Monday 21 June 2021

President-elect Alvarado Faces Biggest Deficit In Three Decades

In the next four years, more than one-third of the central government's debt is due

The challenge facing the next government led by President-elect Carlos Alvarado, is a Costa Rica economy facing its biggest fiscal deficit in 30 years, when more than one-third of the central government’s debt is due and without many instruments to finance it, with permission to issue bonds abroad, and the pressure of a reduction in the risk rating.

In the next four years, more than one-third of the central government’s debt is due

In addition, it is possible that the next government may not even have an approved tax plan to generates new resources, including the Value Added Tax (VAT) proposal, which has so far not received the political commitment to approve the project.

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Another negative outlook is that the economy, although it has recovered since December, is still slow, which means less tax collection and more uncertainty.

Consumption continues to decelerate, and this means that people are not spending, credit is stationary, and unemployment continues as one of the largest the country has, mainly in young people and rural areas. Needless to even mention the actuarial problem facing the regime of Disability, Old Age and Death Fund (IVM), in general.

To find solutions, the President-elect’s economic team will be led by Edna Camacho, who is part of the alliance with Rodolfo Piza, leader of the Partido Unidad Social Cristiana (PUSC), and Alberto Franco, Edgar Robles, Javier Chaves, Pablo Villamichel, Roxana Morales, Sol Echeverría, José Francisco Pacheco, Jorge Guardia, André Garnier, Ottón Solís, among others.

First challenge: Do not enter into defaults (impagos in Spanish)

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The first thing that President-elect Alvarado must do is to have a plan so that the country does not go into default. If the Central Bank projection of a deficit of 8% of GDP in 2019 is reached, the red lights of a possible default would be on.

If with a deficit of 6.2% of GDP last year, we are already experiencing interest rate pressures, the uncertainty of consumers and investors, liquidity problems in the Treasury, warnings from risk rating agencies and a squeeze on resources.

What would the panorama look like if there is no fiscal solution?

Experts say the solution must start with lowering expenses. Income must be raised, the VAT is vital instead of the central government relying solely on a general sales tax on goods. With that there is a dire need to modernize the tax authority (Ministerio de Hacienda), to make tax collection more efficient.

Finding measures to lower informality (in labor) and contraband are two good actions that would provide the central government with added resources.

Among the experts pointing out the most critical points that President Alvarado will face are: economist and former President Miguel Angel Rodriguez and Daniel Sucher, financial expert and independent analyst.

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Source (in Spanish): La Republica



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