Excess liquidity in the financial system, soaring loans in dollars, a rising fiscal deficit and a less favorable global environment will complicate the path in the rest of the year and in 2017.
The document"Macroeconomic Review Program 2016-2017"by the Central Bank of Costa Rica says that these four elements are the main factors that could adversely affect overall economic performance.
The organization says there is an urgent need to raise revenue and reduce expenses, "including the public sector wage bill, which is growing rapidly."
The report "Economic assessment of Costa Rica 2016" by the Organisation for Economic Co-operation and Development (OECD) highlights the fiscal problem as the main challenge for the country on its way towards accession to the bloc.
Main challenges and key recommendations for 2016-17:
Challenge: Tax revenues are low and spending is increasing rapidly, pushing public debt to high levels.Public administration is highly fragmented and the Ministry of the Treasury has limited control of the total public expenditure.
Recommendation: Reducing the central government deficit by 2% of GDP during 2016-17 and then an additional 1.5%, approving and implementing the proposed tax reform, combating tax evasion, removing tax exemptions that have no economic or social justification, and containing expenditure growth. Introducing a medium-term fiscal framework with a clear and verifiable rule for expenses. Improving efficiency in public spending by strengthening the authority of the Ministry of Finance to control overall public sector spending and introducing a results-based budget.
Despite being reduced compared to 2013, the IMF insists that the fiscal deficit remains a thorn in its side for preventing the economy from reaching its full potential.
From a statement issued by the International Monetary Fund (IMF):
January 30, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Costa Rica.
In a clear warning signal, the ratings agency has changed the outlook for Costa Rica's sovereign debt from stable to negative, arguing that there is a lack of measures to reduce the fiscal deficit.
From a statement issued by Fitch Ratings:
Fitch Ratings-New York-22 January 2015: Fitch Ratings has revised the Rating Outlook on Costa Rica's Long-term foreign and local currency Issuer Default Ratings (IDRs) to Negative from Stable and affirmed the IDRs at 'BB+'. The issue ratings on Costa Rica's senior unsecured foreign and local currency bonds have been affirmed at 'BB+'. The Short-term foreign currency IDR has been affirmed at 'B' and the Country Ceiling at 'BBB-'.
Costa Rica is the one of the best examples of what happens when obstacles like the coming and going between state paternalism and trade affect the social and economic development.
While receiving an award from the National Association for Economic Development for Freedom (ANFE) 2014, Juan Carlos Hidalgo gave a stark analysis of the Costa Rican situation, which highlights the apparent contradictions between sustained economic growth and the painful reality of growing poverty.
The academic corporatism which has come to power in Costa Rica brings a "vision of the world of the Social Democrats of the sixties and seventies."
An analysis carried out by Juan Carlos Hidalgo on his blog on Elfinancierocr.com on the proposed Costa Rican state budget points to a decalogue of macroeconomic horrors that besides contradicting election promises on cost containment and austerity, show an outdated vision of the new government regarding the alleged benefits of increased public spending in the functioning of a modern economy.
The Central Bank has lowered its inflation forecast to 4% for 2014 and projects increases in interest rates in colones and dollars.
From a Communiqué from the Central Bank of Costa Rica:
The Board of the Central Bank of Costa Rica, in Article 4 of the 5633-2014 session of January 29, 2014 approved the 2014-15 macroeconomic program.
This program is intended to inform the public on the performance of key macroeconomic variables during 2013, as well as the goals, policy measures, assumptions and projections for the next two years, consistent with the priorities and subsidiaries assigned in Article 2 of the Organic Law (Law 7558).
The public finances of Costa Rica went rapidly from surplus to a 4% deficit, with negative outlook.
A preliminary analysis of the situation shows that the problem is not in revenues, which have been constant in real terms, but expenses, which have increased since August 2008.
The global financial and economic crisis hit the Costa Rican economy, causing the Government to double social spending, in addition to enlarging the state’s payroll and increasing salaries.