IMF approves $ 1.8 billion loan for Costa Rica –

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The IMF approved a 36-month loan agreement with Costa Rica for $ 1.778 billion, the company reported Monday, which immediately released $ 296.5 million to help stabilize the Central American country’s economy.

The money will be used to “support Costa Rica’s recovery and stabilize its economy” and to ensure sustainable debt levels, the agency said in a statement from its Washington headquarters.

“The IMF-backed homegrown program focuses on implementing equitable tax reforms to ensure debt sustainability while protecting the most vulnerable,” the agency said.

“Looking ahead, the government’s reform agenda is designed to help promote inclusive and sustainable growth, including through innovative digitalization, mitigating climate change and building resilience.”

The country hopes the credit facility will help reduce a large budget deficit of 8.3% of GDP. The last time Costa Rica had a budget deficit of this magnitude was in 1981 when it reached 9.1% of GDP.

The government also announced that the primary deficit, which excludes debt servicing, reached 3.5% of GDP, below the 4% forecast by the central bank, although it has not yet been revised downwards.

Consequences of the pandemic

In January, Costa Rica and the International Monetary Fund announced that the agreement to balance the country’s finances would rule out privatization or higher taxes on consumption or pensions, proposals that were rejected by the population.

This possibility sparked public anger with street demonstrations in September and October 2020 in a country whose economy was already affected by the absence of tourism due to the Covid-19 pandemic.

Costa Rica “has made important advances in its tax and structural reform agenda in recent years as part of the Organization for Economic Co-operation and Development (OECD) accession process,” the IMF said.

“However, the pandemic has hit the economy hard, exacerbating pre-existing vulnerabilities, undermining expected returns on the ambitious financial reform launched in late 2018, and creating a significant funding gap,” it said.

The multilateral organization predicts an economic recovery for Costa Rica in 2021 with growth of 2.6% of GDP.

Although the country was one of the first in Latin America to start vaccinating against Covid-19, “the risks to the outlook remain elevated given the uncertainty surrounding the pandemic.”

Faced with this situation, the IMF loan aims to “secure macroeconomic stability and advance the reform agenda of the domestic authorities”.

The compromises

Costa Rica plans to increase tax revenue through a 0.5% tax on luxury homes and transferring up to 30% of the profits of 14 state-owned companies to the treasury. This measure will be in place for four years to collect 0.2% of GDP each year.

The measures envisaged in the agreement suggest a fiscal adjustment of 5% of GDP to reduce the deficit and achieve a primary surplus in 2023 “to put debt on a downward path”.

Congress is also discussing a public employment law to regulate wages in the state sector, which is responsible for much of the budgetary imbalance in Costa Rica.

As part of its austerity efforts, the country passed a law that significantly cuts government contributions to political parties for the 2022 election campaign.

The central government’s debt reached 69.7% of GDP in 2020, which is slightly below the original forecast of 70.1%.



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