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The International Monetary Fund has welcomed the Costa Rican Government's medium-term strategy to strengthen public finances by about 2.5 percent of gross domestic product (GDP) with tax-raising measures.
The Fund said in a statement following its 2016 Article IV consultation with the country that the strategy is appropriate considering Costa Rica's low revenue effort compared to other upper-middle-income countries.
However, the statement said that the authorities need to target a fiscal adjustment of 3.75 percent of GDP in order to stabilize the public debt-to-GDP ratio. Indeed, a partial fiscal adjustment scenario – if tax reform proposals currently in Congress are watered down and efforts to contain spending are insufficient – would result in continued large fiscal deficits driven mainly by a mounting interest bill, and significant additional debt accumulation, it said.
On the other hand, full fiscal adjustment would yield a much more favorable outlook, the IMF said. This would require congressional approval of all submitted tax measures, coupled with a reduction in the growth of current spending to keep it, throughout the medium term, below the expansion of nominal GDP, it added.
Standard & Poor's Ratings Services recently lowered its long-term foreign and local currency sovereign credit ratings for Costa Rica due partly to a lack of tax reform.
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