Costa Rica Continues To Wait On Fiscal Reform Package

by Mike Godfrey, Tax-News.com, Washington

15 June 2004

The Costa Rican government’s two top economic officials have warned that further delay in the approval of a permanent package of fiscal reforms will undermine the country’s capacity to absorb external economic shocks.

The Permanent Fiscal Reform Plan was first conceived two years ago to bolster the government’s tax revenues, pay off the country’s growing foreign debt, and reduce the deficit to 2.65% of GDP through a series of tax hikes and improved collection methods.

However, the implementation of the reform package has been dogged by delays, as Deputies in the Legislative Assembly fail to meet successive deadlines for approving the legislation. After the latest deadline in May was missed, it has now been extended indefinitely.

Finance Minister Alberto Dent has said that the new measures are much needed as they will better insulate Costa Rica from external economic factors such as US interest rate movements and soaring oil prices.

Meanwhile, Central Bank president Francisco de Paula Gutiérrez has expressed the belief that the reforms will also help strengthen the economy by allowing Costa Rica to take more advantage of the benefits offered by the CAFTA free trade deal with the United States.

The large fiscal deficit in Costa Rica has in recent times fuelled doubts over the country's ability to service its debt. However, austerity measures at public institutions and an Emergency Tax Plan approved by Congress in December 2002 have helped to reduce the deficit from 5.4% of the country's gross domestic product to 4.3% last year.

Economic growth generally appears to be on a sounder footing and Gutiérrez has reported that growth rates are steady at the 4% mark. Whilst international institutions such as the IMF and ratings agencies have recognized this, they continue to warn on the pressing need for the tax reforms to be put into action.

“Going forward, a stabilization of Costa Rica's sovereign creditworthiness will depend on the ability of the government to tackle fiscal deficits and implement structural reform," ratings agency Fitch observed in its January report.

Recommended