Wednesday 22 March 2023

Government debt would reach 74% of GDP in 2022

The Comptroller's Office estimates that indebtedness will continue to show levels above its natural limit (50% of production) for at least ten years.

Paying the bills


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22 March 2023 - At The Banks - BCCR

Paying the bills


QCOSTARICA – Public debt would reach 74% of Gross Domestic Product (GDP) next year, alerted the Comptroller General (CGR)on September 30, in a report where it analyzed in depth the data incorporated by the Ministry of Finance in the 2022 National Budget bill.

The Ministerio de Hacienda (Ministry of Finance) in September presented to Congress the draft of the National Budget 2022.

The CGR estimated that although the Government expects that the inflow of external resources for budgetary support will make it possible to substitute internal debt for external debt and reduce the growth of these liabilities, the debt / GDP ratio for next year will be at 74% “and will continue presenting levels above its natural limit (50% of production) for at least ten years ”.

This was pointed out when considering that the financing needs reflected in the 2022 budget project will continue to exert pressure on indebtedness. In this regard, he argued that to regain stability in public finances, it will take time and specify measures in terms of income and expenses that generate constant surpluses.

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Exceeding the natural limit of the debt means that there is the possibility that at some point in the future the financing spaces will become scarce and expensive, as explained by the Ministry of Finance, in the document Justification for the definition of the Debt Policy for the Costa Rican Public Sector.

The CGR indicated that the actions must be accompanied by the allocation and efficient use of public debt and a liability management that allows reducing the pressure that the existing obligations will generate in the future.

On the other hand, the entity pointed out that the results of the Medium Term Fiscal Framework 2021-2026 (MFMP) indicate that if the fiscal adjustment measures promoted by the Alvarado administration are not applied, the debt would reach 74.7% of GDP at 2026.

It added that, if they are implemented, for that year the indebtedness would be placed at 68.5% of GDP and that by 2032 it would return to the natural debt limit.

“The fiscal strategy proposed by the Ministry of Finance to achieve said sustainability consists of the materialization of the fiscal adjustment plan (elements in income and expenses) in the context of a favorable macroeconomic environment and an intensive use of external financing resources,” the CGR commented.

At the beginning of this year, the Government negotiated with the International Monetary Fund (IMF) the approval of an agenda of bills to increase income and reduce expenses, in exchange for a loan of US$1.778 billion to balance public finances.

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However, in the heat of the electoral campaign, legislators have already let the deadlines to discuss three of these initiatives in committee expire without having discussed them. These are the tax on lottery prizes, the reduction of tax benefits (eliminates the exemption from school salary to income tax) and the elimination of vacant places and the freezing of government pensions.

The same will happen in a few days with the bills for the tax on luxury homes, global income, reform of the Customs Law and the contribution of public companies to the payment of public debt.

These bills aim to increase revenues to reduce the public debt of ¢26.4 trillion colones, while reducing spending with the public employment reform, which is being adjusted according to the observations of Room IV to give it a second debate.

Last week, an IMF mission asked legislators about the possibility of the agenda being approved during the month of October.

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Regarding the fiscal risks in the medium term, the CGR expressed its concern about two problems: the prolonged containment of spending in substantive functions to meet the financial cost of the debt and the growth of the State’s debt with the Caja Costarricense de Seguro Social (CCSS ).

“In the latter case, without remedial measures, it could continue to increase at an accelerated rate,” warns the comptroller.

On the other hand, the Comptroller stated that although for the 2022 budget it is estimated that revenues will recover to levels similar to those registered before the pandemic, and that there will be a decrease in primary spending and a positive fiscal situation, it is necessary to have a primary surplus (difference between government income and expenditures not including interest payments).

“The debt is growing, as a result of the devaluation of the colón and the accumulation of considerable liquid funds, while there are unmet obligations. For this reason, a significant reduction of the debt is imposed in the medium term in order to attend to the substantive functions of the State ”, the document adds.

Additionally, it pointed out that there are a series of law initiatives that seek to create exemptions for different sectors or new expenses, which would impact deteriorated public finances. The CGR indicated that this is the orientation of 28 of 62 bills consulted with the Comptroller’s Office last September.

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Paying the bills
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