IMF Completes Multiple Reviews, 2023 Consultation for Costa Rica

• The IMF Executive Board concluded the fifth review under the Extended Fund Facility (EFF) for Costa Rica, allowing for a disbursement equivalent to about US$ 276 million.
• The IMF Executive Board also concluded the second review under Costa Rica's Resilience and Sustainability Facility (RSF) arrangement, making available about US$ 495 million in support of Costa Rica's ambitious climate change agenda.
• Costa Rica is reaping the benefits from the home-grown reform program. To institutionalize progress, it is critical to continue adhering to the existing fiscal framework, restrain foreign exchange intervention, ensure compliance with the Public Employment Law, and restart central bank autonomy and governance reform.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed today the fifth review of Costa Rica's economic reform program supported by the IMF's extended arrangement under the Extended Fund Facility (EFF). Completion of this review makes available SDR 206.23 million (about US$ 276 million), bringing total disbursements under the arrangement to SDR 1.03115 billion (about US$ 1.4 billion). The Executive Board also completed the second review under Costa Rica's Resilience and Sustainability Facility (RSF) arrangement. The completion of this assessment makes available SDR 184.7 (about US$ 247 million) associated with this review and again makes available another SDR 184.7 million, which the authorities did not request be disbursed within the required 30-day window following the first review. The Executive Board also concluded the 2023 Article IV consultation with Costa Rica.[1]

Costa Rica's three-year extended arrangement under the EFF was approved on March 1, 2021, in the amount of SDR 1.23749 billion (335 percent of quota in the IMF or about US$1.8 billion at the time of approval of the arrangement, see Press Release No. 21/53) and was extended by five months on March 25, 2022 (see Press Release No. 22/91).

Costa Rica's RSF arrangement was approved on November 14, 2022, in the amount of SDR 554.1 million (150 percent of quota in the IMF or about US$ 725 million at the time of approval of the arrangement, see Press Release No. 22/382). Its duration coincides with the period remaining under the EFF – disbursements under the RSF being contingent on the conclusion of relevant reviews under the EFF and implementation of scheduled reform measures. The Costa Rican Legislative Assembly's Ratification of the RSF, which occurred on October 17, 2023, will enable the authorities to request disbursements made available by completion of assessments.

Real GDP growth is expected to reach around 5 percent this year, supported by buoyant exports and recovering domestic demand. Growth is expected to moderate to 3½ percent in 2024, which is broadly in line with the medium-term potential growth rate. Headline inflation has been negative as global commodity prices fell and a stronger currency helped to reduce goods prices. Inflation is expected to rise back within the Central Bank of Costa Rica (BCCR)'s tolerance band by mid-2024. The value of the colón has stabilized near its historical average in real effective terms and international reserves buffers are strong. Banking sector capital and liquidity metrics are comfortable and provisioning is adequate, although dollarization remains high. The ratio of gross debt-to-GDP has continued to decline despite the government's efforts to build up liquidity buffers. Staff projects a primary surplus of 1.5 percent of GDP this year and of around 2 percent of GDP over the medium term.

Following the Executive Board's discussion on Costa Rica, Mr. Bo Li, Deputy Managing Director and Acting Chair of the Board, issued the following statement:

"Costa Rica is reaping the benefits from its home-grown reform program. Strong implementation of the Fund-supported programs has enabled the country to restore confidence in the strength of its policy frameworks, withstand multiple external shocks, push forward key reforms, and achieve robust growth. Fiscal outturns have exceeded expectations, and the institutional framework for fiscal policy has been particularly valuable in achieving these results. Monetary policy has demonstrated its ability to react to inflation shocks and anchor expectations and reserves are adequate.

"The central bank should return to a neutral stance by mid-2024 and the exchange rate allowed to respond flexibly to market conditions. The BCCR has appropriately lowered the policy rate and should continue to do so to ensure that inflation converges decisively to the target. A more flexible exchange rate and greater transparency in central bank FX operations would allow monetary policy to have its full effect on activity and inflation and would incentivize the deepening of the FX market. Further institutional and technical reforms should be targeted at improving the functioning of the FX market and strengthening market participants' ability to manage currency risks.

"The authorities should continue pursuing improvements to the central bank's governance and autonomy. While the central bank is conducting monetary policy in an independent manner, these practices should be institutionalized through legislation. It is critical that the central bank's autonomy and other areas of improvements recommended in the 2020 Safeguards Assessment that remain unaddressed be followed up in a steadfast manner.

"Ongoing spending restraint is expected to continue to reduce the debt and interest burden and should be continued. Passage of the income and value added tax bills would improve the equity and efficiency of the tax system and raise revenues that have been eroded in recent reforms. Broadening the CIT base and abolishing income tax exemptions would further these objectives, reduce debt faster, and create more space for spending to improve public services. The implementation of the public employment bill by the executive branch marks an important milestone.

"There are ongoing efforts to make productivity gains more broad-based and to green the economy. The authorities should deepen their efforts to boost female labor force participation and integrate migrants into the formal labor market as part of their package of reforms to make growth more equitable. Efforts to increase digital connectivity, reduce electricity costs, and improve educational outcomes will boost productivity throughout the economy. Building on progress on both climate adaptation and mitigation, reform measures to publish guidelines to assess the climate impact of public projects, introduce a vehicle feebate scheme, expand climate transition fiscal risk analysis, and better evaluate climate change-related credit risks are all important steps to make the Costa Rican economy greener and more resilient."

Executive Board Assessment[2]

Executive Directors commended the authorities for their strong implementation of the Fund-supported programs, which has enabled the country to restore confidence in the strength of its policy frameworks, withstand multiple external shocks, and achieve robust growth. To build on this progress, Directors encouraged continued fiscal prudence while supporting social assistance, carefully calibrated monetary policy, and structural reforms to broaden employment and support the green transition.

Directors agreed that monetary policy has demonstrated its ability to react to inflation shocks and anchor expectations. They agreed that the central bank should return to a neutral stance by mid-2024 and that the exchange rate should be allowed to respond flexibly to market conditions. Further institutional and technical reforms targeted at improving the functioning, deepening, and transparency of the FX market and strengthening market participants' ability to manage currency risks were encouraged.

Directors encouraged the authorities to continue pursuing improvements to the central bank's governance and autonomy, including through legislation. They stressed that the central bank's autonomy and other recommendations in the 2020 Safeguards Assessment should be addressed in a steadfast manner.

Directors commended the authorities for the impressive fiscal performance. They supported the ongoing spending restraint, which will help reduce the debt and interest burden. Directors encouraged passage of the government's income and value added tax bills to improve the equity and efficiency of the tax system and restore revenues. Broadening the CIT base and abolishing tax exemptions would reduce debt faster and create space for enhanced social and infrastructure spending. They welcomed reforms to improve fiscal transparency and spending, including implementation of the public employment bill.

Directors were encouraged by ongoing efforts to make productivity gains more broad-based and to build a greener and more resilient economy. They supported the authorities' efforts to boost female labor force participation and integrate migrants into the formal labor market, increase digital connectivity, reduce electricity costs, and improve educational outcomes to boost productivity throughout the economy. Directors welcomed progress on both climate adaptation and mitigation and the reform measures in the context of the RSF, which should help catalyze much needed climate financing.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.