Press Release No. 21/20

IMF Reaches Staff-Level Agreement with Costa Rica on a Three-Year Extended Fund Facility and Completes 2021 Article IV Discussions

January 22, 2021

• The IMF mission and the Costa Rican government reached a staff-level agreement on a three-year program to anchor the government’s policy and reform efforts, aimed at bolstering the country’s response to the pandemic and at laying the foundation for a strong and durable economic recovery.
• Key policy actions under the home-grown program supported by the IMF will focus on ensuring fiscal sustainability and fostering monetary and financial stability, while protecting the poor and most vulnerable.
• The authorities’ ambitious macro-structural reforms are designed to help promote inclusive and sustainable growth, including through innovative digitalization and climate-change mitigation and resilience building.

Washington, DC: In response to a request by the Costa Rican authorities, an International Monetary Fund (IMF) mission led by Ms. Manuela Goretti held virtual meetings during January 11-21 to discuss IMF financial support to the authorities’ economic reform program, targeted at promoting a strong and sustainable recovery from the pandemic, and also to conduct the 2021 Article IV Consultation. At the end of the virtual mission, Ms. Goretti issued the following statement:

“I am pleased to announce that the Costa Rican authorities and the IMF mission team have reached a staff level agreement on economic and structural policies and reforms that would underpin a three-year arrangement under the Extended Fund Facility (EFF) for about US$1.75 billion. The staff level agreement is subject to IMF management approval and Executive Board consideration, which is expected in the coming weeks. The program will support the authorities’ fiscal reform plans to gradually achieve a primary surplus and place public debt on a downward path, while addressing upfront financing needs, and lay the ground for a strong, durable and inclusive recovery. The arrangement is also expected to catalyze additional bilateral and multilateral financial support.

“Like all countries in the region, Costa Rica has been hit hard by the COVID-19 pandemic, notwithstanding the government’s proactive response and the country’s sound universal healthcare system. The socio-economic impact of the pandemic has been significant, exacerbating pre-existing imbalances and an already fragile economic outlook, resulting in a sharp decline in economic activity and a rise unemployment, especially among women and the young. While the authorities’ swift and comprehensive response has helped avoid a deeper crisis, the recovery is expected to be protracted, with the economy estimated to grow by 2.6 percent in 2021, following a strong contraction in 2020. Moreover, the shock has further weakened the country’s fiscal position, undermining the expected yields from the ambitious fiscal reform launched in late-2018 and generating a large financing gap. Emergency financing from the IMF through its Rapid Financing Instrument (RFI)—ratified by Costa Rica’s Legislative Assembly in August 2020—provided much-needed resources to help address the socio-economic impact of the pandemic, including by catalyzing financial support from other official partners. However, financing needs remain sizable over the medium term.

“In addition to supporting a recovery from the pandemic, the IMF-supported home-grown program aims at securing macroeconomic stability and advancing a reform agenda that would help secure strong, durable and inclusive growth in Costa Rica. The authorities’ reform efforts will be anchored by three key pillars: (i) implementing equitable fiscal reforms to ensure debt sustainability, while protecting the poor and most vulnerable; (ii) maintaining monetary and financial stability, while continuing to strengthen the central bank’s autonomy and governance and address structural financial vulnerabilities; and (iii) advancing structural reforms to support inclusion, while boosting labor productivity, under the government´s strong commitment to fighting climate change.

“As the pandemic wanes and the economic recovery takes hold, building on a broad-based social dialogue and the 2018 fiscal reform, the government is taking measures to achieve a primary surplus of 1 percent of GDP by 2023 and to place public debt on a downward path. The fiscal consolidation will be led by a balanced mix of expenditure rationalization—underpinned by the fiscal rule—and equitable revenue mobilization, while maintaining space for adequate pandemic-related spending in 2021 and continuing to provide support for the most vulnerable. The government’s ongoing efforts to strengthen the coverage and targeting of social assistance programs can help limit the economic fallout from the COVID-19 crisis and, together with the reforms envisaged under the ambitious Public Employment Bill currently under discussion, improve the equity and efficiency of government spending.

“The BCCR’s monetary policy stance remains appropriately accommodative and should continue to be data-dependent and forward-looking. Reducing the policy interest rate and other measures pursued by the BCCR in response to the crisis, consistent with its inflation targeting and flexible exchange rate regime, have been transparent and well-communicated. Greater development of the foreign exchange market will help facilitate effective risk management and support increased intermediation in colones, while plans to further strengthen the central bank law during the program period will further enhance the BCCR’s operational autonomy and governance.

“The authorities have taken swift and decisive actions to support the financial sector in response to the COVID-19 shock and have provided credit relief to affected businesses and households. These measures remain temporary, transparent, and well-targeted, with some of them being gradually unwound as conditions improve. While the financial system appears resilient to a range of shocks, the authorities have stepped up the monitoring and supervision of credit portfolios, given the large share of restructured loans and the high degree of uncertainty surrounding this crisis, to ensure banks remain adequately capitalized. Financial stability can be further buttressed by continued advances in strengthening the regulatory and supervisory frameworks, the financial safety net, and by fostering greater financial inclusion.

“An ambitious structural agenda geared towards lifting potential growth and addressing inequality will hinge upon strengthening education, promoting innovation, cutting red tape, and leveraging the greater use of digitalization. Promoting formalization, including with stepped-up initiatives to support female labor force participation, would also help deliver broad-based improvements in productivity and living standards.

“Finally, Costa Rica’s commendable efforts to further improve resilience to climate change and fully decarbonize its economy make it a trailblazer in the global arena and will help generate new and sustainable business and growth opportunities.

“The IMF team is grateful to the Costa Rican authorities and other interlocutors for the candid and constructive discussions.”