Statement by an IMF Mission to Costa Rica
A staff team from the International Monetary
Fund (IMF) visited Costa Rica on August
10-21, 2009 to conduct the 2009 Article IV
consultation and the first review of the
Stand-By Arrangement approved last April.
The mission met with Minister of Finance
Jenny Phillips; Central Bank President
Francisco de Paula Gutiérrez; other
government officials, and representatives of
the private sector and the academia.
After the conclusion of the discussions, Mr.
Andreas Bauer, the IMF mission chief for
Costa Rica, made the following statement:
“The Costa Rican economy has withstood the
impact of the global economic and financial
crisis relatively well. The strategy to
shield the economy from external shocks
through fiscal stimulus and the mobilization
of contingent external financing has helped
preserve confidence and financial stability,
and mitigated the decline of the economy.
“Near term prospects have improved. Recent
signs of a turnaround in economic activity
and somewhat more favorable perspectives for
external demand point to a gradual recovery
of the Costa Rican economy going forward.
The mission now expects real GDP to decline
by 1.5 percent in 2009, before returning to
positive growth of 2.3 percent in 2010.
Inflation should continue to decline,
reaching 5 percent by end-year.
“The external position has evolved
favorably. During the first half of 2009,
the external current account deficit was
almost balanced and external short-term debt
declined as banks and corporations repaid
credit lines. Net international reserves
have increased slightly since end-December
2008 and will be further supplemented in the
coming weeks by an allocation of 132.8
million SDRs (equivalent to about US$205
million).1 In addition, the mission’s
analysis suggests that the current level of
the real effective exchange rate is broadly
in equilibrium.
“Performance under the Stand-By Arrangement
has been commendable. The authorities have
met all quantitative performance criteria
and structural benchmarks for the first
program review. However, lower growth and
inflation will generate a revenue shortfall
compared to the original program projections
for the central government. The authorities
and the mission have agreed to pass on part
of the revenue shortfall to the deficit of
2009, which is now expected to reach 4.1
percent of GDP. This will allow to protect
higher social spending and support domestic
demand, while keeping the increases in the
domestic borrowing requirement and the
debt-to-GDP ratio within reasonable margins.
“The medium-term prospects for the Costa
Rican economy remain generally promising.
Strong institutions and higher public
investments in human and physical capital
should provide a solid basis for the
resumption of high, well-balanced economic
growth. A key objective for the authorities
should be to consolidate recent gains in
domestic and external stability, boost the
credibility of fiscal and monetary policies,
and further strengthen the economy’s
resilience to external shocks.
“After large expenditure increases in
2008-10, which are providing countercyclical
support to domestic demand, the fiscal
deficit will need to be reduced to contain
vulnerabilities and allow for a gradual
reduction in the debt burden. Achieving
this—while maintaining higher levels of
social spending and investment—will require
a tax reform to increase revenues by at
least 2 percent of GDP. Fostering an early
consensus on the need to increase revenues
would be desirable to ensure a swift debate
and passage of tax reform.
“With inflation at historical lows, the
central bank has an opportunity to achieve
price stability faster than previously
expected. The mission supports the gradual
increase in exchange rate flexibility and
transition to an inflation targeting
framework that the Central Bank of Costa
Rica is pursuing. During this transition,
the room for additional interest rate cuts
will depend on further declines in inflation
and devaluation expectations. To support
this process, the mission encourages the
Central Bank of Costa Rica to clarify its
role in the foreign exchange market and
streamline its liquidity instruments. The
mission also notes that achieving price
stability will require a strengthening of
the Central Bank’s balance sheet through
recapitalization.
“The banking sector remains sound. The
authorities should continue to monitor
developments closely and implement their
well-focused agenda to strengthen
supervision and the financial sector safety
net. In this context, the mission welcomes
the SUGEF’s ambitious strategic plan to
implement risk-based supervision and urges
swift approval of the law to establish
consolidated supervision in line with best
international practices. To further
strengthen market discipline, legal
provisions that prohibit the publication of
certain prudential indicators for individual
banks (e.g., the risk-adjusted capital asset
ratio) should be removed.
“The mission expects that the IMF Executive
Board will conclude Costa Rica’s 2009
Article IV consultation and the first review
of the Stand-By Arrangement by
end-September. The authorities have
indicated that they will continue to treat
the Stand-By Arrangement as precautionary.” |
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