Reducing the Fiscal Deficit: A Great Challenge

After the multi-sector dialogue in Costa Rica was concluded, the main risk qualifiers agree that because the agreements signed to reduce the deficit are not enough, the government should execute its fiscal policies in a timely manner.

Tuesday, December 1, 2020

Although Costa Rica's fiscal situation was already precarious before the health and economic crisis that led to the covid-19 outbreak began, the scenario started to worsen since March of this year.

The Costa Rican government has had to manage to stay afloat, since due to the drop in economic activity and the decrease in government income, on September 17 the Alvarado administration presented the plan with which it intended to mitigate the fiscal impact of the health crisis, which consisted of a proposal to negotiate an agreement with the International Monetary Fund (IMF) to obtain a $1.75 billion credit.

The proposal caused widespread discontent and the authorities were forced to convene a national dialogue, a process that concluded on November 21, when 58 agreements were reached that focus on reducing the fiscal deficit.

Gabriela Torres, Moody's senior sovereign debt analyst, told that "... it is positive that some agreements were reached, but now the big question is: How much of this will be implemented in time to effectively result in the reduction of the deficit? Costa Rica requires a fiscal adjustment of at least 4% of the GDP, or bringing the primary deficit close to zero."

According to Lisa Schineller, Costa Rica's sovereign rating analyst for Standard & Poor's, the "... national dialogue was important in generating proposals and promoting the participation of sectors of society. However, given the current dynamics, the most pertinent for the rating is the timely fiscal action and execution to reduce the high deficits and financing needs."

For Carlos Morales, director of Latin American sovereign ratings at Fitch Ratings, "... the dialogue table is an important step towards achieving fiscal consolidation, but the agreements agreed upon are not enough to stabilize the public debt. The Government and Congress must focus on seeking a fiscal adjustment that allows for a reduction of the primary deficit by at least 5% of the national product."

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