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.
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 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.
After the Alvarado administration agreed to backtrack on the proposal to negotiate a $1.75 billion loan with the IMF, it is predicted that next year the government will depend on domestic debt to finance its expenditures.
In this regional context of economic crisis, falling fiscal revenues and increasing public debt, Costa Rica's debt level is expected to rise to 75% of GDP by 2021, and in the case of El Salvador, the indicator could exceed 85%.
The outbreak of covid-19 in Central America forced the government to declare severe household quarantines and to restrict several economic activities, restrictions that in some cases are still in place after five months of health and economic crisis.
For Moody's, the Costa Rican government's response to the Covid-19 crisis will put negative pressure on the country's fiscal profile.
According to the rating agency's analysis, the measures include a three-month moratorium on tax payments, a gradual reduction in corporate social benefit contributions and extended credit lines for the companies most affected by the economic recession.
Although Costa Rica and Nicaragua approved fiscal reforms this year, it is predicted that the expected results in terms of tax collection will not be achieved.
The document "Centroamérica: análisis sintético, por país, del desempeño de la recaudación tributaria en 2019", prepared by the Instituto Centroamericano de Estudios Fiscales (Icefi), explains that, in the case of Costa Rica and Nicaragua, the expected results in terms of improved collection are still in doubt.
In Costa Rica, modifications to the salary tax brackets establish that income of up to $1,394 will be exempt from collection of the tax, and those exceeding $1,394 and up to $2,046 will pay 10%.
On June 25, the Ministry of Finance published in La Gaceta the new income tax brackets to be applied to salaries between July 1 and September 30, 2019.
In Costa Rica, the central government's financial deficit at the fifth month of the year maintained its upward trend as a result of higher interest expenditure and stood at 2.6% of GDP.
While the behavior of the financial deficit is largely due to interest payments, the increase in capital spending also shows significant variation, which translates into better infrastructure conditions needed to facilitate the mobility of goods and people, explains a newsletter from the Costa Rican Ministry of Finance.
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. They recommended the full and timely implementation of fiscal reform to improve market confidence and reconstitute fiscal space to handle potential shocks and large contingent liabilities, especially in pensions. However, they believe that additional measures may be needed.
It is estimated that construction costs in Costa Rica could increase up to 9% once the new fiscal plan comes into effect.
From next July 1, the collection of value added tax (VAT) will be staggered, because in the first year new buildings will not pay taxes, in the second pay 4%, in the third 8% and in the fourth 13%.
With the new agreement published in the official newspaper La Gaceta, double taxation is avoided and its effects mitigated, as well as helping to eliminate barriers to trade and prevent tax evasion.
On March 21, Law 9644 was published in La Gaceta, corresponding to the agreement between the Republic of Costa Rica and the United Mexican States, which avoids the double taxation of income and wealth taxes.
With the application of the fiscal rule, by 2020 in Costa Rica the growth of current expenditure in the regular budgets of the entities of the Non-Financial Public Sector will not exceed 4.67%.
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."
The financial deficit of the Central Government at the end of last year was equivalent to 6% of the Gross Domestic Product, 1.2% less than originally expected.
According to the authorities, the fiscal deficit as a proportion of GDP was lower than expected because of the measures taken in terms of collection, expenditure containment and efficiency, and the approval of the Law to Strengthen Public Finances. See "Tax Reform: First Step" and "Ambitious Plan for External Debt"
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).
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