Friday 1 December 2023

If the IMF option fails there would be no plan B

Higher interest on loans and the exchange rate would skyrocket; Structural adjustment measures must be approved, even if there is no agreement, specialists consider

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1 December 2023 - At The Banks - Source: BCCR

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QCOSTARICA – On Monday, January 11, the central government began negotiations with the International Monetary Fund (IMF) without a plan B to address the government’s financing, despite the fact that at this time there is no guarantee of success.

“The problem is that as a country it has been difficult to take the adjustment measures, but with or without a loan agreement, they must be made,” said Shirley Saborío, Executive Vice President of the Council for the Promotion of Competitiveness.

This is even more noticeable if one considers that Elián Villegas himself, Minister of Finance, no longer sees the placement of Eurobonds as “essential” this year.

The dangers for the country in case the negotiations are not fruitful are multiple, including the drop in risk ratings, loss of competitiveness for investors, and the risk of default.

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On the other hand, the exchange rate is another of the main problems, since it would skyrocket, at the same time that the Central Bank would be pressured to use its monetary reserves, as it did last year for more than US$1 billion dollars to maintain its stability.

Then there are interest rates. Costa Rica’s debt would be increasingly expensive, as it is forced to go exclusively to the local market to access credit, regardless of the fact that the rates are higher than in the foreign market.

This, without neglecting that the expiration dates are usually shorter in the domestic market. In November, 12.1% of the domestic debt had to be paid in less than a year, while only 1.1% was the case in the foreign market.

What to do?

If the negotiation with the IMF falls, is there a plan B? This is the opinion of experts.

Gerardo Corrales, Economist at Economía Hoy: There is no plan B, it would be to flood the domestic market that would skyrocket rates and, furthermore, not signing with the IMF would precipitate capital outflows, taking the exchange rate through the roof.

Melanie Jimenez, Economic Analyst at Cefsa: The Government would have a difficult situation obtaining funds, before which it could resort to options such as swaps or renegotiating the debt, but if a good adjustment is proposed, the confidence of the agencies can even be improved. This would be a complicated scenario, but not impossible.

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Shirley Saborío Executive Vice President, Council for the Promotion of Competitiveness: Negotiating with the IMF is an option, and perhaps the best one now; But the important thing is the structural reforms that we as a country take to reduce the problem and ensure that it does not happen again.

Daniel Suchar, Independent Economic analyst: Changes must be made, even if the IMF says there is no agreement; that is, the public employment law, sale of assets, among others, are measures that must be taken.

The IMF deal

The talks with the International Monetary Fund intend to conclude with the acceptance of a loan for US$1.75 billion to help clean up the country’s finances.

This Monday an IMF team began its mission virtually with economic authorities, legislators, private sector organizations, civil society, and academics, trying to find out the actions that will be needed to ensure financial sustainability in the medium and long term.

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The main expectation is to generate a minimum primary balance of 1% of GDP in 2023, in order to reverse the growing trend of debt.

However, doubts abound the talks, such as the contradictions in the government’s discourse and the lack of clarity in the measures to be discussed.

This is because legislators warn that both President Carlos Alvarado, as well as Ministers Geannina Dinarte and Pilar Garrido, had advanced the intention of increasing the VAT rate by 1% or assessing financial transactions.

However, just 24 hours after the ministers raised it with the legislators, Elián Villegas, the finance minister, denied that these measures were being considered.

Another issue that generates uncertainty is what will be the position of the IMF officials on the proposals made by the country?

Source: La Republica


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