Tuesday 21 September 2021

IMF Mission: Fiscal Measures in Costa Rica Are Insufficient, But Necessary

The International Monetary Fund urged the government to apply measures to cut spending and tax reform, that without places the government's debt on an unsustainable path

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The International Monetary Fund (IMF), during a visit to Costa Rica from June 12 to 15, 2018, warned that although the measures announced by the authorities to confront the fiscal situation are a step in the right direction, a more comprehensive reform strategy would be needed to achieve long-term fiscal sustainability.

Ministry of Finance (Ministerio de Hacienda) building in downtown San Jose

The organization, headquartered in Washington, D.C., estimates that, in a scenario of an absence of policy measures, the fiscal deficit is expected to reach 7.2% of gross domestic product (GDP) in 2018, placing the central government’s debt on an unsustainable path.

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This figure is slightly higher than the 7.1% of GDP estimated by the Banco Central (Central Bank) in its macroeconomic program published last February.

Finance Minister Rocio Aguilar, announced on May 30, a series of measures to contain public spending, such as the establishment of a fixed amount for annuities (pluses in Spanish) of central government workers and not a percentage as is currently, and the reduction of the percentage for new civil servants.

The IMF team, led by Mr. Trevor Alleyne, met with the Economic Coordinator Edna Camacho, the Minister of Finance Rocio Aguilar, the President of the Banco Centraal (BCCR) Olivier Castro, and members of the Legislative Assembly, including some members of the Treasury Affairs Committee and the Special Commission of the Legislative Assembly for Fiscal Reform.

Following is the ‘Concluding Statement’ describing the preliminary findings of IMF staff at the end of the official visit:

1. Economic activity continues to be solid but has slowed down, and strengthening the fiscal position remains a major policy challenge. The average growth rate of the monthly economic activity index (IMAE) was 3.2 percent in the first quarter of 2018 (compared to 3.3 percent in the same period last year). Both the inflation rate and inflation expectations remain within the target range, and the monetary policy stance is adequate. The external position remains stable as robust growth in merchandise exports and tourist arrivals are dampening the negative effect on the current account of recovering oil prices. However, in the absence of policy measures, the fiscal deficit is expected to reach 7.2 percent of GDP in 2018, putting the debt of the central government on an unsustainable path.

2. In this context, the IMF’s technical team believes that the fiscal reform being considered by the Legislative Assembly, together with the initiatives for cutting public spending proposed by the Minister of Finance two weeks ago, constitute an important first step towards restoring fiscal sustainability and removing the main risk to economic growth facing the country. Given the magnitude of the required adjustment, it is appropriate that the plan incorporates a strategy of both revenue mobilization and expenditure containment.

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3. While the authorities’ announced measures are a step in the right direction, a more comprehensive reform strategy would be needed to achieve long-term fiscal sustainability. However, delaying the implementation of the reform that is in the Legislative Assembly, awaiting the preparation of a comprehensive plan, will only increase the cost of the adjustment and prolong the uncertainty in the financial markets and among investors that is contributing to the slowdown in the economic activity.

4. It is necessary to start implementing the proposed measures as soon as possible. At the same time, it is important that the government carry out a detailed analysis of the expected savings of each of the measures considered in the fiscal reform, and ensure the credibility of its commitment to implement other structural reforms to achieve long-term fiscal sustainability.

5. In this effort, the IMF stands ready to assist the authorities in whatever way they deem most convenient.

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