October 7, 2022
- The IMF team and Costa Rican authorities reached staff-level agreement on a request for access under the newly established Resilience and Sustainability Trust (approximately US$ 710 million) and the third review under the Extended Fund Facility. The IMF’s Executive Board will consider these requests in the coming weeks.
- Costa Rica is one of the first countries to request financing from the IMF’s newly established Resilience and Sustainability Facility to support its pioneering and ambitious agenda to build climate resilience and transition to a zero-carbon economy, while helping catalyze climate financing from other official and private partners.
- The authorities are taking important steps to strengthen Costa Rica’s economic reform program. Monetary policy and exchange rate flexibility need to continue to proactively respond to the shocks facing the economy. Fiscal consolidation should advance, while making space for targeted support to the most vulnerable.
- A more progressive tax system, strengthened social protection, incentives to greater formality and female economic empowerment will all help create a solid foundation for more inclusive growth.
An International Monetary Fund (IMF) team led by Ms. Manuela Goretti held virtual and in-person meetings with the Costa Rican authorities during September 20 – October 3, 2022 for the third review of the economic reform program supported by the Extended Fund Facility (EFF). Access under the existing EFF is 335 percent of quota (SDR 1.23749 billion, approximately US$ 1.8 billion) and completion of the third review, subject to approval by the IMF Executive Board, will make available SDR 206.23 million (approximately US$ 264 million). The team also discussed the authorities’ request to access financial resources under the Resilience and Sustainability Facility (RSF) in the amount of 150 percent of quota (SDR 554.1 million, approximately US$ 710 million). At the conclusion of the mission, Ms. Goretti issued the following statement:
“The IMF team and the Costa Rican authorities reached staff-level agreement on the policies needed to complete the third review under the EFF-supported economic reform program as well as on the request to access financial resources from the RSF, the latter subject to the full operationalization of the Resilience and Sustainability Trust. The IMF’s Executive Board will discuss these requests in the coming weeks.
“After rebounding strongly in 2021, real GDP is projected to slow to 4.4 percent in 2022, amid a slowdown in global growth and tighter financial conditions. Headline inflation is expected to have peaked in the third quarter and gradually return towards the Central Bank of Costa Rica (BCCR)’s target by late 2024. The rise in the cost of living is putting pressure on the population, in particular the poor. The economic outlook remains subject to important downside risks.
“The fiscal targets under the program were comfortably met, despite the disruptions created by the cyberattacks. The authorities are on track to exceed their end-2022 primary balance target even as they provide greater support to address the impact of rising inflationary pressures on the most vulnerable. For 2023, they are targeting a primary balance of 1.3 percent of GDP and further strengthening debt sustainability. The authorities should press ahead with their ambitious plans to increase the fairness and progressivity of personal income taxes, improve the equity and efficiency of government spending, and strengthen debt management. Ongoing efforts to revamp public investment management will also be critical to this strategy.
“The mission welcomed the BCCR’s decisive move to tighten the monetary policy stance and its readiness to continue adjusting monetary policy in line with its data-dependent and forward-looking approach, supported by clear and transparent communication. The difficult external environment has been weighing on international reserves despite continued exchange rate flexibility. The BCCR is taking steps to strengthen its reserve position and deepen the foreign exchange market, while legal amendments are under way to strengthen the BCCR’s governance, autonomy, and operational framework.
“While the banking sector has withstood well the unwinding of COVID-19 related emergency measures, the supervisory authorities should continue to proactively monitor the financial system to anticipate sources of stress, including from the economic slowdown and tighter financial conditions. Ongoing efforts to strengthen supervisory tools, including legal amendments to strengthen bank resolution and deposit insurance, are also critical.
“The authorities are committed to strengthen social protection and foster a more dynamic and equitable economy. Stepped up efforts to prioritize spending on the most impactful social assistance programs, alongside actions to enhance targeting and delivery, should be supported by measures to incentivize formality and enhance the quality of education. In this context, the mission also welcomed ongoing efforts to boost female labor force participation.
“Costa Rica was also the first member country to formally request financing under the IMF’s newly established Resilience and Sustainability Facility to further advance its ambitious climate adaptation and mitigation agenda. The new facility would support Costa Rica’s pioneering efforts to assess climate risks, decarbonize its economy, strengthen infrastructure resilience, as well as green the BCCR’s reserves and the financial sector. Reform measures will continue to be closely coordinated with the World Bank, the Inter-American Development Bank, and other international partners. The facility will provide resources at longer maturities and more affordable terms, while helping catalyze critical climate financing from other official and private partners.
“The IMF team is grateful to the Costa Rican authorities and other counterparts for the productive discussions and congratulates them on being among the first countries to reach a staff-level agreement on access under the Resilience and Sustainability Trust.”