essential foods and agriculture.

Original proposal

The original proposal by the Presidency was a series of measures to cut spending and generate new income that was to be proposed to the IMF. The question now is which ones will be maintained, which ones will change and which ones will be discarded.

Spending

  • Labor mobility
  • Reduction of political debt from 0.19% of GDP to 0.10% of GDP to generate savings of ¢ 30 thousand
  • Freeze annuities for four years
  • Application of the fiscal rule
  • Public employment law
  • Closure and merger of decentralized institutions
  • Freeze on salary increases
  • Reduction in rental expenses

Income

  • Lottery prizes would be taxed 25% when the amount won exceeds 50% of the base salary
  • A tax on school wages would be established
  • Income tax on cooperatives, when they qualify as large taxpayers or large territorial taxpayers (about 20 cooperatives in total)
  • Global income will be incorporated from 2023, while world income is discarded
  • Increase in the real estate tax, from 0.25% to 0.75 for the benefit of the State
  • Corporate income would go from 30% to 36%
  • The income tax on wages will rise in the first tract from 10% to 12.5%, the second tract from 15% to 20%, the third tract from 20% to 25% and the fourth from 25% to 35%.
  • The income tax will be charged from ¢840,000 of monthly income
  • Remittances will pay an additional 5% tax
  • A tax on all financial transactions of 0.3% for the first two years (2021 and 2022) and 0.2% for 2023 and 2024

Source: La Republica

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FACT CHECK:
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"Rico" is the crazy mind behind the Q media websites, a series of online magazines where everything is Q! In these times of new normal, stay at home. Stay safe. Stay healthy.

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