IMF Concludes Staff
Visit To Costa Rica
By Mike Godfrey, Tax-News.com,
Washington
An International
Monetary Fund (IMF)
staff mission led by
Dominique Desruelle,
Chief of the Central
America Division in the
Western Hemisphere
Department last week
concluded a visit to
Costa Rica.
The IMF mission visited
San José, Costa Rica
during between 30th June
and 3rd July to review
recent developments and
discuss policies for
2008.
The mission met with
Central Bank Governor
Francisco de Paula
Gutiérrez, Finance
Minister Guillermo
Zúñiga, Financial Sector
Superintendent Óscar
Rodríguez, members of
the Monetary Board,
other senior government
officials, and
representatives of the
private sector.
In a statement released
following the mission's
visit, the IMF observed
that:
"As other countries in
the region, Costa Rica
is facing an
increasingly challenging
global environment,
marked by high commodity
prices and a slowing US
economy. Economic growth
has been resilient to
these large adverse
shocks so far: it slowed
moderately in the first
few months of the year,
but remained supported
by domestic demand.
However, the surge in
commodity prices
combined with domestic
demand pressures pushed
inflation well up. Food
prices have risen twice
as fast as headline
inflation, which
disproportionately
affected the poor."
"Economic activity is
expected to slow below
its trend rate of about
5 ½ percent over
2008-2009, while the
current account could
widen further,
reflecting a
significantly higher oil
import bill and slower
export growth. The main
risk to this outlook
stems from further
global shocks,
particularly commodity
price surges, which
would have an additional
adverse impact on
growth, inflation, and
the external current
account position."
"The mission noted that
Costa Rica was in a
significantly better
position to respond to
such shocks now than in
the past, thanks to a
marked improvement in
public finances, sizable
foreign exchange
reserves, steps taken
toward a more flexible
exchange rate regime in
the context of the
transition to inflation
targeting, and measures
already adopted to
strengthen the financial
system."
It continued:
"The mission welcomed
the authorities'
initiatives to cushion
the impact of higher
food prices on the most
vulnerable segments of
society, while allowing
the necessary
pass-through of
international price
shocks to domestic
prices. In particular,
it commended the
decision to focus on
well-targeted social
programs, including
increased conditional
cash transfers, child
nutrition, and income
support to families in
extreme poverty. The
mission also welcomed
the envisaged technical
assistance to small
farmers to boost the
supply of food staples."
"The mission concurred
with the authorities on
the need to tighten
monetary policy in order
to stop and, then,
reverse the increase in
underlying inflation. It
welcomed the central
bank's recent decisions
to increase its policy
rate, but stressed the
need to raise interest
rates further in the
period ahead. It also
welcomed the submission
to congress of a bill to
recapitalize the central
bank. A prompt and
substantial
recapitalization of the
central bank would
increase the
effectiveness of
monetary policy."
The IMF mission further
congratulated the
authorities on the
pursuit of a sound
fiscal policy, which has
helped contain demand
pressures and reduce
public debt. It also
acknowledged their
continued efforts to
improve tax collection,
which created space for
greater social and
infrastructure spending.
The mission encouraged
the authorities to
continue to exercise
fiscal discipline to
support the
anti-inflation efforts
of the central bank, and
to accommodate much
needed increases in
targeted social spending
within the 2008 budget.
"While addressing the
global shocks is clearly
a short-term policy
priority, the mission
and the authorities
agreed on the need to
pursue the medium-term
reform program. In this
regard, the mission
welcomed the progress
made on the CAFTA-DR
implementation agenda.
It concurred on the
priority given to
enacting legislation to
enhance financial sector
regulation and
supervision. It
reiterated that further
measures will need to be
taken in this area,
including improvements
in the legal protection
of supervisors. The
authorities and the
mission agreed that the
approval of a
substantial tax reform,
including a revamp of
the income tax and Value
Added Tax (VAT), remains
a priority."
The statement concluded
by announcing that:
"The IMF will maintain a
close policy dialogue
with the authorities,
keep exchanging
information on global
developments, and
provide technical
assistance in a number
of areas in the period
ahead. The next Article
IV mission is
tentatively scheduled
for December 2008."
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