IMF Comments Following Staff Mission To Costa Rica

by Mike Godfrey, Tax-News.com, Washington

28 August 2009

Commenting following the conclusion of an International Monetary Fund staff mission to Costa Rica earlier this month, IMF mission chief for Costa Rica, Andreas Bauer revealed that in the Fund's opinion, the Costa Rican economy has withstood the impact of the global economic crisis "relatively well".

The IMF staff team visited Costa Rica between August 10-21 to conduct the 2009 Article IV consultation and the first review of the Stand-By Arrangement approved last April, meeting with Minister of Finance Jenny Phillips Central Bank President Francisco de Paula Gutiérrez, other government officials, and representatives of the private sector and academia.

Mr Bauer, observed on Monday that:

“The strategy to shield the economy from external shocks through fiscal stimulus and the mobilization of contingent external financing has helped preserve confidence and financial stability, and mitigated the decline of the economy."

“Near term prospects have improved. Recent signs of a turnaround in economic activity and somewhat more favorable perspectives for external demand point to a gradual recovery of the Costa Rican economy going forward. The mission now expects real GDP to decline by 1.5% in 2009, before returning to positive growth of 2.3% in 2010."

He continued:

“The medium-term prospects for the Costa Rican economy remain generally promising. Strong institutions and higher public investments in human and physical capital should provide a solid basis for the resumption of high, well-balanced economic growth. A key objective for the authorities should be to consolidate recent gains in domestic and external stability, boost the credibility of fiscal and monetary policies, and further strengthen the economy’s resilience to external shocks."

“After large expenditure increases in 2008-10, which are providing countercyclical support to domestic demand, the fiscal deficit will need to be reduced to contain vulnerabilities and allow for a gradual reduction in the debt burden. Achieving this—while maintaining higher levels of social spending and investment—will require a tax reform to increase revenues by at least 2% of GDP. Fostering an early consensus on the need to increase revenues would be desirable to ensure a swift debate and passage of tax reform."

The need for tax reform was also flagged up in the IMF's 2008 Article IV consultation, when the IMF observed that:

"The authorities and the mission agreed that the approval of a substantial tax reform, including a revamp of the income tax and Value Added Tax (VAT), remains a priority."

Concluding his comments on the 2009 mission visit, Mr Bauer observed that:

“The banking sector remains sound. The authorities should continue to monitor developments closely and implement their well-focused agenda to strengthen supervision and the financial sector safety net."

“The mission expects that the IMF Executive Board will conclude Costa Rica’s 2009 Article IV consultation and the first review of the Stand-By Arrangement by end-September. The authorities have indicated that they will continue to treat the Stand-By Arrangement as precautionary.”

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