The Costa Rican government is facing a complex scenario, since by not achieving consensus to access international loans, it will be forced to seek domestic funding sources, which would put pressure on the exchange rate and interest rates to rise.
The economic crisis that the country is going through due to the outbreak of covid-19 ended up sharpening the country's fiscal situation.
For the IMF, the country "may need additional fiscal measures, focused on the short term, to alleviate financing pressures and improve debt dynamics.”
After analyzing the current economic situation in Costa Rica, the directors of the International Monetary Fund (IMF) commended the recent fiscal reform, which is important to restore fiscal sustainability.
Although Costa Rica's fiscal reform has already been approved, the IMF proposes raising some taxes as part of an "additional adjustment" to reduce debt and ease financial pressure in the short term.
"... “We are negatively surprised by the simplistic position of the International Monetary Fund that in the absence of money, taxes should be raised, we consider those words unacceptable, because it has been demonstrated in this country that a large part of the deficit is because of the inefficient use of public funds and an issue of state efficiency that does not allow people to become businessmen," said UCCAEP President Gonzalo Delgado."
During the new year, the main challenge for Costa Rica's economy will be to increase above 3%, given that 2018 was marked by a context of fiscal uncertainty and economic slowdown.
According to the Central Bank of Costa Rica, economic growth, measured by the year-on-year variation of the trend cycle of gross domestic product (GDP), slowed last year, and recorded to the third quarter a 2.1% rate (3.2% in the same period of 2017 and 2.8% as the average rate of the two previous quarters).
The economic environment in 2018 was defined by a context of fiscal uncertainty, economic slowdown and greater financial volatility, together with a difficult external environment.
Regarding the fiscal uncertainty occupying a large part of last year's economic agenda, explains the Central Bank of Costa Rica (BCCR) which was originated, firstly, in the electoral process that lasted until April, and later in the difficulties faced to achieve an agreement that would help restore the sustainability of public finances in the medium term.
After Costa Rica's Constitutional Chamber prepared the path for tax reform in the Congress, the dollar's price against the local currency stopped rising, and positive reactions were reported in the risk outlook.
Last November 23rd, Court IV issued its judgment, so the law project has a free way to move forward more quickly during the coming weeks in the Congress.
The impact of the strike, the uncertainty of the fiscal situation and the increased risk perception by investors and consumers, explain much of the depreciation that the Colon is suffering against the dollar in Costa Rica.
Figures from the Central Bank of Costa Rica (BCCR) suggest that between September 27th and October 5th the exchange rate in the wholesale market Monex registered a significant upward trend, which is reflected in the increase from ¢570.75 to ¢591.25 per dollar, equivalent to a depreciation of 3.59%.
The deterioration of public finances and the inability of the Alvarado administration to end the blockades set up by trade unionists are again drawing the attention of rating agencies and the international market, who foresee a complicated economic future for Costa Rica.
According to the risk rating agency Moody's, the demonstrations by public sector unions are increasingly complicating the path towards a much-needed reform of public finances, which would take its first steps with the approval of the bill that is being discussed in the Legislative Assembly.
The cost of not making decisions about the serious fiscal problem affecting Costa Rica "is incommensurable and has the potential to affect not only the economic but also the social and democratic order of the country."
This is the emphatic and clear position of the Comptroller General of the Republic of Costa Rica regarding the serious and risky situation in which the public finances of the country find themselves.Furthermore, as is well mentioned in the report "Fiscal and Budgetary Evolution I semester 2018", published recently by the institution, if decisions related to solving problems of short-term liquidity and modifying the structure of public expenditure to the medium and long term continue to be delayed, the cost to the country will be much more than just economic.
In one of the regions that receives the least amount of taxes in the world, the tax burden remained relatively stable in 2017.
From the section Fiscal Outlook for Central America, from the report "Macro-fiscal Profiles: 9th edition", by the Central American Institute of Fiscal Studies (Icefi):
In 2017, the fiscal trajectory of countries in the region remained relatively constant with respect to what was observed in 2016.The following are highlighted as policy orientations: a) lack of political agreements, which transformed into a real impossibility of increasing tax revenues through tax reforms or strengthening the administrative capacity of tax administrations, and b) implementation of austerity programs, which in several countries had a greater impact on capital expenditures, in order to avoid an increase in the fiscal deficit and public sector debt.
Facing a second round of elections scheduled for April 1, private sector unions are calling on the two candidates to present their economic proposals for reducing the uncertainty that currently weighs heavily on the business climate.
A solution to the fiscal problem, and options for reducing the cost of energy and other production costs that are affecting the country's competitiveness is what Costa Rican businessmen are asking of the candidates who will face a second round of elections on April 1.
Fitch Ratings has changed the outlook from stable to negative, due to "diminished flexibility to finance its rising budget deficits and public debt burden, as well as persistent institutional gridlock preventing progress on reforms to correct the fiscal imbalance."
EDITORIAL
Costa Rica is running out of time.The decision taken by Fitch Ratings to reduce from the outlook for the sovereign debt rating from stable to negative reflects a serious problem that the country faces and shows us that, in the not very long term, the rating agency could lower this rating, currently in the BB category.
Forecasts are for lower economic growth this year, driven by a weakening of the terms of trade and more restrictive financial conditions, caused by the high fiscal deficit.
From a press release issued by the IMF:
I. Recent Developments
1. Both output and growth are at potential, while inflation has reemerged and is rising moderately.
The favorable conditions in the global economy allowed the country to grow by 4.25% in 2016, and administrative efforts to reduce the fiscal deficit were noted, however they will not prevent the debt /GDP ratio from growing.
From a press release by the IMF:
Costa Rica’s economy growing robustly, GDP expected to growth by 4.25% in 2016
More needs to be done to stabilize public debt levels
Key for government and Congress to reach consensus on VAT and income tax reforms proposals to help address fiscal imbalances
Central government, state unions, managers of public enterprises, deputies, supreme judges, all are being held in the deadly embrace of privileges while they drag Costa Rica over a cliff.
EDITORIAL
As long as the compensation system that excessively rewards state employees, regardless of their actual performance, is maintained, and the tax system is not reformed, fiscal problems will get worse.