Tuesday 22 June 2021

Reversing public debt of 80% of GDP would take up to 10 years

Economists point out that the situation is "gigantic serious" and that the Government should not wait any longer to communicate it to the population

(QCOSTARICA) It could take up to 10 years to considerably reduce Costa Rica’s public debt, after it takes a gigantic step and reaches 80% of gross domestic product (GDP) by the end of 2021, according to estimates by the Ministry of Finance.

Economists Olman Segura, director of the International Center for Economic Policy for Sustainable Development (Cinpe) of the National University (UNA), and José Luis Arce point to a decade to get out of the quagmire and return to a debt of 60% of GDP.

According to Olman Segura, director of the International Center for Economic Policy for Sustainable Development (Cinpe), for the government to lower the debt / GDP ratio, a clear plan is required to boost trade Photo: Rafael Pacheco.

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The specialist Gabriel Alpízar estimates that the process would take no less than four or five years and, for Alberto Franco, the debt will continue to grow until 2024, a year in which the curve could begin to flatten if the appropriate measures are taken.

In fact, by asking the International Monetary Fund (IMF) for the quick credit of US$508 million, which has just been approved in Congress, the Government committed to reducing public debt to 50% of GDP by 2034.

At the end of 2019, public debt was equivalent to 58.5% of GDP. In 2020, with the pandemic crisis, it will rise to 70.3% and, next year, it will skyrocket to 80.5%.

Economists Olman Segura and Gabriel Alpízar agree that the Government should not wait any longer to communicate with transparency to the population the seriousness of the situation and implement the high level of discipline that is required to face the task.

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The biggest problem with public debt is that it chokes a country’s finances in the same way that loans and credit cards choke many families.

“It is as if a family had their credit card almost full and they have no way to pay the interest; they look for another card to pay the interest on the first one and now they have two, and then you have a third card and a fourth. We are entering a very important crisis and that is where the Government has to consider fiscal discipline,” Segura said.

“Either we take our children out of private school, or we sell the car or we spend less a month on gasoline, or we lower our purchases,” added the economist, who believes the goal should be to return to a debt of 60% of GDP, a margin that is still considered extremely high, according to the parameters set in the fiscal rule.

However, it is unlikely that a mess of such magnitude can be repaired quickly.

“It will not be a quick process, because the magnitude of the adjustment to be made in income and expenses is considerable (…) the reduction in the primary deficit may take two or three years, and the fall in the level of public debt at 60% it can take more than ten years, inclusive,” said José Luis Arce.


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