Tal og statistik

IMF Executive Board Concludes 2019 Article IV Consultation with Costa Rica

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Via IMF (Den Internationale Valutafond)

On March 27, 2019, the Executive Board of the International Monetary
Fund (IMF) concluded the Article IV consultation

[1]

with Costa Rica.

Costa Rica has made great strides converging towards OECD living
standards, and its accession process to the OECD was opened in 2015.
Moreover, over the last four decades the export sector has transformed
itself from being agricultural-based to high-value-added manufacturing
and service-oriented, helped by trade openness and strong FDI inflows.
Nevertheless, unemployment and income inequality remain elevated, and
the persistently high fiscal deficit and rapidly rising public debt
continue to pose vulnerabilities. The new government recognizes the
challenges and passed a fiscal reform bill—after nearly two decades of
gridlock—into law last December. It is also planning a broad array of
reforms, including those required for OECD accession.

Reflecting the impact of a public-sector strike against the fiscal
reform, developments in Nicaragua, tighter global and domestic
financial conditions, and the uncertainty surrounding the fiscal reform
that eroded consumer confidence, growth slowed markedly in 2018 to 2¾
percent, falling below potential and closing the output gap. Inflation
remains low, and inflation expectations are converging toward the
mid-point of the target range. External sector performance continues to
be solid. The banking system is sufficiently well-capitalized to absorb
sizable shocks.

Fiscal consolidation and tight financial conditions are expected to
keep growth moderate in 2019-20 (around 2¾-3 percent), notwithstanding
a pickup in public investment, base effects associated with the 2018
public-sector strike, and improving terms of trade. In the medium term,
positive confidence effects and progress with structural reforms,
including those related to OECD accession, should lower risk premia and
boost investment, pushing growth up towards its potential of 3½
percent. Inflation is expected to remain within the target range.
Despite the fiscal reform, the government faces sizable financing needs
in the near term and central government debt is expected to reach above
60 percent of GDP in 2023, after which it will gradually decline.

The outlook is subject to downside risks, including partial
implementation of the fiscal reform, an escalation of global trade
tensions, and a sharp tightening of global financial conditions.


Executive Board Assessment

[2]

Directors commended Costa Rica for the significant progress made in
improving living standards and reducing poverty. Directors noted that
while the medium-term outlook is generally positive, it faces downside
risks. Directors encouraged the authorities to continue their efforts
to address fiscal and financial vulnerabilities, strengthen the
economy’s resilience, and advance structural reforms to foster
inclusive growth.

Directors commended the recent fiscal reform, which is important for
restoring fiscal sustainability. They called for full and timely
implementation of the fiscal reform to improve market confidence and
rebuild fiscal space to manage potential shocks and major contingent
liabilities, especially pensions. While being mindful of the current
political constraints, Directors generally considered that further
front-loaded measures might be needed to reduce financing pressures and
improve debt dynamics. Directors underscored that given the relatively
low tax-to- GDP ratio, any further adjustment, if needed, should be
underpinned by well-designed revenue measures while protecting the
poor. To allow fiscal policy to better contribute to growth and equity,
they highlighted the importance of improving public spending efficiency
and debt management, ensuring better targeting of social assistance,
and implementing a medium-term expenditure framework and fiscal
council.

Directors welcomed the passage of the bill safeguarding the central
bank independence and greater foreign exchange flexibility. They
considered that monetary policy should continue to remain data
dependent and balance downside risks to inflation stemming from slower
activity and upside risks to inflation arising from tighter global
financial conditions. Directors noted that transparency could be
further improved by publishing the calendar of monetary policy meetings
and their corresponding meeting minutes, helping further anchor
inflation expectations.

Directors observed that the banking system is sufficiently
well-capitalized to absorb shocks. They saw need for continued efforts
to monitor and tackle financial vulnerabilities related to high
dollarization, sizable net foreign liabilities of banks, sharply
growing household borrowing, and significant sovereign exposure.
Directors welcomed the authorities’ plans to push ahead with the FSAP/
FSSR recommendations and encouraged their rapid implementation and
adoption of Basel III standards.

Directors welcomed the authorities’ efforts to implement structural
reforms in line with the OECD accession process, to boost
competitiveness and inclusive growth, and to continue pursuing green
development and the objectives of the Paris Agreement. They viewed
promoting female labor force participation, tackling youth
unemployment, and addressing weaknesses in transport infrastructure as
key priorities. Directors supported the OECD’s recommendation to
undertake an in-depth review of key sectors (e.g. electricity) exempted
from the competition law, and measures to increase banking competition
and reduce high interest rate spreads.


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