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Costa Rica: Staff Report for the 2016 Article IV Consultation

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
May 2016
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Overview

1. Having bounced back quickly from the global crisis, growth has moderated below trend and macro vulnerabilities, mainly from the weak fiscal position, are rising. After falling modestly in 2009, real GDP surged in 2010–12. Since then, however, growth has remained below potential, with the latter also declining. Hence, structural impediments must be removed to maintain sustained rates of economic expansion. The counter-cyclical budgetary stimulus imparted in 2009 pushed the deficit above 5 percent of GDP in 2010 (mainly through a rise in wages and transfers). The deficit has crept up further to 6 percent since then, placing the public-debt-to-GDP ratio on an unsustainable upward trajectory and fast approaching levels associated with higher risks of disorderly adjustment in emerging economies. Continuing fast expansion of dollar-denominated credit, facilitated by a stable XR, exacerbates vulnerabilities in the financial sector, rendering further improvements in regulation and supervision even more important.

2. Policy actions have been broadly consistent with past Fund advice. The authorities submitted to Congress a fiscal reform package that is in line with staff advice, though its approval will require cooperation of opposition parties (¶22). Other measures consistent with past Fund advice include: (i) the removal of the XR band in early 2015 and continued reserve accumulation (¶5), (ii) the reduction in the inflation target range in 2016 to 2–4 percent, in line with the average inflation of trading partners (¶4), and (iii) tightening of prudential requirements to discourage dollarization (¶28). The large easing of monetary policy was an appropriate response to the unexpectedly sharp decline in headline and core inflation amid low international oil prices (¶4). Additional progress is needed to implement the 2008 FSAP recommendations (¶129).

Recent Economic Developments and Outlook

A. Recent Developments

3. A third year of growth below potential has resulted in a moderate output gap. Having expanded by almost 5 percent annually in 2010–2012, growth slowed to 2½ percent in 2013–14. This reflected both gradual weakening of domestic demand following the rebound from the 2008–09 crisis as well as sluggish export growth, the latter mirroring the pace of the U.S. recovery. Growth picked up to 3¾ percent in 2015, as the boost to domestic demand from improved terms of trade, associated with lower commodity prices, and higher investment more than offset the drag from Intel manufacturing’s closure, adverse weather conditions for the main agricultural export crops, and slightly contractionary financial conditions—the latter reflecting higher real lending rates and real appreciation (¶9). Nevertheless, both private and public investment recovered significantly, the latter supported by construction of a new port terminal and public water systems. Overall, with growth below its trend rate of 4 percent during 2013-15, a negative output gap of about 1 percent of GDP has opened up (Analytical Note (AN) VIII).1 The unemployment rate has been elevated since the crisis; its slight decline in 2015 was mainly due to lower participation from discouraged workers.

GDP growth, Potential and Output Gap

(Percent)

Sources: National authorities, and IMF staff estimates

4. The central bank took advantage of the favorable shock from lower oil prices to reduce its inflation target range. Inflation increased sharply and breached its upper limit in 2014, owing mostly to the pass-through to domestic prices from XR depreciation in early 2014. The breach was short-lived, though, as the sharp decline in imported oil prices, tight monetary policy, and a widening output gap drove inflation into negative territory by the second half of 2015. The central bank reacted by cutting the policy rate by 350 basis points to 1¾ percent. It also availed itself of the propitious circumstances—with inflation projected to stay below the 3–5 target range until the end of 2016 and inflation expectations falling for the first time below the center of the range—to lower the target to 2–4 percent, in line with average inflation of trading partners.

Headline Inflation

(Percent, y-o-y)

Sources: Haver, BCCR and Fund staff calculations.

Costa Rica: Inflation Decomposition

(Contribution to growth y/y, in percent)

Sources: Haver analytics and Fund staff estimates.

5. The exchange rate has been stable despite abandonment of the band regime, and reserve accumulation has resumed strongly. After a short period of heightened volatility in early 2014, amid increased prospects for U.S. monetary policy normalization, the XR quickly stabilized again about 6–7 percent above the floor of the XR band, and remained there despite the early-2015 removal of the band, in line with Fund advice to strengthen the inflation targeting framework. A lower current account deficit—4 percent of GDP in 2015, driven by lower oil prices—as well as continued government Eurobond issuance, resilient FDI flows, and increased net foreign bank liabilities to meet renewed demand for credit in FX resulted in continued strong foreign reserve accumulation, in line with the authorities FX purchase program, to $7.8 bn at end-2015, above the IMF adequacy metrics.2 Nonetheless, in December 2015 and early 2016, reserves declined somewhat, as FX demand, including by financial intermediaries, increased and the central bank accommodated it, resulting in a flat XR.

6. The external position is close to equilibrium, with competitiveness largely unchanged in 2014–15. In the first half of 2014, a third of the 30 percent real effective exchange rate (REER) appreciation accumulated over the last decade was undone, as nominal colón depreciation outpaced a growing inflation differential. Since then, however, the REER rose steadily until stabilizing about 5 percent above its end-2013 level. At the same time, this increase is consistent with the change in the REER equilibrium value and, as a result, competitiveness has not deteriorated (Box 1). In particular, multilaterally consistent estimates under the EBA and other regression-based approaches support this view. Nevertheless, productivity-enhancing reforms (¶32) and wage restraint are needed to maintain Costa Rica’s competitiveness in world markets. Fiscal consolidation (¶18–23) would also buttress long-term external stability.

External Sustainability AssessmentCosta Rica: Implied Undervaluation (“+” = Overvaluation)
Regression-based methodsCA normCA projected/cyclically-adjustedREER gap (updated)REER gap (2014 AIV)REER gap (2012 AIV)
Macroeconomic Balance−3.2−3.91.9−0.87.9
External sustainability (ES)−2.4−4.56.813.28.5
ES (NFA exclud. FDI)−7.2−4.5−7.1−5.9NA
EBA
Macroeconomic Balance−4.7−3.9−2.1−4.78.5
Average−0.10.59.9
Sources: Fund staff estimates.
Sources: Fund staff estimates.

7. Failure to reverse the countercyclical fiscal policies implemented during the global financial crisis put public debt on a rapid upward trend. Attempts to curb government outlays, mainly through capital expenditure cuts in 2011, were undermined by the rising transfers (to decentralized public entities) and interest bill in 2012–2013. Tax collections, after falling from precrisis levels that were boosted by GDP growth well above trend, remained stagnant, with a revenue-enhancing tax reform nullified by the Constitutional Court owing to procedural irregularities in 2012. Consequently, the central government (CG) primary deficit returned to its crisis peak of around 3 percent of GDP in 2013. The new administration that came into power in mid-2014 maintained a broadly unchanged non-interest deficit, as efforts to restrain spending and reduce tax evasion prevented a budgeted deterioration in the primary balance of more than ½ percent of GDP in 2014–15. Meanwhile, a rising interest bill has lifted the overall CG deficit to 6 percent of GDP in 2014–15, with debt exceeding 42 percent of GDP in 2015. Though the impact on domestic financing costs has been muted by the annual $1 bn external bond issuance since 2012 and aggressive monetary easing in 2015, spreads on external bonds have doubled since the 2013 tapering tantrum and the country lost its investment grade in 2014.3

Central Government

(Percent of GDP)

Sources: National authorities and Fund staff estimates.

8. The authorities have developed a strategy for fiscal consolidation focused on strengthening revenue. The new government initially formulated a consolidation proposal focused on reducing tax evasion and a few exemptions. Since then, a more comprehensive plan, that is broadly consistent with staff recommendations both in its size and its emphasis on revenue enhancements through tax base widening and higher rates, has been developed (¶21).

Potential Output Growth and Output Gap Estimates(In percent)
Potential GDP growth rateOutput Gap 1/
2000-082009-14201520142015
Production Function4.603.783.950.25−0.36
Cycle Extraction Filters
Hodrick-Prescott4.603.743.850.46−0.06
Butterworth4.523.663.780.490.03
Christiano-Fitzgerald4.533.523.990.42−0.24
Baxter-King5.233.763.800.16−0.31
Univariate Kalman Filters
Deterministic Drift4.114.114.110.43−0.33
Mean Reversion4.514.604.60−0.40−1.15
Multivariate Kalman Filter
With inflation4.783.783.64−0.02−0.34
Average of All Models4.613.873.970.22−0.35
Macroframework 2/4.794.004.00−0.43−1.11
Source: Fund staff estimates.

Includes level effect on potential output of Intel exit, estimated at 0.2 percent of GDP in 2014 and 0.8 percent in 2015.

The output gap in the macroeconomic framework is slightly different from model-based estimates, as the level of potential output for each past year in the historical series reflects the estimate available at the time.

Source: Fund staff estimates.

Includes level effect on potential output of Intel exit, estimated at 0.2 percent of GDP in 2014 and 0.8 percent in 2015.

The output gap in the macroeconomic framework is slightly different from model-based estimates, as the level of potential output for each past year in the historical series reflects the estimate available at the time.

9. The recent loosening of monetary policy is expected to bring about financial conditions more supportive of growth. Real lending rates have been edging upwards since mid-2014, as limited transmission of the large policy rate cuts to lending rates thus far has been more than offset by the fall in inflation expectations. In addition, the REER has resumed its appreciating trend and credit growth has moderated. A broad-based index (FCI) developed by staff (featuring the influence on economic activity of credit, deposits, real interest rates, REER, and house prices) suggests that financial conditions were slightly contractionary in 2015, owing to higher real interest rates and real appreciation (AN III). However, this is likely to be reversed as the lower policy rates gradually complete their pass-through. Monetary transmission, though, is hamstrung by high dollarization, segmentation of the banking system, limited capital market development (¶33 and AN V), and anticipation of forthcoming upward pressures on interest rates from large budgetary financing needs.

10. The financial system appears sound, though profitability is low and dollarization continues to be a source of vulnerability. Bank capital is well above regulatory requirements and liquidity indicators are robust. While non-performing loans have remained low, profitability has declined slightly in recent years, and remains below that of regional peers. Reliance on foreign funding has continued to increase, although staff analysis suggests that associated rollover risks remain manageable even under scenarios of extreme shocks in international banking systems. Moreover, macroeconomic trends are consistent with recent and anticipated credit growth and there is little evidence of financial sector risk buildup (ANs I and II). Indeed, while the depth of Costa Rica’s financial system improved considerably in the past decade, it continues to lag those of comparable emerging markets as well as the degree of development implied by its macroeconomic fundamentals. In particular, credit to the private sector is still well below the estimated level consistent with fundamentals (ANs IV and V). Amid renewed exchange rate stability since late 2014, however, credit growth has again tilted toward FX, including to sectors without natural FX hedges, despite already high levels of bank loan dollarization.

Distribution of Macro Outcomes Conditional on Real Private Sector Credit Growth

Source: IMF staff estimates based on RES Macro Financial Forecast

Private Sector Credit Growth by Currency

(Percent, y-o-y)

Sources: BCCR and Fund staff calculations.

Costa Rica. Financial Soundness Indicator Heat Map
Costa Rica2013Q22013Q32013Q42014Q12014Q22014Q32014Q42015Q12015Q22015Q3
Overall Financial Sector RatingLLLMMMMLLL
Credit cycleLLLHHMMLLL
Change in credit / GDP ratio (pp, annual)1.31.61.95.15.24.74.31.51.72.8
Growth of credit / GDP (%, annual)2.73.33.910.510.69.68.42.73.15.2
Credit-to-GDP gap (st. dev)1.21.21.41.71.20.80.6−0.1−0.40.6
Balance Sheet SoundnessLLLLLLLLLL
Balance Sheet Structural RiskMMMMMMMMMM
Deposit-to-loan ratio113.7110.8107.5105.0101.7101.5100.797.297.795.3
FX liabilities % (of total liabilities)36.735.433.236.636.935.934.534.635.133.8
FX loans % (of total loans)37.337.737.938.738.037.537.036.737.037.2
Balance Sheet BuffersLLLLLLLLLL
LeverageLLLLLLLLLL
Leverage ratio (%)10.110.09.79.89.79.79.710.09.79.9
ProfitabilityLLLLLLLLLL
ROA1.31.11.21.51.31.21.11.11.01.0
ROE8.67.57.910.79.58.47.68.07.47.4
Asset qualityLLLLLLLLLL
NPL ratio1.91.91.71.61.61.71.61.61.61.7
NPL ratio change (%, annual)1.24.30.2−10.6−14.9−12.0−11.2−2.00.71.6
Memo items:2013Q22013Q32013Q42014Q12014Q22014Q32014Q42015Q12015Q22015Q3
Credit-to-GDP (%)48.749.450.853.453.854.155.154.955.556.7
Credit-to-GDP gap (%; HP filter)−1.9−1.6−0.61.51.41.11.60.91.0n.a
Credit growth (%; annual)11.111.312.219.019.818.717.511.811.412.2
CAR (in %)17.217.216.616.016.316.216.616.616.416.6
Tier 1 CAR (in %)13.713.513.012.912.712.612.712.912.612.8
Sources: BIS; FSIs; IMF IFS; and national authorities.
Sources: BIS; FSIs; IMF IFS; and national authorities.

B. Macroeconomic Outlook and Risks

11. The joint view of staff and the authorities was that the economy will expand faster and inflation revert to the target range in 2016, with activity returning to potential over the medium term. Growth is expected to accelerate to 4¼ percent in 2016, slightly above potential growth, supported by: (i) dissipation of the one-off effects of Intel’s manufacturing withdrawal, (ii) further terms-of-trade improvement from the additional decline in international oil prices, (iii) domestic monetary stimulus—model simulations suggest that the monetary easing implemented in 2015 would boost GDP growth by ½–¾ percent of GDP in 2016, assuming full though gradual transmission from policy to lending rates—and (iv) sustained real credit expansion (estimated by staff to be consistent with projected GDP growth based on historical precedent).4 The output gap is anticipated to stabilize in 2016, and then mostly close over the medium term. Model simulations also suggest that the monetary stimulus, together with fading base effects from the oil price decline in 2015, would also bring inflation back to the center of the new 2–4 percent target range by end-2016. Inflation is then projected to hover around that value throughout 2017–21, buttressed by continued prudent monetary policy, while still allowing for continued monetary accommodation during the initial phase of the fiscal adjustment. The current account deficit will widen slightly to 4¼ percent of GDP over the medium-term, amid gradual recovery of international commodity prices, while partial fiscal consolidation—focused on revenue measures that increase the progressivity of the tax system and with some attendant confidence effects—is not expected to have a significant negative impact on domestic demand. The staff baseline scenario, which incorporates the measures already submitted to Congress that have a higher probability of being approved, contemplates fiscal consolidation measures of 2¼ percent of GDP over the medium term. The CG overall deficit would decline slightly to 5½ percent of GDP and the public debt ratio would reach 55 percent of GDP by 2021 (¶18 and AN VI).

Real Effect of a 300bp Policy Rate Cuts with Different PT

(Percent difference from baseline)

Sources: IMF staff calculation based on RES FSGM

Note: PT=Pass-through to Lending Rates; SPPT=Slower, more persistent PT (1/3)

12. The authorities also concurred that an alternative scenario incorporating the fiscal adjustment necessary to restore debt sustainability would yield a more favorable outlook. According to staff analysis, a total correction of about 3¾ percent of GDP would stabilize public debt in the medium term within “safe levels,” with only moderate short-term output costs (¶19). Growth would be only slightly lower in initial years and higher in outer years than in the baseline case. This is not only because of significant confidence effects but also of the more balanced macro policy mix allowed by tighter budgets consistent with restoring fiscal sustainability and reducing the current account deficit. Indeed, a looser monetary stance than in the baseline would be sufficient to achieve the inflation target over the medium-term, thereby also mitigating increases in market rates associated with the normalization of U.S. monetary policy.

Costa Rica: Baseline Scenario, Partial Fiscal Adjustment 1/(In percent of GDP, unless otherwise indicated)
2015201620172018201920202021
Real GDP growth (percent)3.74.24.34.44.34.04.0
Output gap (percent of potential GDP)−1.1−0.9−0.6−0.30.00.00.0
CPI (percent, end-of-period)−0.83.03.03.03.03.03.0
Current account balance−4.0−4.2−4.3−4.2−4.3−4.3−4.3
Central government fiscal balance−5.8−5.8−5.4−5.5−5.5−5.5−5.3
Structural primary balance−2.9−2.3−1.4−1.1−1.2−1.2−1.2
Structural overall balance−5.7−5.6−5.3−5.4−5.5−5.5−5.2
Central government debt42.445.047.349.451.352.954.4
Source: Fund staff estimates.

The baseline scenario includes fiscal consolidation measures of about 2¼ percent of GDP, partly offset by a projected underlying deterioration in the primary balance mainly driven by the constitutionally mandated increase in education expenditure.

Source: Fund staff estimates.

The baseline scenario includes fiscal consolidation measures of about 2¼ percent of GDP, partly offset by a projected underlying deterioration in the primary balance mainly driven by the constitutionally mandated increase in education expenditure.

Costa Rica: Full Fiscal Adjustment Scenario 1/(In percent of GDP, unless otherwise indicated)
2015201620172018201920202021
Real GDP growth (percent)3.74.24.24.64.54.24.3
Output gap (percent of potential GDP)−1.1−0.9−0.7−0.20.20.30.4
CPI (percent, end-of-period)−0.83.03.03.03.03.03.0
Current account balance−4.0−4.2−4.2−4.1−4.0−3.8−3.7
Central government fiscal balance−5.8−5.7−4.4−3.6−3.6−3.3−3.2
Structural primary balance−2.9−2.3−0.80.10.10.20.2
Structural overall balance−5.7−5.5−4.2−3.6−3.6−3.4−3.3
Central government debt42.444.946.246.146.045.745.5
Source: Fund staff estimates.

Includes measures as in the baseline scenario and additional measures of 1½ percent of GDP.

Source: Fund staff estimates.

Includes measures as in the baseline scenario and additional measures of 1½ percent of GDP.

13. The authorities agreed that risks to the outlook were tilted to the downside. Downside risks stem from both global uncertainties and weaknesses in domestic fundamentals (as detailed in the Risk Assessment Matrix):

  • External risks. The normalization of U.S. monetary policy presents moderately upside risks. Absent pronounced increases in market volatility, faster U.S. growth would have a positive impact on Costa Rican GDP, given strong trade ties, more than offsetting the negative influence of tighter global financial conditions. However, extreme bouts of market volatility— from a disorderly U.S. monetary policy normalization, stresses in emerging markets with high corporate leverage (including in FX), or heightened global geopolitical risks—could inflict serious damage, especially given Costa Rica’s weak fiscal position, bank reliance on foreign funding, and domestic credit dollarization, with associated exposures to interest rate and exchange rate risks, the latter evident only in the event of a large depreciation (¶26 and AN I). Conversely, if the nominal effective exchange rate of the colón continues to appreciate in line with the U.S. dollar, competitiveness vis-à-vis other trading partners would be negatively affected. In addition, deeper-than-expected slowdowns in the rest of the world could hamper Costa Rica’s growth, both in the short term—as the credit cycle matures in key emerging markets—and in the medium term, reflecting structurally weaker growth in advanced countries that have not fully addressed crisis legacies. At the same time, model simulations of the effect of slowdowns in foreign demand suggest that Costa Rica is less vulnerable to adverse developments in key emerging markets, including China and Brazil, than in the U.S., consistent with relative trade ties (AN VIII). In addition, the fact that Costa Rica does not have a significant offshore sector like other countries in the Central America-Caribbean region, and given also comparatively limited anti-money-laundering-compliance concerns (¶31), the country appears less vulnerable to de-risking strategies by global banks, including loss of correspondent banking services.5 Risks from energy prices are balanced, with increased volatility possibly deriving from geopolitical tensions weighing on the downside, while lower-than-anticipated prices would have moderately positive effects.

  • Domestic risks. The persistence of large fiscal deficits and the ensuing rapid rise in the public debt ratio in a passive scenario where political support for budget consolidation falls short, could render the economy vulnerable to sudden changes in financial market conditions. Also, large government gross financing requirements could lift domestic interest rates, weighing on private investment and growth. Expectations of a pick-up in interest rates driven by the government short-term financing needs are already encouraging maintenance of excess liquidity in banks, which also limits the transmission of the monetary stimulus to lending rates—model simulations suggest that if pass-through of the policy rate cuts continued to be hindered by these concerns, the short-term boost to growth from monetary stimulus would be reduced by half (¶11 and AN I). Given low profitability and heavy dollarization of the banking system, financial stability could also be jeopardized by substantial currency depreciation, mainly through higher NPLs (¶26, AN I and II).

Real and Financial Spillovers

Costa Rica: Passive Scenario 1/(In percent of GDP, unless otherwise indicated)
2015201620172018201920202021
Real GDP growth (percent)3.74.24.24.03.93.63.5
Output gap (percent of potential GDP)−1.1−0.9−0.6−0.6−0.7−1.1−1.6
CPI (percent, end-of-period)−0.83.33.53.53.53.53.5
Current account balance−4.0−4.5−5.0−5.8−6.5−6.5−6.5
Central government fiscal balance−5.8−6.7−7.3−7.8−8.5−9.2−9.6
Structural primary balance−2.9−3.1−3.3−3.3−3.4−3.4−3.4
Structural overall balance−5.7−6.6−7.2−7.6−8.4−9.0−9.3
Central government debt42.445.950.154.459.164.069.1
Source: Fund staff estimates.

This scenario does not include any fiscal consolidation measures, while reflecting the underlying deterioration in the primary balance mainly driven by the constitutionally mandated increase in education expenditure.

Source: Fund staff estimates.

This scenario does not include any fiscal consolidation measures, while reflecting the underlying deterioration in the primary balance mainly driven by the constitutionally mandated increase in education expenditure.

Costa Rica: Financial Stability Map

Source: Fund staff estimates.

Real Effect of a 100bp Increase in Market Interest Rates

(Percent difference from control)

Sources: IMF staff calculation based on RES FSGM

Costa Rica: Risk Assessment Matrix
Source of RisksOverall Level of Concern (Scale—high, medium, or low)
Relative Likelihood2Impact if Realized
1. Slower growth in advanced and/or emerging economies.Low/Medium/High
  • Sharper-than-expected global slowdown in the short-term, triggered by significant China slowdown (Low in the short-term, Medium thereafter), or turning credit cycle in EMs (Medium).

  • Protracted period of slower growth in advanced (High) and emerging economies (Medium) would reduce growth in Costa Rica, in particular, if growth in the U.S. is negatively affected.

Medium/High
  • Impact of weaker emerging markets growth in the short-or long-term would be moderate, as long as U.S. growth was relatively unaffected (Medium).

  • Protracted period of weaker-than-expected growth in the U.S. would lower export demand and significantly weigh on activity and tax revenues. A shock could have a more severe impact than in 2008–09, as fiscal buffers have been drawn down (High).

2. Tighter or more volatile global financial conditions,Medium/High
  • Surges in global financial market volatility—triggered by geopolitical tensions, or revised market expectations on UMP exit/emerging market fundamentals—would reduce capital flows to Costa Rica, lead to an increase in cost of government financing, as well as potentially an increase in cost of funding for the private sector (Medium).

  • Surge in U.S dollar prompted by improving U.S. economic prospects versus the rest of the world (High).

High/Medium
  • While orderly UMP exit with stronger U.S. growth in tandem with higher U.S. rates would on net be beneficial for Costa Rica, a decline in capital flows to emerging markets under more disorderly scenarios could disrupt foreign credit lines and reduce banking sector liquidity. If markets reassess more negatively fiscal risks in Costa Rica, the cost of external government and private sector financing could increase sharply, negatively affecting public debt dynamics and growth (High).

  • If the NEER continues to appreciate in line with the dollar, competitiveness vis-à-vis de rest of the world would be negatively affected. Conversely, if the local currency depreciated, the private sector (with negative foreign exchange positions) and banks would be negatively affected (through higher credit risks on unhedged borrowers, despite banks’ long FX positions) (Medium).

3. Dislocation in capital and labor flows.Medium/High
  • Reduced financial services by global/regional banks, including loss of correspondent banking services (Medium).

  • Increased volatility due to security dislocations in the Middle East, Africa, and Europe, leading to sharp rise in oil price volatility (High).

Medium
  • Could curtail cross-border payments, trade finance, and remittances.

  • Volatile oil prices could result in adverse changes in terms of trade, increase inflation, and be a drag on growth.

4. Sustained decline in energy prices.High
  • The recent fall in oil prices could persist and deepen, with supply factors reversing only gradually.

Low
  • Persistently low oil prices would improve Costa Rica’s terms of trade and counterbalance inflationary pressures, potentially yielding a modest boost to growth prospects.

5. Worse-than-anticipated impact from persistently high fiscal deficits, or higher deficits than projected in the baseline scenario.High
  • Lack of fiscal consolidation prospects may hurt confidence.

  • Continued expenditure pressure and lack of tax reform could increase the fiscal deficit and public debt more than projected in the baseline scenario, which already envisages a rapid build-up of public debt.

High
  • Lower confidence or a higher government financing requirement could raise domestic interest rates further and reduce investment and growth.

  • Lower growth or a higher fiscal deficit would exacerbate fiscal sustainability risks, increasing the economy’s vulnerability and reducing the government’s ability to respond to adverse shocks.

  • Alternatively, even if confidence remained strong and financing were available, a looser fiscal stance could result in overheating.

6. Larger than anticipated impact from INTEL withdrawalLow
  • INTEL’s withdrawal and external competition weighs down on FDI and leads to an increase in unemployment and a reduction in productivity growth as the enterprises with a more sophisticated export base close. An unsustainable fiscal position may exacerbate these risks.

Low/Medium
  • Depending on the size of the reduction in FDI flows, there may be low to moderate impact on short-term growth, due to lower capital accumulation and productivity growth. The impact on potential growth, however, is likely to be limited since Costa Rica has strong institutions and a well-educated workforce.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path discussed in this report (which is the scenario most likely to materialize in the view of the staff). The RAM reflects staff’s views on the source of risks and overall level of concerns as of the time of discussions with the authorities. The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding this baseline.

In case the baseline does not materialize.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path discussed in this report (which is the scenario most likely to materialize in the view of the staff). The RAM reflects staff’s views on the source of risks and overall level of concerns as of the time of discussions with the authorities. The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding this baseline.

In case the baseline does not materialize.

Policy Discussions

14. Discussions focused on the policy mix appropriate for current cyclical conditions and mitigation of longer-term economic vulnerabilities. In particular, the latter centered on how to: (i) restore fiscal sustainability; (ii) improve the monetary policy framework; (iii) further enhance financial system supervision and regulation; and (iv) boost potential and inclusive growth.

A. Near-term Policy Mix

15. There was agreement that economic conditions call for a policy mix characterized by the start of fiscal tightening and continuation of a supportive monetary policy. The authorities appropriately intend to begin a gradual fiscal adjustment in 2016 (¶s16, 20). With output below potential and zero inflation, a continued accommodative monetary policy stance consistent with bringing inflation back to the target range will help offset the small contractionary impact of the tighter budgetary stance in the short term.

16. Indeed, the authorities are pursuing a sizable reduction in the deficit in 2016 as part of a gradual path toward fiscal sustainability. Although the 2016 budget6 envisaged the overall and primary deficits to edge up to 6½ and 3¼ percent of GDP respectively in a passive scenario, as a result mainly of constitutionally-mandated rises in education outlays and continued increases in interest payments, the government has submitted to Congress bills that could result in a correction of about ¾ percent of GDP relative to the budget. In staff’s view, this correction, as part of a policy mix that takes into account the cyclical position of the economy (¶20), would be suitable. Officials were also adamant that it will be critical to implement these measures as part of a comprehensive package that delivers the total budgetary consolidation measures of 3¾ percent of GDP needed to stabilize debt over the medium-term (¶s19 and 20).

17. The authorities concurred that the current expansionary monetary stance is broadly adequate. Headline inflation was negative and core inflation was below the lower bound of the 3-5 percent target range during most of 2015. Inflation is projected to return to the center of the new 2-4 percent target range by end-2016, while output remains below potential. Thus, the monetary stance—with 350 basis points in cumulative policy rate cuts to 1¾ percent, well below the estimated neutral rate of 5 percent—is appropriately expansionary (AN III). While transmission of the stimulus has been slow (¶9), domestic financial conditions are expected to gradually reflect the monetary easing, which, together with continued credit growth at a pace consistent with healthy financial deepening, should support the return of economic activity to its potential level over the medium term and of inflation within the target range in the near term (¶11). At the same time, it was noted that, if signs emerge whereby price pressures threaten to drive inflation above the mid-point of the new target range and jeopardize the still-very-recent anchoring of inflation expectations, taking into account the lags in monetary policy transmission, the central bank ought to start reversing the easing cycle. This consideration is reinforced by the prospective upward normalization of global interest rates, which could induce depreciation pressures.

Policy Rate and Bank Lending Rates

(In percent)

Sources: Nationalauthorities, and IMF Staff estimates

Neutral Interest Rate for Costa Rica. Latest Estimates
Expected Inflation Dic-20163.00
Actual Monetary Policy Rate1.75
Method 1/Neutral Real Interest RateNeutral NominalNominal Monetary
(NRIR)Interest Rate (NNIR)Policy GAP (bps) 2/
Uncovered Interest Parity1.64.6283
Expected-Inflation Augmented Taylor Rule
2006–20152.45.4368
General Equilibrium Model
2006–20152.65.6381
Forward Looking Monetary Model
1994–20151.84.8301
QPM Model
1996–20151.44.4265
Average1.94.9320
Sources: National authorities and Fund staff estimates.Notes:

All units expressed as percent points unless otherwise stated.

(bps): Basis points

Sources: National authorities and Fund staff estimates.Notes:

All units expressed as percent points unless otherwise stated.

(bps): Basis points

B. Safeguarding Fiscal Sustainability

18. The authorities viewed current fiscal trends as unsustainable in the long term. Staff stressed that, without any policy action, the CG deficit would be above 9 percent of GDP and debt rise to almost 70 percent by 2021. Even in the baseline scenario, which incorporates a fiscal adjustment of 2¼ percent of GDP, the CG deficit would persist at about 5½ percent of GDP by 2021, owing to a mounting interest bill and constitutionally-mandated education spending. Correspondingly, CG debt would grow to 55 percent of GDP by 2021 (from 42½ percent of GDP at end-2015), further raising vulnerabilities and potentially eroding the underpinnings of macroeconomic stability.

19. The government confirmed that a fiscal adjustment of almost 4 percent of GDP is needed to stabilize the public debt ratio. In staff’s estimates, budget retrenchment measures amounting to 3¾ percent of GDP over the medium-term would suffice to steady the share of public debt to GDP below levels which tend to weaken macro stability in emerging markets, while allowing for some desirable increases in growth-friendly capital spending (Annex III). The authorities agreed and are prepared to implement a fiscal consolidation package expected to gradually close this fiscal sustainability gap (¶21).

20. To pace consolidation, the authorities aptly intend to maintain a balance between lowering the sustainability gap and limiting any adverse impact on growth. The front-loaded fiscal consolidation appropriately planned by the government, with somewhat less than two-thirds of the total adjustment in 2016–17 and smaller corrections in subsequent years, would have only moderate output cost over the forecast period (¶12 and AN VI). Staff underscored that further postponing fiscal retrenchment would be costly, since, the longer the delay, the larger will be the improvement in the primary balance required to stabilize the public debt ratio. The authorities had the same concern. They asked staff to explain publicly that failing to deliver on the fiscal consolidation plan would increase the risk of an abrupt shift in investor sentiment and of acute financial market tensions, thus forcing a disorderly adjustment.

Costa Rica. Fiscal Consolidation Path(Percent of GDP)
201620172018201920202021Total
Total Adjustment0.81.61.00.10.10.13.8
Baseline0.81.10.42.3
Revenue0.41.00.31.7
Expenditure0.40.10.00.6
Additional Adjustment0.60.70.10.10.11.5
Revenue0.30.50.8
Expenditure0.20.20.10.10.10.7
Source: Fund staff estimates.
Source: Fund staff estimates.

21. The authorities’ fiscal adjustment plans adequately focus on raising revenues, with a sizable contribution from expenditures, but full implementation is critical. The measures in the authorities’ plans broadly follow staff advice, including recommendations provided in past technical assistance by the Fund and other multilaterals.

  • The government’s strategy envisions about 2½ percent of GDP in higher taxes, consistent with staff’s advice that about two-thirds of the adjustment should consist of increases in receipts, given Costa Rica’s low revenue effort compared to other upper-middle-income countries. VAT and income tax reforms would boost collections by slightly more than 2 percent of GDP over the medium-term, and other provisions—reduced exemptions, further amendments to the corporate income tax and anti-tax evasion measures—would generate almost ½ percent of GDP. The VAT reform envisages broadening the base to include services and a gradual increase in the rate from 13 to 15 percent, starting in 2017, as well as separate increases of taxes on sales of vehicles and real estate. The bill also foresees a radical narrowing of the basic goods basket, conditional on the establishment of a transfers system that would make the VAT reform broadly revenue-neutral for lower-income households. The income tax reform introduces additional marginal rates of 20 and 25 percent on higher-income brackets, unifies the rate on capital income at 15 percent, and subjects capital gains to tax.

  • Furthermore, the authorities have already identified legislative changes—including to curtail growth of pensions paid out of the budget and transfers to decentralized entities—and administrative measures that would yield the 1¼ percent of GDP of cuts in current expenditures also required to fully close the sustainability gap.

  • The authorities share staff’s view that only the full adjustment of 3¾ percent of GDP needed to stabilize the public-debt-to-GDP ratio would be adequate from a macro-economic perspective. Indeed, a partial fiscal adjustment as assumed in the baseline scenario—with tax reform proposals currently in Congress watered down and insufficient efforts to contain spending—would result in continued large fiscal deficits driven mainly by a mounting interest bill, and significant additional debt accumulation subject to important downside risks under less favorable macroeconomic conditions (¶11 and Annex III). This would further raise vulnerabilities and potentially erode the underpinnings of macroeconomic stability.

  • The alternative full adjustment scenario assumes Congressional approval of all submitted measures, yielding 2¾ percent of GDP. Moreover, it includes administratively-determined spending cuts that would contain the growth of current spending—mostly transfers and public sector wages—to keep it throughout the medium term below the expansion of nominal GDP.

Tax Revenue, 2014

(Percent of GDP)

Source: WEO and Fund staff calculations.

Costa Rica. Central Government. Fiscal Consolidation Measures(in percent of GDP)
Authorities’ plansBaseline Scenario 2/ (I)Adjustment Scenario 3/
TotalSubmitted to Congress, Staff Assessment 1/Additional Measures (II)Total adjustment (I + II)
Total adjustment4.02.92.31.53.8
Revenue2.72.51.70.82.5
Anti-tax evasion0.50.20.20.2
VAT1.31.30.50.81.3
Income tax0.60.60.60.6
Corporate income tax0.20.20.20.2
Vehicles and real estate tax0.20.20.20.2
Expenditure1.30.40.60.71.3
Transfers0.40.40.40.4
Wages 4/0.60.60.6
Miscellaneous cuts in 2016 budget0.20.20.2
Goods and services0.10.10.1

On the revenue side, includes staff’s assessment of the expected yield from revenue measures submitted to Congress. On the expenditure side, includes measures already submitted to Congress.

In addition to the lower yield assumed from anti-tax evasion meaures, the difference with the authorities’ plans is that it incorporates only measures that are deemed to have a higher probability of approval. The assumption in the baseline is that the proposed VAT tax rate increases will not be approved by Congress.

Reflects total adjustment needed to close the sustainability gap.

Includes measures to contain nominal growth of public wages, so that their share in GDP is gradually reduced. Also includes freeze in hiring outside education, and cuts to public compensation bonus schemes.

On the revenue side, includes staff’s assessment of the expected yield from revenue measures submitted to Congress. On the expenditure side, includes measures already submitted to Congress.

In addition to the lower yield assumed from anti-tax evasion meaures, the difference with the authorities’ plans is that it incorporates only measures that are deemed to have a higher probability of approval. The assumption in the baseline is that the proposed VAT tax rate increases will not be approved by Congress.

Reflects total adjustment needed to close the sustainability gap.

Includes measures to contain nominal growth of public wages, so that their share in GDP is gradually reduced. Also includes freeze in hiring outside education, and cuts to public compensation bonus schemes.

22. The government is considering steps to ensure durable commitment to contain expenditures, thus shoring up parliamentary support for fiscal consolidation. The executive power has a minority representation in Congress; hence approval of most budget consolidation measures requires the cooperation of opposition parties. Notwithstanding the broad consensus across the political and societal spectrum that fiscal retrenchment is needed, some opposition parties and influential lobbies have called for greater emphasis on lowering outlays. In this regard, bills currently under discussion to reform public employment conditions—thus preventing excessive automatic increases in current outlays—and a recently presented fiscal rule proposal—aimed at the preservation of government debt sustainability, broadly in line with staff advice though still requiring greater specification of its key elements—are welcome (AN VI). An agreement is likely to require simultaneous advances on all aspects of the consolidation package. Despite promising moves toward a compromise, the process could still be derailed.

23. The authorities agree that the pension system’s financial position also has to be strengthened in the long run. The pension plan run by the Social Security agency (CCSS) and the special regime for the judiciary are actuarially imbalanced. They are projected to turn a cash deficit over the long term due to system maturation and population aging. Preliminary projections suggest that an additional adjustment equivalent to about 1½ percent of GDP would be required at the general government level to ensure actuarial equilibrium of the CCSS for the next 50 years (AN VI). A study commissioned by the CCSS and the Superintendence of Pensions to be released in 2016 will determine the size the imbalance more precisely. The authorities have nevertheless already taken some measures, including the elimination of the early retirement option, and are considering increasing minimum contributions and gradually raising contribution rates over the medium-term above the scheduled increases already stipulated in 2005. Several legislative proposals currently in Congress also contemplate parametric adjustments to the special regime for the judiciary.

C. Improving the Monetary and Exchange Rate Policy Framework

24. Staff commended the authorities for their achievements in lowering inflation and endorsed their decision to further lower the target range. The central bank’s monetary policy has succeeded in preventing any durable deviations from the target range since 2009 and anchoring inflation expectations to the center of the 3-5 percent target range introduced in 2014. Based on this, the staff supported the central bank’s decision to take advantage of the recent sharp decline in inflation to revise the target range to 2-4 percent, in line with average inflation of trading partners. At the same time, staff emphasized, this move should be accompanied by fiscal consolidation to prevent the risk that an excessively tight monetary policy might be needed to contain inflation within the target range.

25. The authorities have made steady progress toward full-fledged inflation targeting, but additional steps would be useful.

  • The mission underlined that removal in early 2015 of the legal constraint to exchange rate flexibility posed by the XR band is a milestone toward establishing inflation as the undisputed anchor of monetary policy and lowering XR pass-through to inflation. It also acknowledged that the authorities’ preference for maintaining a significant role for active XR management, with an FX intervention rule aimed both at averting excessive volatility and at countering unwarranted deviations from medium-term fundamentals, is understandable, in light of the large financial dollarization.

  • However, staff advised that a gradual, contained increase in the flexibility of the exchange rate, in line with the stated policies of the central bank, would be important to further strengthen the credibility of the inflation-targeting framework, as well as to enhance the role of the exchange rate as a shock absorber and make market participants more cognizant of two-way risks in exchange markets, promoting the development and use of hedging facilities and the reduction of foreign currency mismatches, while more generally discouraging dollarization. The latter should also be pursued with the tightening of macro-prudential norms (¶28). Moreover, the mission questioned whether the lack of transparency of the triggers for the FX-intervention-rule aimed at curbing volatility might not, under circumstances less favorable than those presently prevailing (¶4), undermine confidence in the full subordination of XR management objectives to the inflation target. The central bank agreed in principle, but emphasized that allowing more XR flexibility and more transparency about the intervention policy should proceed in parallel with the transfer of all FX transactions to the open market to make the XR less prone to speculative moves. Staff saw merit in deepening the FX market, thereby facilitating higher XR flexibility.

  • Fostering growth of the underdeveloped secondary market for government securities, including through use of standardized simple instruments with conventional maturities, was also considered desirable to reinforce the effectiveness of monetary policy and enhance resilience to external financial shocks.

D. Financial Stability

26. The authorities acknowledge that currency mismatches in the private sector pose the key risk to financial stability. Staff noted that Costa Rica’s current level of credit and broader financial development is well below the threshold beyond which risks to stability outweigh the benefits from the positive impact on growth (AN IV). In particular, the current pace of overall credit expansion, not high by historical standards, seems consistent with continued healthy financial deepening. Moreover, a top-down stress test conducted by staff depicts a sound banking sector that could absorb a range of sizable shocks (AN II). However, large dollarization of bank loans was jointly identified as a serious and intensifying concern. Indeed, notwithstanding the overall long FX position of the banking system, a large depreciation of the colón may impact asset quality, given unhedged FX liabilities in large segments of the household and corporate sectors. In particular, staff pointed out that, according to the stress tests, the deterioration of bank capitalization, and related contingent liabilities for the sovereign, could be substantial (AN II). As for the macro impact, general equilibrium model simulations suggest that loan impairment and implied lower credit growth from, say, a twenty percent depreciation could reduce GDP growth by about 1½ percent over the medium-term (AN I).

Effect on Real GDP of Adverse Shocks on FX and NPL

(Percent difference from baseline)

Sources: IMF staff calculation based on RES FSGM

Note: NPL= Non Performing Loans; MRP= Market Risk Premium

27. High net foreign liabilities of banks, growing household leverage, and sovereign exposures represent other vulnerabilities of the financial sector. After a period of large bank borrowing abroad incurred to fund the rapid growth of FX credit to residents, Costa Rica is among the countries in the region with highest reliance on foreign bank funding, raising concerns about rollover risks. Indeed, staff analysis, based on network model simulations of spillovers from asset quality and capital shocks in international banks, suggests that reduced foreign bank funding could lead to a significant reduction in credit in Costa Rica (Panel 5 and AN II). While the increase in private sector debt has been limited compared to other emerging markets,7 in Costa Rica it has been mainly concentrated in the household sector, and officials are aware that rising household leverage, not least via credit by non-bank commercial entities, could also endanger asset quality. Finally, it was observed that, though starting from the low levels prevailing before the global crisis, continuing brisk accumulation of holdings of government debt by banks, boosted by the large fiscal deficits, is an additional hazard, particularly in an environment where, over the medium term, interest rates are likely to increase. Although staff recognized that, based on its analysis, banks could currently sustain losses from a significant spike in interest rates on domestic government bonds without capital falling below regulatory requirements (AN II), it also expressed concern that risks from mark-to-market losses on bank exposures to the sovereign will mount without adequate fiscal consolidation.

Bank Credit to the Private Sector

(in percent of GDP)

Source: National authorities and IMF staff estimates.

28. Supervisors recognized these risks and are taking positive steps to gradually reduce them. Staff welcomed the recent increase in capital risk-weightings on FX loans to unhedged borrowers and the extension of reserve requirements to medium- and long-term foreign bank borrowing (in addition to the existing requirement on short-term foreign borrowing). Officials explained that additional measures to further reduce vulnerabilities are currently under consideration. These include: (i) stricter provisioning on FX loans to unhedged borrowers and household debt with income-to-debt service ratios above 30 percent; (ii) counter-cyclical provisioning; and (iii) higher risk-weightings for household mortgages with high loan-to-value and income-to-debt service ratios. The mission deemed that these steps were appropriate, but it was not possible yet to determine whether they would be sufficient to achieve substantial reductions in credit dollarization and rollover risks. Staff recommended that further tightening of provisioning on FX bank lending and of reserve requirements on FX bank borrowing (the latter requiring Congressional action) should be contemplated, if there is no evidence of a reduction in banks’ FX exposures within a reasonable time frame. Additionally, the coverage of the credit bureau should be extended to loans to households granted by non-bank entities to better assess household leverage and preserve asset quality.

29. Staff urged speedier implementation of the pending 2008 FSAP recommendations. Key points (Annex I) include empowering the Superintendence of Financial Institutions to conduct consolidated supervision, providing legal protection to bank supervisors in line with international best practice, strengthening bank resolution procedures, and broadening the supervisory perimeter to non-bank financial institutions, all of which require new legislation. The authorities remarked that advances remain slow due to the crowded legislative agenda, but also stressed that introduction of further legal protection for bank supervisors faces strong opposition and is constitutionally controversial. Staff commended the progress made towards full implementation of risk-based supervision, although efforts to bring it up to best standard should be stepped up. The FSAP update tentatively planned for 2017 will allow for a more thorough assessment of the financial system and determine the need for additional measures.

30. Officials reiterated their support for gradual adoption of Basel III standards. Staff concurred that it would further improve resilience of the financial system and thus welcomed the recent enactment of the Basel III Liquidity Coverage Ratio. The regulatory and risk management frameworks would also greatly benefit from introducing Basel III definitions of capital, a capital conservation buffer, and a leverage ratio. Staff analysis shows that this could be accomplished without significant detrimental effects on growth.

31. It was agreed that further improvements in the effective supervision of cross-border financial operations are critical for stability. Such a requirement has become more urgent because financial linkages within the region have been growing, though they are not yet fully understood, owing in part to data limitations but also to legal restrictions on information sharing. Enhancing transnational monitoring is especially important for Costa Rica, since conglomerate BCT operates in Panama and regional integration plays an important role in the transmission of financial shocks (AN I). In this respect, staff welcomed Costa Rica’s participation in the system of multilateral MoUs and in the Central American Council of Banking Supervisors. In addition, strengthening the AML/CFT supervision of cross-border financial operations and implementing the recommendations of the GAFILAT mutual evaluation report would assist in safeguarding the financial sector against illicit financial flows, notably to and from higher-risk jurisdictions.8 Swift adoption at the national level of the relevant recommendations in the WHD Cluster Surveillance Report on Financial Integration in CAPDR (Annex II) and strengthening of the national institutional framework in support of the medium-term Regional Macroprudential Policies Project for CAPDR would also help identify likely spillovers and assess joint risks.

Costa Rica. Financial System Assessment Program (FSAP) Main Pending Recommendations (2008)
Prudential Supervision and Regulation
• Amend the legal framework in order to provide protection for supervisors while performing their responsibilities in good faith.
• Introduce pertinent laws for the Superintendency of Banks (SUGEF) to be able to supervise banking groups (including offshore structures) on a consolidated basis. Upon the approval of such laws the SUGEF should issue without delay operational regulations to ensure its rapid implementation by the banking system.
• Apply higher risk weight ratios to unhedged borrowers for capital adequacy purposes.
• Modify the funding arrangements for supervision, in line with international best practices.
Crisis Management and Bank Crisis Resolution Framework
• Amend article 155 of the Central Bank law in order to grant the SUGEF an appropriate range of supervisory tools to require a bank to take prompt remedial action and to impose penalties in accordance with the gravity of a situation.
• Amend the rating system for prompt corrective actions, to include new directives that allow the SUGEF to take an appropriate range of remedial actions and supervisory decisions.
• Improve the early warning system, to allow the adoption of remedial actions in a timely manner.
• Eliminate the emergency loan window and improve the design and operational arrangements of the ordinary rediscount window, including by establishing prudential limits in terms of regulatory capital.
• Establish a deposit insurance scheme, in line with international best practices.
• Amend the bank resolution legal framework to include purchase and assumption type techniques.
• Enable voluntary, extra-judicial corporate restructuring agreements.
Note: See Annex I for details on the status of implementation.
Note: See Annex I for details on the status of implementation.
Costa Rica. Summary of Stress Test Results
All BanksState OwnedDomestic PrivateForeign
Summary of Results
Solvency
Pre-shock CAR17.018.012.215.9
Impact of (percentage points of the original RWA)
Increase in NPLs 1/−1.7−1.7−1.6−1.8
Increase in interest rates 2/−0.1−0.3−0.50.3
Exchange rate depreciation 3/−2.2−2.2−2.4−2.2
Post-shock CAR (percent of post-shock RWA)13.113.97.812.2
Change in CAR (all fundamental shocks)−4.0−4.1−4.4−3.7
Impact of interbank contagion
Post-contagion CAR13.113.97.812.2
Post-contagion CAR if profits used for defense13.514.58.112.6
Liquidity 4/
Liquid assets/total assets
Pre-shock22.622.319.923.4
Post-shock (after 5 days)4.02.44.87.1
Liquid assets/short-term liabilities0.00.00.00.0
Pre-shock69.963.580.784.2
Post-shock (after 5 days)36.316.7106.9117.1
Source: SUGEF; and IMF staff estimates.

Assumes an increase in NPLs of 8 percent of performing loans; and a 25 percent provisioning rate. The sectoral shock to NLP assumes that 6 and 10 percent of the loan portfolio to the construction and trade sectors respectively become non-performing.

Assumes a 3.5 percentage points nominal interest rate increase.

Assumes a 14 percent depreciation of the FX rate, leading to 6 percent of FX loans becoming non-performing, and a 50 percent provisioning rate.

Assumes a 10 and 8 percent per day withdrawal of demand deposits in domestic and foreign currency respectively; and a 5 and 3 percent per day withdrawal of time deposits in domestic and foreign currency respectively.

Source: SUGEF; and IMF staff estimates.

Assumes an increase in NPLs of 8 percent of performing loans; and a 25 percent provisioning rate. The sectoral shock to NLP assumes that 6 and 10 percent of the loan portfolio to the construction and trade sectors respectively become non-performing.

Assumes a 3.5 percentage points nominal interest rate increase.

Assumes a 14 percent depreciation of the FX rate, leading to 6 percent of FX loans becoming non-performing, and a 50 percent provisioning rate.

Assumes a 10 and 8 percent per day withdrawal of demand deposits in domestic and foreign currency respectively; and a 5 and 3 percent per day withdrawal of time deposits in domestic and foreign currency respectively.

Figure 1.Costa Rica: Stress Test Results

Source: SUGEF, and IMF staff estimates.

Note: The Credit Risk Shock assumes an increase in NPLs of 8 percent of performing loans; and a 25 percent provisioning rate. The Interest Rate Shock assumes a 3.5 percentage points nominal interest rate increase. The FX Shock assumes a 14 percent depreciation of the FX rate, leading to 6 percent of FX loans becoming NPL, and a 50 percent provisioning rate. The Liquidity Shock assumes a 10 and 8 percent per day withdrawal of demand deposits in domestic and foreign currency respectively; and a 5 and 3 percent per day withdrawal of time deposits in domestic and foreign currency respectively.

E. Structural Reforms

32. Further structural reforms are needed to buttress Costa Rica’s competitiveness and promote inclusive growth. While Costa Rica ranks favorably in many business indicators and has been a regional leader in attracting foreign direct investment, further steps are needed to maintain the country’s competitive edge (Box 1). Staff argued that a better separation of electricity generation from the natural monopoly element associated with electricity transmission and distribution would allow private generators to compete more effectively with the state-owned enterprise ICE, thereby increasing efficiency. Besides, revised price-setting procedures to enhance cost discipline could help bring down electricity tariffs, especially for the industrial sector. The authorities observed that the private sector already participates in electricity generation and that overall electricity provision coverage and reliability in Costa Rica are high in the region. With regards to human capital, officials deemed that there were significant margins to improve the efficiency of public social and education spending, which would help protect vulnerable groups and lift outcomes without jeopardizing the budget. Expanded child-care provision and early childhood education as well as ameliorating infrastructure, including for IT, would facilitate increased female labor force participation (AN IX).

Real Effect of Halving Collateral Requirements

(Percent difference from baseline)

Sources: IMF staff calculation based on RES FSGM

Contribution to Female Labor Force Participation in CRI and LA5

(Difference)

Sources: ENAHO, 2012.

Real Effect of Reducing Interest Rate Spreads

(Percent difference from baseline)

Sources: IMF staff calculation based on RES FSGM

Note: The reduction in interest rate spreads is modeled as a 100bp decrese in market risk premiums

LAC and EMs: Enterprise Use of Financial Services

(Percent)

More generally, discussions underscored that addressing infrastructure bottlenecks, especially in the transportation sector—as the fiscal adjustment creates space for higher public investment (¶19)—and streamlining business regulations, not least to facilitate entry of new firms, would also stimulate competiveness and help accelerate potential growth.

33. Staff analysis indicates that the financial sector remains underdeveloped, especially outside the banking area, relative to the country’s level of income and other determinants (¶26 and AN IV). Also, while Costa Rica ranks high for inclusion of households, that of enterprises is low relative to the country’s fundamentals (AN V). It would be important to take measures to foster capital market development including through more market-friendly debt management and issuance strategies that promote larger secondary markets for government securities (¶25), as well as through better protection of investor rights and development of a larger institutional investor base. Stepping up competition among banks, refining loan-provisioning rules to avoid high collateral requirements being used as a substitute for proper credit-risk analysis, and further ameliorating the judicial enforcement of secured and unsecured claims would also help reduce financial constraints and support financial deepening. The authorities agreed that these actions should permanently lower interest rate spreads and borrowing costs, with positive effects on credit, investment and growth.

Staff Appraisal

34. Macro prospects are generally benign, though downside risks, mainly from the weak fiscal position, prevail. Costa Rica’s economy has been expanding below trend for the past three years. Despite a growth uptick in 2015, unemployment remained high and inflation sharply declined, under the combined effect of the widening output gap and the drop in oil prices. Nonetheless, the currency has been stable and reserve accumulation resumed strongly in 2015, as the current account deficit narrowed and foreign direct investment inflows remained strong. Growth is expected to pick up again in 2016, with inflation moving to the middle of the new target range by end-year. Output is anticipated to return to potential over the medium term. However, high budget imbalances cloud the horizon. The real effective exchange rate continues broadly in line with economic fundamentals.

35. Persistence of large fiscal deficits and a growing public debt, as well as the high credit dollarization, have increased vulnerability to financial shocks. In the absence of policy action, public debt is unsustainable in the long term and could reach close to 70 percent of GDP by 2021, with attendant funding and rollover concerns. Substantial currency depreciation would likely trigger an increase in non-performing loans given banks’ sizable foreign currency lending to non-hedged private borrowers. As a small open economy, which relies on agricultural products and tourism for a third of its exports and imports all its oil, Costa Rica is also exposed to external trade shocks.

36. Current economic conditions call for immediate fiscal tightening and the continuation of an accommodative monetary policy. The authorities’ intention to start gradually reducing the fiscal deficit from this year onward is timely. The ongoing accommodative monetary policy, warranted by the low inflation and negative output gap, would help offsetting the short-term contractionary effects of the fiscal adjustment.

37. A sizable fiscal correction is the key priority and there are still margins to implement it at a measured pace. A total budgetary adjustment of 3¾ percent of GDP over the medium-term is required to stabilize the public debt ratio at a safe level. This consolidation effort is consistent with the plans announced by the government to increase revenues by about 2½ percent of GDP and decrease expenditures by around 1¼ percent of GDP. To minimize the negative impact on output and since financing is still available, the correction should be phased gradually over 2016-2020, though with a significant front-loading to lend credibility to the fiscal adjustment package.

38. Budget consolidation should rely mainly on tax increases, given a comparatively low revenue effort, but expenditure containment is a necessary complement. It is advisable to bring Costa Rica’s tax collection closer to that of other upper-middle income countries, while increasing the progressivity of the tax system, as in the government’s plan. Indeed, the announced tax measures aptly include a broadening of the base and a rate increase for the VAT, the introduction of two new brackets in the personal income tax for high earners, the reduction of tax exemptions, and a strengthening of sanctions against evasion. A refund system would compensate lower-income households for the VAT hike. A reduction in the growth of current expenditures below nominal GDP growth, in particular of public sector wages and transfers, is also necessary to fully close the fiscal sustainability gap. Current legislative proposals for public employment reform to prevent excessive automatic wage increases and for a fiscal rule to ensure public debt sustainability are useful tools to buttress longer-term fiscal discipline.

39. The authorities have appropriately strengthened the inflation-targeting framework, but greater XR flexibility is desirable. The central bank has managed to lower inflation and to anchor inflation expectations to the center of the 3-5 percent target range introduced in 2014, thus creating the conditions for the further downward revision of the target range in early 2016. The XR band was successfully removed in early 2015, thereby confirming inflation as the key objective of monetary policy, while maintaining XR stability, thanks partly to recurring FX interventions and a favorable external environment. However, a gradual increase in XR flexibility, which could be facilitated by a concurrent deepening of the FX market, would enhance the XR’s role as a shock-absorber and encourage awareness by private agents of two-way risks in exchange markets. An improvement in the central bank’s communication about FX interventions is also warranted.

40. Regulatory upgrades should primarily aim at reducing financial dollarization, but it is important also to strengthen cross-border supervision and creditworthiness scrutiny. FX lending, funded by foreign borrowing, is growing faster than lending in colones, despite the recent tightening of reserve requirements on bank foreign borrowing and increase in capital risk weights for foreign currency loans to un-hedged borrowers. Although staff analysis suggests that associated risks are currently manageable even under extreme stress scenarios, further strengthening of prudential measures may be necessary should this trend continue. The implementation of pending 2008 FSAP recommendations and the gradual adoption of Basel III standards, as well as improvements in cross-country supervision, should reinforce the existing regulatory and supervisory framework. The extension of the credit bureau’s coverage would facilitate credit risk monitoring and thus also support financial deepening. In addition, removing competition distortions between public and private banks would help lower interest rate spreads and improve credit supply.

41. Boosting Costa Rica’s growth potential and competitiveness requires energy sector reform, infrastructure upgrades, and education reform. Greater private sector participation in the energy sector along with a review of tariffs would allow for a reduction in the cost of electricity for firms. An additional investment effort is needed to address infrastructure bottlenecks, in particular in the transportation sector. Sizable government education expenditures, already close to the constitutional mandate of 8 percent of GDP, should put more emphasis on early childhood and the secondary level with the goal of reducing drop-outs in secondary grades. More generally, gains in efficiency of education and social spending would especially benefit the most vulnerable segments of the population and foster more inclusive growth.

42. It is recommended that Costa Rica remain on the standard 12-month consultation cycle.

Box 1.Costa Rica: External Stability Assessment

The real effective exchange rate (REER) continues to be broadly in line with fundamentals. Staff has used various approaches to assess the appropriateness of the external balance and real exchange rate. These include descriptive quantitative indicators, regression-based methods to estimate the distance of the current account (CA) balance and the REER from the values determined by their fundamentals and desirable policy settings, as well as stability conditions for net foreign assets.

The REER has been stable in 2015 and early 2016, at a level about 6 percent higher than at the beginning of 2014. In the first half of 2014, nominal depreciation outpaced a growing inflation differential with the main trading partner (USA), resulting in substantial REER depreciation that eliminated a third of the accumulated 30 percent REER appreciation since 2003. In the second half of 2014, however, the REER appreciated by 14 percent, reversing the depreciation occurred during the first half of the year. The REER adjusted for the Balassa-Samuelson effect shows that total REER appreciation since 2003 was driven by the labor productivity differential between Costa Rica and the U.S., and therefore reflects changes in fundamentals, rather than unsustainable developments.

At the same time, the CA deficit has declined and the non-Intel export market share has increased (see chart below). The CA deficit has improved reaching around 4 percent of GDP in 2015 on the back of low fuel prices and continued strong positive services balance. While the Intel exit in 2014 had a significant impact on Costa Rican exports (16 percent less cumulatively in 2014-15), it had a muted impact on the overall trade balance due to the small domestic value added of the company. At the same time, non-Intel exports have gained export market share in the world markets increasing by 3 percent relative to 2014.

The financing structure of the CA and somewhat low external liabilities mitigate risks. The CA is largely financed by FDI inflows. While the IIP is negative at almost 45 percent of GDP, FDI comprises almost 65 percent of total liabilities. The external debt profile presents no sustainability concerns, with the external debt-to-GDP ratio set to decline into the medium term and a low share of short-term debt. Net international reserves stood at 5.8 months of non-maquila imports of goods and services at end-2014 and are above the Fund’s composite reserve adequacy metric.

Real Exchange Rate Measures

Sources: INS; St. Louis Fed; national authorities; and Fund staff calculations.

Costa Rica’s Export Share in World Exports

IMF’s multilaterally consistent estimates suggest that Costa Rica’s REER is broadly in line with fundamentals and desirable policy settings both in the short term and relative to medium-term benchmarks.

  • The macro-balance approach in the External Balance Assessment (EBA) estimates the sustainable CA implied by existing fundamentals and desirable policies. It points to a current account norm deficit of 4.7 percent of GDP in 2015, which is about 0.8 percent of GDP larger than the actual cyclically-adjusted deficit of 3.9 percent of GDP in 2015, implying a REER undervaluation of 3.5 percent. Identified policy gaps in Costa Rica are negative and significant at -1.7 percent of GDP, suggesting further undervaluation if corrected. Health expenditures, which are significantly higher than the world average, as well as recommended fiscal adjustment, explain 70 and 30 percent of the policy gap respectively.

  • The macro-balance approach based on the CA panel regression (which relies on medium term fundamentals and assesses the medium-term current account) estimates REER overvaluation of 3.1 percent.

    • The external sustainability (ES) approach, on the other hand, finds a moderate overvaluation of 6.8 percent. However, taking into account the favorable financial structure of external liabilities of Costa Rica, by excluding FDI from the stock of total liabilities, would imply an undervaluation of a similar size.

Staff views the results based on the macro-balance approaches, which both assess the external sector to be neither over- or undervalued, as the most reliable. The simple average across the different methodologies supports this assessment as well. Staff concludes that Costa Rica’s REER is in line with fundamentals.

Costa Rica: Implied Undervaluation (“+” = Overvaluation)
Regression-based methodsCA normCA projected/ cyclically-adjustedREER gap (updated)REER gap (2014 AIV)REER gap (2012 AIV)
Macroeconomic Balance−3.2−3.91.9−0.87.9
External sustainability (ES)−2.4−4.56.813.28.5
ES (NFA exclud. FDI)−7.2−4.5−7.1−5.9NA
EBA
Macroeconomic Balance−4.7−3.9−2.1−4.78.5
Average−0.10.59.9
Sources: Fund staff estimates.
Sources: Fund staff estimates.

The recent withdrawal of Intel operations does not reflect deterioration in external competitiveness. First, the shut down operations had a very small value added. Competitiveness of Costa Rica, as a well-educated upper middle-income country, should be assessed against other middle-income countries that operate in a different market segment with a higher value added. Second, while the withdrawal had a sizable effect on total exports, non-Intel exports gained market share in 2014 and are expected to improve further in 2015. Third, Intel research operations remained in Costa Rica indicating stable demand for highly qualified labor in the country.

While regulatory quality and efficiency has improved, some sectors continue to weigh on overall competitiveness. Costa Rica gained 21 positions in the 2016 Doing Business Survey by the World Bank driven by improved access to credit, introduction of an electronic tax payment system, and easier access to electricity. According to the Global Competitiveness Index by the World Economic Forum, however, Costa Rica’s competitiveness has remained at the same level as last year. Unsatisfactory infrastructure, concerns over inefficient government spending, and insufficient investor protection continue to weigh on competitiveness.

Figure 2.Costa Rica: Recent Developments and Prospects, Real Sector

Sources: National authorities; Haver Analytics; and Fund staff calculations.

Figure 3.Costa Rica: Recent Developments, External Sector

Sources: WEO; national authorities; and Fund staff calculations.

1/ Increase implies appreciation.

2/ The REER based on ULC was calculated with data for 73 percent of the trading partners. Wages are for total employment in Costa Rica and manufacturing sector in trading partners

Figure 4.Costa Rica: Recent Developments and Prospects, Fiscal Sector

1/ Gross financing needs for LA-5 are based on data from latest Article IV reports, published in 2015.

Sources: National authorities; and Fund staff estimates.

Figure 5.Costa Rica: Recent Developments, Financial Sector

Sources: National authorities; and Fund staff estimates.

Figure 6.Costa Rica: Financial Sector Vulnerabilities

Sources: BIS; IFS; and Fund staff estimates.

Figure 7.Costa Rica: Competitiveness and Structural Reforms

Source: World Bank, Doing Buisness Report; World Economic Forum, The Global Competitiveness Report 2015; Latin American Energy Organization (OLADE); National Center for Education Statistics, PISA tests; and Fund staff calculations based on RES FSGM.

Table 1a.Costa Rica: Selected Social and Economic Indicators, Baseline Scenario

(Partial Fiscal Adjustment) 1/2/

Population (2014, millions)4.8Human Development Index Rank (2013)68 (out of 187)
Per capita GDP (2014, U.S. dollars)10,425Life expectancy (2013, years)80.0
Unemployment (2014, percent of labor force)9.7Literacy rate (2014, percent of people ages > 15)98.0
Poverty (2014, percent of population)22.0Ratio of girls to boys in primary and secondary
Income share held by highest 10 percent of households39.4education (2013, percent)103.0
Income share held by lowest 10 percent of households1.7Gini coefficient (2012)48.6
Sources: Central Bank of Costa Rica, Ministry of Finance, and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved tax administration.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

The consolidated public sector balance comprises the central government, decentralized government entities, public enterprises, and the central bank, but excludes the Instituto Costarricense de Electricidad (ICE).

The consolidated public debt nets out central government and central bank debt held by the Caja Costarricense del Seguro Social (social security agency) and other entities of the nonfinancial public sector.

Est.Proj.
201220132014201520162017
(Annual percentage change, unless otherwise indicated)
Output and Prices
Real GDP growth5.21.83.03.74.24.3
Output gap (percent of potential GDP)2.80.4−0.8−1.1−0.9−0.6
GDP deflator3.94.24.72.23.43.2
Consumer prices (end of period)4.63.75.1−0.83.03.0
Money and Credit
Monetary base16.910.210.49.29.19.0
Broad money10.77.715.46.68.68.3
Credit to private sector13.412.217.511.812.112.0
Monetary policy rate (percent; end of period)5.03.85.32.3
(In percent of GDP, unless otherwise indicated)
Savings and Investment
Gross domestic investment20.518.819.619.119.119.3
Gross domestic savings15.313.814.915.114.915.0
External Sector
Current account balance−5.2−5.0−4.7−4.0−4.2−4.3
Of which: Trade balance−11.6−11.3−10.5−10.2−10.2−10.4
Financial and capital account balance9.56.44.66.25.15.1
Of which: Foreign direct investment4.14.84.04.14.34.3
Change in net international reserves (increase -)−2,110−461113−622−500−500
Net international reserves (millions of U.S. dollars)6,8577,3317,2117,8348,3348,834
Public Finances
Central government primary balance−2.3−2.8−3.1−3.0−2.4−1.5
Central government overall balance−4.5−5.6−6.0−5.8−5.8−5.4
Central government debt34.336.039.342.445.047.3
Consolidated public sector overall balance 3/−4.5−5.4−5.6−6.0−6.2−5.7
Consolidated public sector debt 4/37.642.043.246.047.949.6
Of which: External public debt7.38.910.511.712.212.7
Memorandum Item:
GDP (US$ billions)46.549.649.652.956.960.8
Sources: Central Bank of Costa Rica, Ministry of Finance, and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved tax administration.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

The consolidated public sector balance comprises the central government, decentralized government entities, public enterprises, and the central bank, but excludes the Instituto Costarricense de Electricidad (ICE).

The consolidated public debt nets out central government and central bank debt held by the Caja Costarricense del Seguro Social (social security agency) and other entities of the nonfinancial public sector.

Sources: Central Bank of Costa Rica, Ministry of Finance, and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved tax administration.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

The consolidated public sector balance comprises the central government, decentralized government entities, public enterprises, and the central bank, but excludes the Instituto Costarricense de Electricidad (ICE).

The consolidated public debt nets out central government and central bank debt held by the Caja Costarricense del Seguro Social (social security agency) and other entities of the nonfinancial public sector.

Table 1b.Costa Rica: Selected Social and Economic Indicators, Full Fiscal Adjustment Scenario 1/2/
Population (2014, millions)4.8Human Development Index Rank (2013)68 (out of 187)
Per capita GDP (2014, U.S. dollars)10,425Life expectancy (2013, years)80.0
Unemployment (2014, percent of labor force)9.7Literacy rate (2014, percent of people ages > 15)98.0
Poverty (2014, percent of population)22.0Ratio of girls to boys in primary and secondary
Income share held by highest 10 percent of households39.4education (2013, percent)103.0
Income share held by lowest 10 percent of households1.7Gini coefficient (2012)48.6
Sources: Central Bank of Costa Rica, Ministry of Finance, and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario, as well as administratively-determined measures to contain growth in the wage bill, and increases in the VAT rate from 2017.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

The consolidated public sector balance comprises the central government, decentralized government entities, public enterprises, and the central bank, but excludes the Instituto Costarricense de Electricidad (ICE).

The consolidated public debt nets out central government and central bank debt held by the Caja Costarricense del Seguro Social (social security agency) and other entities of the nonfinancial public sector.

Est.Proj.
201220132014201520162017
(Annual percentage change, unless otherwise indicated)
Output and Prices
Real GDP growth5.21.83.03.74.24.2
Output gap (percent of potential GDP)2.80.4−0.8−1.1−0.9−0.7
GDP deflator3.94.24.72.23.63.1
Consumer prices (end of period)4.63.75.1−0.83.03.0
Money and Credit
Monetary base16.910.210.49.29.99.0
Broad money10.77.715.46.68.98.2
Credit to private sector13.412.217.511.812.412.9
Monetary policy rate (percent; end of period)5.03.85.32.3
(In percent of GDP, unless otherwise indicated)
Savings and Investment
Gross domestic investment20.518.819.619.119.119.3
Gross domestic savings15.313.814.915.114.815.1
External Sector
Current account balance−5.2−5.0−4.7−4.0−4.2−4.2
Of which: Trade balance−11.6−11.3−10.5−10.2−10.2−10.3
Financial and capital account balance9.56.44.66.25.15.0
Of which: Foreign direct investment4.14.84.04.14.34.3
Change in net international reserves (increase -)−2,110−461113−622−500−500
Net international reserves (millions of U.S. dollars)6,8577,3317,2117,8348,3348,834
Public Finances
Central government primary balance−2.3−2.8−3.1−3.0−2.4−0.9
Central government overall balance−4.5−5.6−6.0−5.8−5.7−4.4
Central government debt34.336.039.342.444.946.2
Consolidated public sector overall balance 3/−4.5−5.4−5.6−6.0−6.1−4.7
Consolidated public sector debt 4/37.642.043.246.047.748.4
Of which: External public debt7.38.910.511.712.212.7
Memorandum Item:
GDP (US$ billions)46.549.649.652.957.060.8
Sources: Central Bank of Costa Rica, Ministry of Finance, and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario, as well as administratively-determined measures to contain growth in the wage bill, and increases in the VAT rate from 2017.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

The consolidated public sector balance comprises the central government, decentralized government entities, public enterprises, and the central bank, but excludes the Instituto Costarricense de Electricidad (ICE).

The consolidated public debt nets out central government and central bank debt held by the Caja Costarricense del Seguro Social (social security agency) and other entities of the nonfinancial public sector.

Sources: Central Bank of Costa Rica, Ministry of Finance, and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario, as well as administratively-determined measures to contain growth in the wage bill, and increases in the VAT rate from 2017.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

The consolidated public sector balance comprises the central government, decentralized government entities, public enterprises, and the central bank, but excludes the Instituto Costarricense de Electricidad (ICE).

The consolidated public debt nets out central government and central bank debt held by the Caja Costarricense del Seguro Social (social security agency) and other entities of the nonfinancial public sector.

Table 2.Costa Rica: Balance of Payments, Baseline Scenario (Partial Fiscal Adjustment) 1/2/3/
Est.Projection
201020112012201320142015201620172018201920202021
(In millions of U.S. dollars)
Current Account−1,281−2,228−2,408−2,486−2,340−2,135−2,396−2,590−2,759−3,015−3,217−3,463
Trade balance−3,440−5,144−5,375−5,623−5,212−5,370−5,807−6,312−6,952−7,702−8,394−9,180
Export of goods (f.o.b.)9,51610,42611,45411,55411,1399,5349,95610,53311,11011,72512,34712,971
Import of goods (f.o.b.)12,95615,57016,82917,17816,35214,90415,76316,84518,06219,42720,74122,151
Services2,5373,1823,4364,0304,3024,6034,9565,4336,0306,6627,3068,004
Of which: Travel1,5751,7471,8842,2252,4912,6692,7792,9183,0823,2483,4083,574
Income−745−589−801−1,187−1,739−1,680−1,822−2,028−2,179−2,344−2,524−2,708
Current transfers366323333294310312277317341368394422
Financial and Capital Account1,9862,5794,4163,1882,2973,2822,8963,0902,7593,0153,2173,463
Public sector615681,2391,2431,048703724860768774532782
Private sector1,3712,5113,1781,9451,2492,5802,1722,2301,9912,2422,6862,681
Foreign direct investment1,4412,1211,9042,3871,9742,1772,4332,6162,8183,0393,2743,546
Other private sector flows−703911,274−441−725403−261−386−827−798−588−865
Errors and Omissions−144−218101−242−70−525000000
Change in International Reserves (increase -)−561−132−2,110−461113−622−500−5000000
(In percent of GDP)
Current Account−3.4−5.3−5.2−5.0−4.7−4.0−4.2−4.3−4.2−4.3−4.3−4.3
Trade balance−9.2−12.2−11.6−11.3−10.5−10.2−10.2−10.4−10.7−11.1−11.3−11.5
Export of goods (f.o.b.)25.624.624.623.322.518.017.517.317.116.816.616.2
Import of goods (f.o.b.)34.836.836.234.633.028.227.727.727.827.927.927.7
Of which: Oil and fuels3.54.84.74.44.22.41.82.02.12.12.02.0
Services6.87.57.48.18.78.78.78.99.39.69.810.0
Income−2.0−1.4−1.7−2.4−3.5−3.2−3.2−3.3−3.4−3.4−3.4−3.4
Current transfers1.00.80.70.60.60.60.50.50.50.50.50.5
Financial and Capital account5.36.19.56.44.66.25.15.14.24.34.34.3
Of which: Foreign direct investment3.95.04.14.84.04.14.34.34.34.44.44.4
Change in International Reserves (increase -)−1.5−0.3−4.5−0.90.2−1.2−0.9−0.80.00.00.00.0
Memorandum Items:
Non-oil current account (percent of GDP)0.1−0.5−0.5−0.6−0.5−1.7−2.4−2.3−2.2−2.2−2.3−2.3
Terms of trade (annual percentage change)−0.3−3.1−0.80.00.50.70.70.70.70.00.00.0
Net international reserves (millions of U.S. dollars)4,6274,7566,8577,3317,2117,8348,3348,8348,8348,8348,8348,834
−in months of non-maquila imports4.13.95.45.75.65.65.65.65.25.25.25.2
−in percent short-term debt 4/137.5116.4157.9186.7226.0245.0272.7281.3331.1528.6567.9637.4
External debt (percent of GDP) 5/25.726.631.935.638.838.436.534.932.630.428.326.2
Sources: Central Bank of Costa Rica; and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved tax administration.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new h istorical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under th e old standards.

BOP data are reported on a fifth Balance of Payments Manual edition (BPM5) basis, with some differences of presentation relative to the data on a sixth edition (BPM6) basis disseminated by the central bank.

Public and private sector external debt on remaining maturity. Includes trade credit.

Includes public and private sector debt.

Sources: Central Bank of Costa Rica; and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved tax administration.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new h istorical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under th e old standards.

BOP data are reported on a fifth Balance of Payments Manual edition (BPM5) basis, with some differences of presentation relative to the data on a sixth edition (BPM6) basis disseminated by the central bank.

Public and private sector external debt on remaining maturity. Includes trade credit.

Includes public and private sector debt.

Table 3a.Costa Rica: Central Government Balance, Baseline Scenario (Partial Adjustment) 1/2/
Est.Projection
201020112012201320142015201620172018201920202021
(In billions of colones)
Revenue2,5912,8693,1183,3803,6253,9944,4335,0915,6226,0856,5417,025
Tax revenue2,4922,7693,0083,2923,5223,8624,2904,9375,4565,9066,3486,817
Nontax revenue 3/10010011087103132143154166179193207
Expenditure3,6233,7624,1784,7655,2305,6436,1946,8747,5548,2018,8059,349
Current noninterest2,7232,9623,3163,6843,9904,3304,5594,8905,2835,7126,1406,599
Wages1,3491,5141,6471,8171,9692,1132,2742,4572,6602,8763,0913,322
Goods and services121136143158180194193208225243261281
Transfers1,2521,3131,5261,7081,8422,0232,0912,2252,3992,5932,7872,996
Interest 4/4524975306817757871,0271,3031,5111,6681,7821,802
Capital449304332400465526608681759821882948
Primary balance−580−396−529−704−830−862−733−480−421−448−481−523
Overall Balance−1,032−893−1,059−1,386−1,604−1,649−1,761−1,783−1,932−2,116−2,264−2,325
Total Financing1,0328931,0591,3861,6041,6491,7611,7831,9322,1162,2642,325
External (net)247−112356401490598412417372379247385
Domestic (net)7851,0057049841,1151,0511,3491,3661,5601,7372,0171,940
Central government debt5,5626,3828,0158,93210,48411,98413,73215,53217,49019,64021,77024,072
External1,1421,0271,3831,7632,3662,9443,3373,7564,1384,5324,6455,006
Domestic4,4205,3556,6327,1698,1189,04010,39511,77613,35215,10917,12619,065
(In percent of GDP)
Revenue13.213.413.313.613.614.114.515.515.915.915.915.9
Tax revenue12.712.912.913.313.213.714.115.115.415.415.415.4
Nontax revenue 3/0.50.50.50.40.40.50.50.50.50.50.50.5
Expenditure18.517.617.919.219.620.020.321.021.321.421.421.1
Current noninterest13.913.814.214.914.915.314.914.914.914.914.914.9
Wages6.97.17.07.37.47.57.57.57.57.57.57.5
Goods and services0.60.60.60.60.70.70.60.60.60.60.60.6
Transfers6.46.16.56.96.97.26.96.86.86.86.86.8
Interest 4/2.32.32.32.72.92.83.44.04.34.44.34.1
Capital2.31.41.41.61.71.92.02.12.12.12.12.1
Primary balance−3.0−1.9−2.3−2.8−3.1−3.0−2.4−1.5−1.2−1.2−1.2−1.2
Overall Balance−5.3−4.2−4.5−5.6−6.0−5.8−5.8−5.4−5.5−5.5−5.5−5.3
Total Financing5.34.24.55.66.05.85.85.45.55.55.55.3
External (net)1.3−0.51.51.61.82.11.41.31.01.00.60.9
Domestic (net)4.04.73.04.04.23.74.44.24.44.54.94.4
Central government debt28.429.834.336.039.342.445.047.349.451.352.954.4
External5.84.85.97.18.910.410.911.411.711.811.311.3
Domestic22.625.028.428.930.432.034.135.937.739.441.643.1
Memorandum items:
Non-interest expenditure growth (percent)
in nominal terms23.13.011.712.09.19.06.47.88.58.17.57.5
in real terms16.5−1.86.96.44.48.15.34.75.35.04.44.3
Nominal GDP19,58121,39223,37124,78126,70328,27930,49532,80435,43738,31241,18344,263
CPI Inflation (period average)5.74.94.55.24.50.81.13.03.03.03.03.0
Sources: Ministry of Finance and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved tax administration.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

Transfers to the Social development and Family Transfers Fund (FODESAF) are recorded in net terms.

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Sources: Ministry of Finance and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved tax administration.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

Transfers to the Social development and Family Transfers Fund (FODESAF) are recorded in net terms.

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Table 3b.Costa Rica: Central Government Balance, Full Fiscal Adjustment Scenario 1/2/
Est.Projection
201020112012201320142015201620172018201920202021
(In billions of colones)
Revenue2,5912,8693,1183,3803,6253,9944,4335,2025,9096,3966,8757,383
Tax revenue2,4922,7693,0083,2923,5223,8624,2905,0495,7436,2166,6827,176
Nontax revenue 3/10010011087103132143154166179193207
Expenditure3,6233,7624,1784,7655,2305,6436,1696,6497,2047,7788,2528,827
Current noninterest2,7232,9623,3163,6843,9904,3304,5594,8215,1425,5205,8936,289
Wages1,3491,5141,6471,8171,9692,1132,2742,4082,5542,7232,8853,057
Goods and services121136143158180194193188189205220237
Transfers1,2521,3131,5261,7081,8422,0232,0912,2252,3992,5932,7872,996
Interest 4/4524975306817757871,0031,1471,3031,4371,4761,589
Capital449304332400465526608681759821882948
Primary balance−580−396−529−704−830−862−733−30085499145
Overall Balance−1,032−893−1,059−1,386−1,604−1,649−1,736−1,447−1,295−1,383−1,377−1,444
Total Financing1,0328931,0591,3861,6041,6491,7361,4471,2951,3831,3771,444
External (net)247−112356401490598412417372379247385
Domestic (net)7851,0057049841,1151,0511,3241,0309231,0041,1301,059
Central government debt5,5626,3828,0158,93210,48411,98413,70715,17116,49217,90719,15020,570
External1,1421,0271,3831,7632,3662,9443,3373,7564,1384,5324,6455,006
Domestic4,4205,3556,6327,1698,1189,04010,37011,41512,35413,37514,50615,564
(In percent of GDP)
Revenue13.213.413.313.613.614.114.515.816.516.416.416.3
Tax revenue12.712.912.913.313.213.714.015.416.116.015.915.9
Nontax revenue 3/0.50.50.50.40.40.50.50.50.50.50.50.5
Expenditure18.517.617.919.219.620.020.220.320.120.019.719.5
Current noninterest13.913.814.214.914.915.314.914.714.414.214.113.9
Wages6.97.17.07.37.47.57.47.37.17.06.96.8
Goods and services0.60.60.60.60.70.70.60.60.50.50.50.5
Transfers6.46.16.56.96.97.26.86.86.76.76.66.6
Interest 4/2.32.32.32.72.92.83.33.53.63.73.53.5
Capital2.31.41.41.61.71.92.02.12.12.12.12.1
Primary balance−3.0−1.9−2.3−2.8−3.1−3.0−2.4−0.90.00.10.20.3
Overall Balance−5.3−4.2−4.5−5.6−6.0−5.8−5.7−4.4−3.6−3.6−3.3−3.2
Total Financing5.34.24.55.66.05.85.74.43.63.63.33.2
External (net)1.3−0.51.51.61.82.11.31.31.01.00.60.9
Domestic (net)4.04.73.04.04.23.74.33.12.62.62.72.3
Central government debt28.429.834.336.039.342.444.946.246.146.045.745.5
External5.84.85.97.18.910.410.911.411.611.711.111.1
Domestic22.625.028.428.930.432.033.934.834.534.434.634.5
Memorandum items:
Non-interest expenditure growth (percent)
in nominal terms23.13.011.712.09.19.06.46.57.37.56.86.8
in real terms16.5−1.86.96.44.48.15.33.44.14.33.73.7
Nominal GDP19,58121,39223,37124,78126,70328,27930,54932,83235,78038,89241,94145,177
CPI Inflation (period average)5.74.94.55.24.50.81.13.03.03.03.03.0
Sources: Ministry of Finance and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario, as well as administratively-determined measures to contain growth in the wage bill, and increases in the VAT rate from 2017.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

Transfers to the Social development and Family Transfers Fund (FODESAF) are recorded in net terms.

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Sources: Ministry of Finance and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario, as well as administratively-determined measures to contain growth in the wage bill, and increases in the VAT rate from 2017.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

Transfers to the Social development and Family Transfers Fund (FODESAF) are recorded in net terms.

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Table 4a.Costa Rica: Summary Operations of the Central Government, GFSM 2001 Classification. Baseline Scenario

(Partial Adjustment) 1/2/

Est.Projection
201020112012201320142015201620172018201920202021
(In billions of colones)
Revenue2,5912,8693,1183,3803,6253,9944,4335,0915,6226,0856,5417,025
Taxes2,4922,7693,0083,2923,5223,8624,2904,9375,4565,9066,3486,817
Other revenue 3/10010011087103132143154166179193207
Expenditure3,6233,7624,1784,7655,2305,6436,1946,8747,5548,2018,8059,349
Expense3,1743,4593,8464,3654,7655,1175,5866,1936,7947,3807,9228,401
Compensation of employees1,3491,5141,6471,8171,9692,1132,2742,4572,6602,8763,0913,322
Purchases of goods and services121136143158180194193208225243261281
Interest 4/4524975306817757871,0271,3031,5111,6681,7821,802
Of which: Adjustment for TUDES5048585079−13445158667484
Social benefits5065525946166617107668248909621,0341,112
Other expense 5/7477619321,0921,1811,3131,3261,4011,5081,6311,7531,884
Net acquisition of nonfinancial assets449304332400465526608681759821882948
Gross operating balance−583−589−728−985−1,140−1,124−1,153−1,102−1,172−1,295−1,381−1,376
Net lending/borrowing−1,032−893−1,059−1,386−1,604−1,649−1,761−1,783−1,932−2,116−2,264−2,325
Net financial transactions1,0328931,0591,3861,6041,6491,7611,7831,9322,1162,2642,325
(In percent of GDP)
Revenue13.213.413.313.613.614.114.515.515.915.915.915.9
Tax revenue12.712.912.913.313.213.714.115.115.415.415.415.4
Nontax revenue 3/0.50.50.50.40.40.50.50.50.50.50.50.5
Expenditure18.517.617.919.219.620.020.321.021.321.421.421.1
Expense16.216.216.517.617.818.118.318.919.219.319.219.0
Compensation of employees6.97.17.07.37.47.57.57.57.57.57.57.5
Purchases of goods and services0.60.60.60.60.70.70.60.60.60.60.60.6
Interest 4/2.32.32.32.72.92.83.44.04.34.44.34.1
Of which: Adjustment for TUDES0.30.20.20.20.30.00.10.20.20.20.20.2
Social benefits2.62.62.52.52.52.52.52.52.52.52.52.5
Other expense 5/3.83.64.04.44.44.64.34.34.34.34.34.3
Net acquisition of nonfinancial assets2.31.41.41.61.71.92.02.12.12.12.12.1
Gross operating balance−3.0−2.8−3.1−4.0−4.3−4.0−3.8−3.4−3.3−3.4−3.4−3.1
Net lending/borrowing−5.3−4.2−4.5−5.6−6.0−5.8−5.8−5.4−5.5−5.5−5.5−5.3
Net financial transactions5.34.24.55.66.05.85.85.45.55.55.55.3
Memorandum items:
Non-interest expenditure growth (percent)
in nominal terms23.13.011.712.09.19.06.47.88.58.17.57.5
in real terms16.5−1.86.96.44.48.15.34.75.35.04.44.3
Primary balance
in billions of colones−580−396−529−704−830−862−733−480−421−448−481−523
in percent of GDP−3.0−1.9−2.3−2.8−3.1−3.0−2.4−1.5−1.2−1.2−1.2−1.2
Cyclically-adjusted primary balance (percent of GDP)−3.1−2.0−2.6−2.9−3.0−2.9−2.3−1.4−1.1−1.2−1.2−1.2
Fiscal impulse (percent of GDP)1.9−1.00.60.30.1−0.1−0.6−0.9−0.20.00.00.0
Nominal GDP19,58121,39223,37124,78126,70328,27930,49532,80435,43738,31241,18344,263
CPI Inflation (period average)5.74.94.55.24.50.81.13.03.03.03.03.0
Sources: Ministry of Finance and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved anti-tax evasion.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

Transfers to the Social development and Family Transfers Fund (FODESAF) are recorded in net terms.

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Includes subsidies, transfers and other expense.

Sources: Ministry of Finance and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved anti-tax evasion.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

Transfers to the Social development and Family Transfers Fund (FODESAF) are recorded in net terms.

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Includes subsidies, transfers and other expense.

Table 4b.Costa Rica: Summary Operations of the Central Government, GFSM 2001 Classification. Full Fiscal Adjustment Scenario 1/2/
Est.Projection
201020112012201320142015201620172018201920202021
(In billions of colones)
Revenue2,5912,8693,1183,3803,6253,9944,4455,2105,9206,4326,9297,454
Taxes2,4922,7693,0083,2923,5223,8624,3015,0565,7536,2516,7337,244
Other revenue 3/10010011087103132143154166181195210
Expenditure3,6233,7624,1784,7655,2305,6436,1766,6407,2187,8308,3318,908
Expense3,1743,4593,8464,3654,7655,1175,5665,9586,4567,0027,4387,946
Compensation of employees1,3491,5141,6471,8171,9692,1132,2812,4132,5612,7452,9193,100
Purchases of goods and services121136143158180194194189190206223240
Interest 4/4524975306817757879921,1261,3011,4351,4761,568
Of which: Adjustment for TUDES5048585079−13445156616671
Social benefits5065525946166617107688268939701,0471,128
Other expense 5/7477619321,0921,1811,3131,3301,4041,5131,6441,7741,911
Net acquisition of nonfinancial assets449304332400465526610683761828893962
Gross operating balance−583−589−728−985−1,140−1,124−1,121−748−537−570−510−492
Net lending/borrowing−1,032−893−1,059−1,386−1,604−1,649−1,731−1,431−1,298−1,398−1,403−1,454
Net financial transactions1,0328931,0591,3861,6041,6491,7311,4311,2981,3981,4031,454
(In percent of GDP)
Revenue13.213.413.313.613.614.114.515.916.516.516.516.5
Tax revenue12.712.912.913.313.213.714.115.416.116.116.116.0
Nontax revenue 3/0.50.50.50.40.40.50.50.50.50.50.50.5
Expenditure18.517.617.919.219.620.020.220.220.220.119.919.7
Expense16.216.216.517.617.818.118.218.118.018.017.717.6
Compensation of employees6.97.17.07.37.47.57.57.47.27.17.06.9
Purchases of goods and services0.60.60.60.60.70.70.60.60.50.50.50.5
Interest 4/2.32.32.32.72.92.83.23.43.63.73.53.5
Of which: Adjustment for TUDES0.30.20.20.20.30.00.10.20.20.20.20.2
Social benefits2.62.62.52.52.52.52.52.52.52.52.52.5
Other expense 5/3.83.64.04.44.44.64.44.34.24.24.24.2
Net acquisition of nonfinancial assets2.31.41.41.61.71.92.02.12.12.12.12.1
Gross operating balance−3.0−2.8−3.1−4.0−4.3−4.0−3.7−2.3−1.5−1.5−1.2−1.1
Net lending/borrowing−5.3−4.2−4.5−5.6−6.0−5.8−5.7−4.4−3.6−3.6−3.3−3.2
Net financial transactions5.34.24.55.66.05.85.74.43.63.63.33.2
Memorandum items:
Non-interest expenditure growth (percent)
in nominal terms23.13.011.712.09.19.06.76.47.38.17.27.1
in real terms16.5−1.86.96.44.48.15.63.34.24.94.14.0
Primary balance
in billions of colones−580−396−529−704−830−862−739−30533773114
in percent of GDP−3.0−1.9−2.3−2.8−3.1−3.0−2.4−0.90.00.10.20.3
Cyclically-adjusted primary balance (percent of GDP)−3.1−2.0−2.6−2.9−3.0−2.9−2.3−0.80.10.10.20.2
Fiscal impulse (percent of GDP)1.9−1.00.60.30.1−0.1−0.6−1.5−0.90.0−0.1−0.1
Nominal GDP19,58121,39223,37124,78126,70328,27930,54932,83235,78038,89241,94145,177
CPI Inflation (period average)5.74.94.55.24.50.81.13.03.03.03.03.0
Sources: Ministry of Finance and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario, as well as administratively-determined measures to contain growth in the wage bill, and increases in the VAT rate from 2017.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

Transfers to the Social development and Family Transfers Fund (FODESAF) are recorded in net terms.

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Includes subsidies, transfers and other expense.

Sources: Ministry of Finance and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario, as well as administratively-determined measures to contain growth in the wage bill, and increases in the VAT rate from 2017.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

Transfers to the Social development and Family Transfers Fund (FODESAF) are recorded in net terms.

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Includes subsidies, transfers and other expense.

Table 5a.Costa Rica: Consolidated Public Sector Operations, Baseline Scenario (Partial Adjustment) 1/2/3/
Est.Projections
201020112012201320142015201620172018201920202021
(In billions of colones)
Nonfinancial public sector:
Revenue4,2584,7155,0365,6276,0216,5297,1067,9668,7289,44310,15010,904
Tax revenue2,5262,8073,0493,3423,5753,9174,3505,0015,5255,9816,4296,904
Nontax revenue185225182257259309273293317343368396
Social security contributions1,4121,5841,7431,8842,0552,2252,3992,5802,7883,0143,2403,482
Operating balance of public enterprises134996214413278849198106114123
Expenditure 4/5,2095,4825,9416,7707,3448,0018,7599,59310,45311,32612,15812,955
Current noninterest4,1384,5254,8845,4655,8996,4246,8777,3837,9778,6249,2719,964
Wages1,8852,0762,2282,4372,6202,7913,0053,2433,5093,7944,0784,383
Goods and services414482514554594643678729788852916984
Transfers1,8401,9662,1422,4742,6852,9903,1943,4113,6803,9794,2774,597
Interest4324785066607407951,0171,2741,4661,6091,7131,730
Of which: Adjustment for TUDES 5/2826322742−7242832364146
Capital6384805516447057838649351,0101,0921,1741,262
Primary balance−519−289−399−483−583−677−636−353−260−274−294−322
Overall Balance−951−767−905−1,143−1,323−1,472−1,653−1,627−1,725−1,883−2,007−2,052
Central government−1,032−893−1,059−1,386−1,604−1,649−1,761−1,783−1,932−2,116−2,264−2,325
Decentralized government entities50130193207259224150198248275298315
Public enterprises31−4−393424−42−42−42−42−42−42−42
Total Financing9517679051,1431,3231,4721,6531,6271,7251,8832,0072,052
External243−1283384055054794274353903972830
Domestic7088955687388189931,2261,1921,3361,4861,7242,052
Consolidated public sector:
Central Bank balance−88−126−144−195−186−219−231−255−280−305−330−355
Consolidated public sector balance−1,039−893−1,049−1,339−1,508−1,687−1,883−1,883−2,006−2,188−2,337−2,407
Consolidated public sector debt5,8246,8628,78710,42011,53813,00814,61116,25518,00219,91221,78123,804
(In percent of GDP)
Nonfinancial public sector:
Revenue21.722.021.522.722.523.123.324.324.624.624.624.6
Tax revenue12.913.113.013.513.413.914.315.215.615.615.615.6
Nontax revenue0.91.10.81.01.01.10.90.90.90.90.90.9
Social security contributions7.27.47.57.67.77.97.97.97.97.97.97.9
Operating balance of public enterprises0.70.50.30.60.50.30.30.30.30.30.30.3
Expenditure 4/26.625.625.427.327.528.328.729.229.529.629.529.3
Current noninterest21.121.220.922.122.122.722.622.522.522.522.522.5
Wages9.69.79.59.89.89.99.99.99.99.99.99.9
Goods and services2.12.32.22.22.22.32.22.22.22.22.22.2
Transfers9.49.29.210.010.110.610.510.410.410.410.410.4
Interest2.22.22.22.72.82.83.33.94.14.24.23.9
Of which: Adjustment for TUDES 5/0.10.10.10.10.20.00.10.10.10.10.10.1
Capital3.32.22.42.62.62.82.82.92.92.92.92.9
Primary balance−2.6−1.4−1.7−1.9−2.2−2.4−2.1−1.1−0.7−0.7−0.7−0.7
Overall Balance−4.9−3.6−3.9−4.6−5.0−5.2−5.4−5.0−4.9−4.9−4.9−4.6
Central government−5.3−4.2−4.5−5.6−6.0−5.8−5.8−5.4−5.5−5.5−5.5−5.3
Decentralized government entities0.30.60.80.81.00.80.50.60.70.70.70.7
Public enterprises0.20.0−0.20.10.1−0.1−0.1−0.1−0.1−0.1−0.1−0.1
Total Financing4.93.63.94.65.05.25.45.04.94.94.94.6
External1.2−0.61.41.61.91.71.41.31.11.00.70.0
Domestic3.64.22.43.03.13.54.03.63.83.94.24.6
Consolidated public sector:
Central Bank balance−0.4−0.6−0.6−0.8−0.7−0.8−0.8−0.8−0.8−0.8−0.8−0.8
Consolidated public sector balance−5.3−4.2−4.5−5.4−5.6−6.0−6.2−5.7−5.7−5.7−5.7−5.4
Consolidated public sector debt29.732.137.642.043.246.047.949.650.852.052.953.8
Consolidated public sector debt, including ICE33.035.340.745.346.849.651.653.054.054.955.556.2
Nominal GDP19,58121,39223,37124,78126,70328,27930,49532,80435,43738,31241,18344,263
CPI Inflation (period average)5.74.94.55.24.50.81.13.03.03.03.03.0
Sources: Ministry of Finance and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved anti-tax evasion.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

The consolidated public sector balance comprises the central government, decentralized government entities, public enterprises and the Central Bank, but excludes the Instituto Costarricense de Electricidad (ICE).

Expenditure was adjusted downward in 2010 and upward in 2011 by ½ percent of GDP to reflect a capital project recorded in 2010 but undertaken in 2011.

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Sources: Ministry of Finance and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved anti-tax evasion.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

The consolidated public sector balance comprises the central government, decentralized government entities, public enterprises and the Central Bank, but excludes the Instituto Costarricense de Electricidad (ICE).

Expenditure was adjusted downward in 2010 and upward in 2011 by ½ percent of GDP to reflect a capital project recorded in 2010 but undertaken in 2011.

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Table 5b.Costa Rica: Consolidated Public Sector Operations, Full Fiscal Adjustment Scenario 1/2/3/
Est.Projections
201020112012201320142015201620172018201920202021
(In billions of colones)
Nonfinancial public sector:
Revenue4,2584,7155,0365,6276,0216,5297,1068,0779,0159,75310,48411,262
Tax revenue2,5262,8073,0493,3423,5753,9174,3505,1135,8126,2916,7627,262
Nontax revenue185225182257259309273293317343368396
Social security contributions1,4121,5841,7431,8842,0552,2252,3992,5802,7883,0143,2403,482
Operating balance of public enterprises134996214413278849198106114123
Expenditure 4/5,2095,4825,9416,7707,3448,0018,7339,37610,11810,92311,63412,456
Current noninterest4,1384,5254,8845,4655,8996,4246,8777,3147,8368,4339,0249,654
Wages1,8852,0762,2282,4372,6202,7913,0053,1943,4033,6413,8724,118
Goods and services414482514554594643678710752813874940
Transfers1,8401,9662,1422,4742,6852,9903,1943,4113,6803,9794,2774,597
Interest4324785066607407959921,1271,2721,3971,4361,540
Of which: Adjustment for TUDES 5/2826322742−7242831333639
Capital6384805516447057838649351,0101,0921,1741,262
Primary balance−519−289−399−483−583−677−636−173169228286346
Overall Balance−951−767−905−1,143−1,323−1,472−1,628−1,299−1,103−1,169−1,150−1,193
Central government−1,032−893−1,059−1,386−1,604−1,649−1,736−1,447−1,295−1,383−1,377−1,444
Decentralized government entities50130193207259224150190234256269292
Public enterprises31−4−393424−42−42−42−42−42−42−42
Total Financing9517679051,1431,3231,4721,6281,2991,1031,1691,1501,193
External243−1283384055054794274353903972830
Domestic7088955687388189931,2018647137728671,193
Consolidated public sector:
Central Bank balance−88−126−144−195−186−219−231−255−280−305−330−355
Consolidated public sector balance−1,039−893−1,049−1,339−1,508−1,687−1,858−1,555−1,383−1,474−1,480−1,548
Consolidated public sector debt5,8246,8628,78710,42011,53813,00814,58615,90217,02418,21619,22420,383
(In percent of GDP)
Nonfinancial public sector:
Revenue21.722.021.522.722.523.123.324.625.225.125.024.9
Tax revenue12.913.113.013.513.413.914.215.616.216.216.116.1
Nontax revenue0.91.10.81.01.01.10.90.90.90.90.90.9
Social security contributions7.27.47.57.67.77.97.97.97.87.77.77.7
Operating balance of public enterprises0.70.50.30.60.50.30.30.30.30.30.30.3
Expenditure 4/26.625.625.427.327.528.328.628.628.328.127.727.6
Current noninterest21.121.220.922.122.122.722.522.321.921.721.521.4
Wages9.69.79.59.89.89.99.89.79.59.49.29.1
Goods and services2.12.32.22.22.22.32.22.22.12.12.12.1
Transfers9.49.29.210.010.110.610.510.410.310.210.210.2
Interest2.22.22.22.72.82.83.23.43.63.63.43.4
Of which: Adjustment for TUDES 5/0.10.10.10.10.20.00.10.10.10.10.10.1
Capital3.32.22.42.62.62.82.82.82.82.82.82.8
Primary balance−2.6−1.4−1.7−1.9−2.2−2.4−2.1−0.50.50.60.70.8
Overall Balance−4.9−3.6−3.9−4.6−5.0−5.2−5.3−4.0−3.1−3.0−2.7−2.6
Central government−5.3−4.2−4.5−5.6−6.0−5.8−5.7−4.4−3.6−3.6−3.3−3.2
Decentralized government entities0.30.60.80.81.00.80.50.60.70.70.60.6
Public enterprises0.20.0−0.20.10.1−0.1−0.1−0.1−0.1−0.1−0.1−0.1
Total Financing4.93.63.94.65.05.25.34.03.13.02.72.6
External1.2−0.61.41.61.91.71.41.31.11.00.70.0
Domestic3.64.22.43.03.13.53.92.62.02.02.12.6
Consolidated public sector:
Central Bank balance−0.4−0.6−0.6−0.8−0.7−0.8−0.8−0.8−0.8−0.8−0.8−0.8
Consolidated public sector balance−5.3−4.2−4.5−5.4−5.6−6.0−6.1−4.7−3.9−3.8−3.5−3.4
Consolidated public sector debt29.732.137.642.043.246.047.748.447.646.845.845.1
Consolidated public sector debt, including ICE33.035.340.745.346.849.651.451.950.749.748.447.5
Nominal GDP19,58121,39223,37124,78126,70328,27930,54932,83235,78038,89241,94145,177
CPI Inflation (period average)5.74.94.55.24.50.81.13.03.03.03.03.0
Sources: Ministry of Finance and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario, as well as administratively-determined measures to contain growth in the wage bill, and increases in the VAT rate from 2017.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

The consolidated public sector balance comprises the central government, decentralized government entities, public enterprises and the Central Bank, but excludes the Instituto Costarricense de Electricidad (ICE).

Expenditure was adjusted downward in 2010 and upward in 2011 by ½ percent of GDP to reflect a capital project recorded in 2010 but undertaken in 2011.

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Sources: Ministry of Finance and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario, as well as administratively-determined measures to contain growth in the wage bill, and increases in the VAT rate from 2017.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

The consolidated public sector balance comprises the central government, decentralized government entities, public enterprises and the Central Bank, but excludes the Instituto Costarricense de Electricidad (ICE).

Expenditure was adjusted downward in 2010 and upward in 2011 by ½ percent of GDP to reflect a capital project recorded in 2010 but undertaken in 2011.

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Table 6a.Costa Rica: Summary Operations of the Consolidated Public Sector, GFSM 2001 Classification. Baseline Scenario (Partial Adjustment) 1/2/3/
Est.Projection
20102011201220132014201520162017201820192020
(In billions of colones)
Nonfinancial public sector:
Revenue4,2584,7155,0365,6276,0216,5297,1067,9668,7289,44310,1501
Taxes2,5262,8073,0493,3423,5753,9174,3505,0015,5255,9816,429
Social contributions1,4121,5841,7431,8842,0552,2252,3992,5802,7883,0143,240
Operating balance of public enterprises134996214413278849198106114
Other revenue185225182257259309273293317343368
Expenditure5,2095,4825,9416,7707,3448,0018,7599,59310,45311,32612,1581
Expense4,5715,0025,3906,1266,6397,2187,8948,6589,44310,23310,9841
Compensation of employees1,8852,0762,2282,4372,6202,7913,0053,2433,5093,7944,078
Purchases of goods and services414482514554594643678729788852916
Interest 4/4324785066607407951,0171,2741,4661,6091,713
Of which: Adjustment for TUDES2826322742−72428323641
Other expense 5/1,8401,9662,1422,4742,6852,9903,1943,4113,6803,9794,277
Net acquisition of nonfinancial assets6384805516447057838649351,0101,0921,174
Gross operating balance−313−287−354−499−618−689−789−692−715−790−833
Net lending/borrowing (NFPS)−951−767−905−1,143−1,323−1,472−1,653−1,627−1,725−1,883−2,007
Net financial transactions (NFPS)9517679051,1431,3231,4721,6531,6271,7251,8832,007
Consolidated public sector:
Central Bank balance−88−126−144−195−186−219−231−255−280−305−330
Net lending/borrowing (consolidated public sector)−1,039−893−1,049−1,339−1,508−1,687−1,883−1,883−2,006−2,188−2,337
(In percent of GDP)
Nonfinancial public sector:
Revenue21.722.021.522.722.523.123.324.324.624.624.6
Taxes12.913.113.013.513.413.914.315.215.615.615.6
Social contributions7.27.47.57.67.77.97.97.97.97.97.9
Operating balance of public enterprises0.70.50.30.60.50.30.30.30.30.30.3
Other revenue0.91.10.81.01.01.10.90.90.90.90.9
Expenditure26.625.625.427.327.528.328.729.229.529.629.5
Expense23.323.423.124.724.925.525.926.426.626.726.7
Compensation of employees9.69.79.59.89.89.99.99.99.99.99.9
Purchases of goods and services2.12.32.22.22.22.32.22.22.22.22.2
Interest 4/2.22.22.22.72.82.83.33.94.14.24.2
Other expense 5/9.49.29.210.010.110.610.510.410.410.410.4
Net acquisition of nonfinancial assets3.32.22.42.62.62.82.82.92.92.92.9
Gross operating balance−1.6−1.3−1.5−2.0−2.3−2.4−2.6−2.1−2.0−2.1−2.0
Net lending/borrowing (NFPS)−4.9−3.6−3.9−4.6−5.0−5.2−5.4−5.0−4.9−4.9−4.9
Net financial transactions (NFPS)4.93.63.94.65.05.25.45.04.94.94.9
Consolidated public sector:
Central Bank balance−0.4−0.6−0.6−0.8−0.7−0.8−0.8−0.8−0.8−0.8−0.8
Net lending/borrowing (consolidated public sector)−5.3−4.2−4.5−5.4−5.6−6.0−6.2−5.7−5.7−5.7−5.7
Memorandum items:
NFPS non-interest expenditure growth (percent)
in nominal terms20.64.88.612.48.19.17.47.58.08.17.5
in real terms14.1−0.13.96.83.48.36.34.34.95.07.5
NFPS primary balance
in billions of colones−519−289−399−483−583−677−636−353−260−274−294
in percent of GDP−2.6−1.4−1.7−1.9−2.2−2.4−2.1−1.1−0.7−0.7−0.7
Sources: Ministry of Finance and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved anti-tax evasion.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

The consolidated public sector balance comprises the central government, decentralized government entities, public enterprises and the Central Bank, but excludes the Instituto Costarricense de Electricidad (ICE).

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Includes subsidies, transfers and other expense.

Sources: Ministry of Finance and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved anti-tax evasion.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

The consolidated public sector balance comprises the central government, decentralized government entities, public enterprises and the Central Bank, but excludes the Instituto Costarricense de Electricidad (ICE).

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Includes subsidies, transfers and other expense.

Table 6b.Costa Rica: Summary Operations of the Consolidated Public Sector, GFSM 2001 Classification. Full Fiscal Adjustment Scenario 1/2/3/
Est.Projecton
201020112012201320142015201620172018201920202021
(In billions of colones)
Nonfinancial public sector:
Revenue4,2584,7155,0365,6276,0216,5297,1068,0779,0159,75310,48411,262
Taxes2,5262,8073,0493,3423,5753,9174,3505,1135,8126,2916,7627,262
Social contributions1,4121,5841,7431,8842,0552,2252,3992,5802,7883,0143,2403,482
Operating balance of public enterprises134996214413278849198106114123
Other revenue185225182257259309273293317343368396
Expenditure5,2095,4825,9416,7707,3448,0018,7339,37610,11810,92311,63412,456
Expense4,5715,0025,3906,1266,6397,2187,8698,4419,1079,83010,46011,194
Compensation of employees1,8852,0762,2282,4372,6202,7913,0053,1943,4033,6413,8724,118
Purchases of goods and services414482514554594643678710752813874940
Interest 4/4324785066607407959921,1271,2721,3971,4361,540
Of which: Adjustment for TUDES2826322742−7242831333639
Other expense 5/1,8401,9662,1422,4742,6852,9903,1943,4113,6803,9794,2774,597
Net acquisition of nonfinancial assets6384805516447057838649351,0101,0921,1741,262
Gross operating balance−313−287−354−499−618−689−763−364−93−772469
Net lending/borrowing (NFPS)−951−767−905−1,143−1,323−1,472−1,628−1,299−1,103−1,169−1,150−1,193
Net financial transactions (NFPS)9517679051,1431,3231,4721,6281,2991,1031,1691,1501,193
Consolidated public sector:
Central Bank balance−88−126−144−195−186−219−231−255−280−305−330−355
Net lending/borrowing (consolidated public sector)−1,039−893−1,049−1,339−1,508−1,687−1,858−1,555−1,383−1,474−1,480−1,548
(In percent of GDP)
Nonfinancial public sector:
Revenue21.722.021.522.722.523.123.324.625.225.125.024.9
Taxes12.913.113.013.513.413.914.215.616.216.216.116.1
Social contributions7.27.47.57.67.77.97.97.97.87.77.77.7
Operating balance of public enterprises0.70.50.30.60.50.30.30.30.30.30.30.3
Other revenue0.91.10.81.01.01.10.90.90.90.90.90.9
Expenditure26.625.625.427.327.528.328.628.628.328.127.727.6
Expense23.323.423.124.724.925.525.825.725.525.324.924.8
Compensation of employees9.69.79.59.89.89.99.89.79.59.49.29.1
Purchases of goods and services2.12.32.22.22.22.32.22.22.12.12.12.1
Interest 4/2.22.22.22.72.82.83.23.43.63.63.43.4
Other expense 5/9.49.29.210.010.110.610.510.410.310.210.210.2
Net acquisition of nonfinancial assets3.32.22.42.62.62.82.82.82.82.82.82.8
Gross operating balance−1.6−1.3−1.5−2.0−2.3−2.4−2.5−1.1−0.3−0.20.10.2
Net lending/borrowing (NFPS)−4.9−3.6−3.9−4.6−5.0−5.2−5.3−4.0−3.1−3.0−2.7−2.6
Net financial transactions (NFPS)4.93.63.94.65.05.25.34.03.13.02.72.6
Consolidated public sector:
Central Bank balance−0.4−0.6−0.6−0.8−0.7−0.8−0.8−0.8−0.8−0.8−0.8−0.8
Net lending/borrowing (consolidated public sector)−5.3−4.2−4.5−5.4−5.6−6.0−6.1−4.7−3.9−3.8−3.5−3.4
Memorandum items:
NFPS non-interest expenditure growth (percent)
in nominal terms20.64.88.612.48.19.17.46.67.27.77.17.0
in real terms14.1−0.13.96.83.48.36.33.54.14.57.17.0
NFPS primary balance
in billions of colones−519−289−399−483−583−677−636−173169228286346
in percent of GDP−2.6−1.4−1.7−1.9−2.2−2.4−2.1−0.50.50.60.70.8
Sources: Ministry of Finance and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario, as well as administratively-determined measures to contain growth in the wage bill, and increases in the VAT rate from 2017.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

The consolidated public sector balance comprises the central government, decentralized government entities, public enterprises and the Central Bank, but excludes the Instituto Costarricense de Electricidad (ICE).

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Includes subsidies, transfers and other expense.

Sources: Ministry of Finance and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario, as well as administratively-determined measures to contain growth in the wage bill, and increases in the VAT rate from 2017.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

The consolidated public sector balance comprises the central government, decentralized government entities, public enterprises and the Central Bank, but excludes the Instituto Costarricense de Electricidad (ICE).

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure.

Includes subsidies, transfers and other expense.

Table 7.Costa Rica: Public Sector Debt, Baseline Scenario

(Partial Fiscal Adjustment) 1/2/

Est.Projections
201020112012201320142015201620172018201920202021
(In billions of colones)
Debt issued by:
NFPS & Central Bank (I) 3/7,5748,96111,04312,77414,15915,88817,67119,54221,57223,79525,99328,362
Nonfinancial public sector (NFPS) 3/6,1687,2488,97610,15411,81113,35915,17417,04519,07621,29823,49725,866
Central government5,5626,3828,0158,93210,48411,98413,73215,53217,49019,64021,77024,072
Rest of nonfinancial public sector 3/6058669611,2221,3271,3761,4421,5141,5861,6581,7261,794
Central Bank1,4061,7132,0672,6202,3482,5282,4962,4962,4962,4962,4962,496
Intra-public sector debt holdings (II)1,7502,0992,2562,3542,6212,8803,0603,2873,5703,8834,2124,558
CCSS 4/1,1301,3301,3981,4441,6401,8421,9402,0822,2692,4762,7002,933
Other entities of the nonfinancial public sector6047568488999691,0261,1061,1901,2851,3901,4941,606
Central Bank151310111213141516171820
Consolidated public sector debt (I-II)5,8246,8628,78710,42011,53813,00814,61116,25518,00219,91221,78123,804
External1,3631,3301,7112,2012,8123,3193,7244,1644,5684,9845,1165,495
Domestic4,4615,5327,0768,2198,7269,68910,88712,09113,43414,92716,66518,309
(In percent of GDP)
Debt issued by:
NFPS & Central Bank (I) 3/38.741.947.251.553.056.257.959.660.962.163.164.1
Nonfinancial public sector (NFPS) 3/31.533.938.441.044.247.249.852.053.855.657.158.4
Central government28.429.834.336.039.342.445.047.349.451.352.954.4
Rest of nonfinancial public sector 3/3.14.04.14.95.04.94.74.64.54.34.24.1
Central Bank7.28.08.810.68.88.98.27.67.06.56.15.6
Intra-public sector debt holdings (II)8.99.89.79.59.810.210.010.010.110.110.210.3
CCSS 4/5.86.26.05.86.16.56.46.36.46.56.66.6
Other entities of the nonfinancial public sector3.13.53.63.63.63.63.63.63.63.63.63.6
Central Bank0.10.10.00.00.00.00.00.00.00.00.00.0
Consolidated public sector debt (I-II)29.732.137.642.043.246.047.949.650.852.052.953.8
External7.06.27.38.910.511.712.212.712.913.012.412.4
Domestic22.825.930.333.232.734.335.736.937.939.040.541.4
Memorandum items:
Nominal GDP19,58121,39223,37124,78126,70328,27930,49532,80435,43738,31241,18344,263
Sources: Ministry of Finance; and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved anti-tax evasion.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

Excludes the debt issued by the Instituto Costarricense de Electricidad (ICE).

Caja Costarricense del Seguro Social (social security agency).

Sources: Ministry of Finance; and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved anti-tax evasion.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

Excludes the debt issued by the Instituto Costarricense de Electricidad (ICE).

Caja Costarricense del Seguro Social (social security agency).

Table 8.Costa Rica: Monetary Survey, Baseline Scenario (Partial Adjustment) 1/2/
Est.Proj.Proj.
20102011201220132014201520162017
(In billions of colones, unless otherwise indicated)
Net foreign assets2,4852,5673,6123,7994,0384,4134,7925,195
Net international reserves2,3502,4033,4433,6293,8464,1674,4774,793
(In millions of U.S. dollars)4,6274,7566,8577,3317,2117,8348,3348,834
Net medium-term foreign assets135164170171192000
Net domestic assets−1,140−1,067−1,858−1,865−1,902−2,081−2,247−2,420
Net domestic credit−926−729−1,303−935−1,019−1,193−1,290−1,400
Credit to nonfinancial public sector−288−87−561−201−65−123−123−123
Credit to other depository corporations (net)−625−633−733−722−936−1,044−1,141−1,252
Credit to other financial corporations (net)−9−7−7−9−16−25−25−25
Credit to the private sector (net)−3−2−2−2−2−1−1−1
Monetary stabilization instruments (-)−1,252−1,588−1,787−2,492−2,313−2,491−2,491−2,491
Other items (net)−319−235−423−326−421−478−778−1,096
Capital account (-)1,3571,4851,6551,8871,8502,0812,3122,567
Monetary base1,3451,5001,7541,9342,1362,3322,5452,776
Currency6657438459219881,0511,1201,198
Required reserves6807579091,0131,1471,2811,4251,577
Net foreign assets−87−580−1,018−1,534−1,716−2,475−3,507−3,936
Net domestic assets8,3899,28710,56511,79713,50514,96116,97118,420
Net domestic credit11,89113,17515,26517,24120,07222,68225,60228,754
Credit to nonfinancial public sector (net)9801,0011,1481,2251,4931,9862,5883,163
Credit to nonfinancial private sector8,6459,83211,14512,50714,70116,44018,43520,646
Credit to financial corporations (net)2,2672,3422,9733,5083,8774,2574,5794,946
Other items (net)−1,466−1,595−2,097−2,526−3,316−4,093−4,567−5,437
Capital account2,0362,2942,6022,9183,2513,6284,0644,897
Liabilities to nonfinancial private sector8,3018,7079,54710,26311,78912,48613,46414,483
In national currency4,9115,1716,0456,8557,7218,3799,0369,720
In foreign currency3,3903,5363,5033,4094,0684,1074,4284,764
Of which: Deposits8,0968,4709,3009,98411,48612,15113,36414,651
Net foreign assets2,3981,9882,5942,2652,3221,9381,2851,259
Net domestic assets7,4788,4278,93710,15812,01213,34415,31716,719
Net domestic credit9,33610,74611,73113,53216,12918,30320,90123,686
Other items (net)−1,179−1,510−1,847−2,343−2,716−3,412−3,831−4,637
Capital account6808099471,0301,4011,5471,7532,330
Broad money9,87510,41511,53012,42414,33415,28216,60217,978
Memorandum Items:(Annual percentage change)
Monetary base11.211.616.910.210.49.29.19.0
Broad money−0.25.510.77.715.46.68.68.3
Credit to the private sector4.413.713.412.217.511.812.112.0
Adjusted by changes in the exchange rate8.613.813.712.914.111.912.211.6
(In percent of GDP)
Monetary base6.97.07.57.88.08.28.38.5
Broad money50.448.749.350.153.754.054.454.8
Of which: Deposits denominated in foreign currency17.316.515.013.815.214.514.715.0
Credit to the private sector44.146.047.750.555.158.160.562.9
Of which: In foreign currency17.018.119.521.222.524.325.526.0
Central bank balance−0.5−0.6−0.7−0.90.1−0.8−0.8−0.8
Sources: Central Bank of Costa Rica and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved anti-tax evasion.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

Sources: Central Bank of Costa Rica and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved anti-tax evasion.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

Table 9a.Costa Rica: Medium-Term Framework, Baseline Scenario (Partial Adjustment) 1/2/
Est.Projections
201020112012201320142015201620172018201920202021
(Annual percentage change)
Real GDP5.04.55.21.83.03.74.24.34.44.34.04.0
Domestic demand8.25.65.51.44.14.43.34.65.25.24.74.7
Consumption2.53.58.12.83.44.12.24.14.74.64.14.1
Gross fixed capital formation5.58.98.0−1.22.28.37.16.27.07.06.96.9
Exports of goods and nonfactor services6.05.68.12.23.11.9−1.37.15.55.35.05.0
Imports of goods and nonfactor services16.78.78.71.16.24.4−2.97.97.67.96.86.8
(Contributions to real GDP growth)
Domestic demand8.15.75.71.44.34.63.54.85.45.55.05.1
Consumption2.12.96.52.32.93.41.93.53.93.83.43.4
Gross fixed capital formation1.11.71.6−0.20.41.71.51.31.51.61.61.6
Inventory changes4.91.1−2.5−0.71.0−0.50.20.10.00.10.00.0
Net exports−3.2−1.2−0.50.3−1.2−1.00.7−0.6−1.0−1.2−1.0−1.1
(In percent of GDP)
Savings and Investment
Savings20.822.020.518.819.619.119.119.319.319.519.719.8
Domestic savings17.416.815.313.814.915.114.915.015.015.215.315.5
Private sector19.018.116.815.917.217.117.216.816.716.917.017.0
Public sector−1.6−1.3−1.5−2.0−2.3−2.1−2.3−1.8−1.7−1.7−1.7−1.5
External savings 3/3.45.35.25.04.74.04.24.34.24.34.34.3
Gross domestic investment20.822.020.518.819.619.119.119.319.319.519.719.8
Private sector16.617.117.416.216.216.415.815.715.715.715.815.8
Public sector3.43.13.23.23.33.43.53.53.53.53.53.5
Inventory changes0.81.9−0.1−0.60.1−0.7−0.20.00.10.30.40.4
Balance of payments
Current account balance−3.4−5.3−5.2−5.0−4.7−4.0−4.2−4.3−4.2−4.3−4.3−4.3
Trade balance−9.2−12.2−11.6−11.3−10.5−10.2−10.2−10.4−10.7−11.1−11.3−11.5
Services6.87.57.48.18.78.78.78.99.39.69.810.0
Income−2.0−1.4−1.7−2.4−3.5−3.2−3.2−3.3−3.4−3.4−3.4−3.4
Current transfers1.00.80.70.60.60.60.50.50.50.50.50.5
Financial and capital account5.36.19.56.44.66.25.15.14.24.34.34.3
Public sector1.70.22.72.52.11.31.31.41.21.10.71.0
Private sector3.75.96.83.92.54.93.83.73.13.23.63.4
Foreign direct investment3.95.04.14.84.04.14.34.34.34.44.44.4
Other net private flows−0.20.92.7−0.9−1.50.8−0.5−0.6−1.3−1.1−0.8−1.1
Errors and omissions−0.4−0.50.2−0.5−0.1−1.00.00.00.00.00.00.0
Change in net international reserves (increase -)−1.5−0.3−4.5−0.90.2−1.2−0.9−0.80.00.00.00.0
Memorandum items:
Nominal GDP (billions of colones)19,58121,39223,37124,78126,70328,27930,49532,80435,43738,31241,18344,263
GDP deflator (percent change)8.04.53.94.24.72.23.43.23.53.73.43.3
Consumer prices (percent change; period average)5.74.94.55.24.50.81.13.03.03.03.03.0
Consumer prices (percent change; end of period)5.84.74.63.75.1−0.83.03.03.03.03.03.0
Credit to the private sector (percent change)4.413.713.412.217.511.812.112.011.611.611.311.2
Net international reserves (millions of U.S. dollars)4,6274,7566,8577,3317,2117,8348,3348,8348,8348,8348,8348,834
Sources: Central Bank of Costa Rica; and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved anti-tax evasion.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of

External current account deficit.

Sources: Central Bank of Costa Rica; and Fund staff estimates.

Includes cuts in transfers of about 0.4 percent of GDP, another 0.2 percent of GDP of expenditure cuts in a 2016 supplementary budget, broadening of the VAT base and higher taxes on sales of vehicles and real estate from the last quarter of 2016, increase in marginal income tax rates on higher-income brackets from 2017, as well as further amendments to the corporate income tax and moderate gains from improved anti-tax evasion.

Data for 2012–15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of

External current account deficit.

Table 9b.Costa Rica: Medium-Term Framework, Full Fiscal Adjustment Scenario 1/2/
Est.Projections
201020112012201320142015201620172018201920202021
(Annual percentage change)
Real GDP5.04.55.21.83.03.74.24.24.64.54.24.3
Domestic demand8.25.65.51.44.14.44.84.55.55.44.94.9
Consumption2.53.58.12.83.44.14.03.94.74.94.24.2
Gross fixed capital formation5.58.98.0−1.22.28.37.26.27.06.47.17.1
Exports of goods and nonfactor services6.05.68.12.23.11.97.47.45.45.34.94.9
Imports of goods and nonfactor services16.78.78.71.16.24.48.67.77.67.56.46.3
(Contributions to real GDP growth)
Domestic demand8.15.75.71.44.34.65.04.75.85.85.35.3
Consumption2.12.96.52.32.93.43.43.34.04.13.63.5
Gross fixed capital formation1.11.71.6−0.20.41.71.51.31.51.41.61.7
Inventory changes4.91.1−2.5−0.71.0−0.50.10.10.30.30.10.1
Net exports−3.2−1.2−0.50.3−1.2−1.0−0.8−0.5−1.2−1.3−1.0−1.0
(In percent of GDP)
Savings and Investment
Savings20.822.020.518.819.619.119.119.320.020.520.720.9
Domestic savings17.416.815.313.814.915.114.815.115.916.516.817.2
Private sector19.018.116.815.917.217.117.115.815.816.416.716.9
Public sector−1.6−1.3−1.5−2.0−2.3−2.1−2.2−0.80.10.00.10.2
External savings 3/3.45.35.25.04.74.04.24.24.14.03.83.7
Gross domestic investment20.822.020.518.819.619.119.119.320.020.520.720.9
Private sector16.617.117.416.216.216.415.815.715.615.315.315.4
Public sector3.43.13.23.23.33.43.53.53.53.53.53.6
Inventory changes0.81.9−0.1−0.60.1−0.7−0.20.01.01.71.81.9
Balance of payments
Current account balance−3.4−5.3−5.2−5.0−4.7−4.0−4.2−4.2−4.1−4.0−3.8−3.7
Trade balance−9.2−12.2−11.6−11.3−10.5−10.2−10.2−10.3−10.5−10.6−10.6−10.6
Services6.87.57.48.18.78.78.78.99.29.49.69.7
Income−2.0−1.4−1.7−2.4−3.5−3.2−3.2−3.3−3.3−3.3−3.3−3.3
Current transfers1.00.80.70.60.60.60.50.50.50.50.50.5
Financial and capital account5.36.19.56.44.66.25.15.04.14.03.83.7
Public sector1.70.22.72.52.11.31.31.41.21.10.71.0
Private sector3.75.96.83.92.54.93.83.62.92.93.12.7
Foreign direct investment3.95.04.14.84.04.14.34.34.34.44.44.5
Other net private flows−0.20.92.7−0.9−1.50.8−0.5−0.7−1.4−1.5−1.3−1.8
Errors and omissions−0.4−0.50.2−0.5−0.1−1.00.00.00.00.00.00.0
Change in net international reserves (increase -)−1.5−0.3−4.5−0.90.2−1.2−0.9−0.80.00.00.00.0
Memorandum items:
Nominal GDP (billions of colones)19,58121,39223,37124,78126,70328,27930,54932,83235,78038,89241,94145,177
GDP deflator (percent change)8.04.53.94.24.72.23.63.14.24.03.43.3
Consumer prices (percent change; period average)5.74.94.55.24.50.81.13.03.03.03.03.0
Consumer prices (percent change; end of period)5.84.74.63.75.1−0.83.03.03.03.03.03.0
Net international reserves (millions of U.S. dollars)4,6274,7566,8577,3317,2117,8348,3348,8348,8348,8348,8348,834
Sources: Central Bank of Costa Rica and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario, as well as administratively-determined measures to contain growth in the wage bill, and increases in the VAT rate from 2017.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

External current account deficit.

Sources: Central Bank of Costa Rica and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario, as well as administratively-determined measures to contain growth in the wage bill, and increases in the VAT rate from 2017.

Data for 2012-15 reflect new nominal and real GDP data released by the authorities under new statistical standards and new base year 2012. The methodological changes resulted in an upward revision in nominal GDP of about 2½ percent in the base year, as a result mainly of a higher share of the rapidly growing services sector. Pending the release of the full new historical GDP series, nominal and real GDP prior to 2012 are staff estimates using new 2012 GDP data by component, and available past growth rates of components under the old standards.

External current account deficit.

Table 10.Costa Rica: Banking Sector Indicators 1/
2010201120122013201420152016
DecDecDecDecDecDecJan
(In percent)
Capitalization
Risk-adjusted capital ratio17.317.316.816.616.716.216.2
Capital-to-assets ratio14.815.014.814.514.114.114.2
Asset quality
Nonperforming loans to total loans1.81.71.71.71.51.61.7
Non-income generating assets to total assets17.417.716.817.116.315.615.8
Foreclosed assets to total assets0.80.81.01.01.00.90.9
Loan loss provisions to total loans1.81.81.71.61.61.92.0
Management
Administrative expenses to total assets4.34.24.23.93.63.53.5
Noninterest expenses to gross income85.076.567.468.177.767.667.4
Total expenses to total revenues96.293.190.792.594.292.792.6
Profitability
Return on assets (ROA)1.21.31.51.21.21.01.0
Return on equity (ROE)8.39.110.38.28.57.37.6
Interest margin to gross income16.627.232.130.522.833.533.7
Liquidity
Liquid assets to total short-term liabilities90.185.192.6101.298.797.898.5
Liquid assets to total assets30.728.829.230.429.128.929.0
Loans to deposits97.8105.2106.3106.6109.5115.5115.2
Liquid assets to deposits43.842.744.047.045.146.646.8
Sensitivity to market risk
Net open FX position to capital18.818.819.117.817.419.919.9
Other
Financial margin 1/8.28.17.76.87.17.07.0
Source: Superintendency of Banks (SUGEF).

Difference between implicit loan and deposit rates.

Source: Superintendency of Banks (SUGEF).

Difference between implicit loan and deposit rates.

Annex I. Costa Rica: Financial System Assessment Program (FSAP) Main Pending Recommendations (2008)
RecommendationsComments
A. Prudential Supervision and Regulation
Amend the legal framework in order to provide protection for supervisors while performing their responsibilities in good faith.Art. 28 of Insurance Law 8653 of August 7, 2008, provides legal protection to insurance supervisors. A draft bank resolution law contemplates protection for bank supervisors participating in the resolution process.

A constitutional reform is necessary to establish legal protection for bank supervisors. CONASSIF has issued agreements to provide legal assistance to SUGEF senior personnel in case of judicial inquiries arising from the exercise of their functions.
Introduce pertinent laws for the Superintendency of Banks (SUGEF) to be able to supervise banking groups (including offshore structures) on a consolidated basis. Upon the approval of such laws the SUGEF should issue without delay operational regulations to ensure their rapid implementation by the banking system.The draft law that was submitted in the past has been archived by Congress. SUGEF is in the process of re-drafting a new reform bill. The strategic orientations of this bill have been defined in 2015.
Apply higher risk weight ratios to unhedged borrowers for capital adequacy purposes.Amendment to capital adequacy regulation took effect in August 2013. This implemented gradual increases in the percentages over 18 months, to reach final levels of 125% for unhedged borrowers and 62.5% for those with residential mortgages by March 2015. 1 A normative reform that increases the generic provision for unhedged borrowers from 0.5 to 1.5 percent is in process. Approval is expected by May 2016.
Modify the funding arrangements for supervision, in line with international best practices.A draft legislation to recapitalize the central bank also addresses the increase in the financing share of the industry.
B. Crisis Management and Bank Crisis Resolution Framework
Amend article 155 of the Central Bank law in order to grant the SUGEF an appropriate range of supervisory tools to require a bank to take prompt remedial action and to impose penalties in accordance with the gravity of a situation.With the IMF’s help, SUGEF is in the process of drafting a new reform bill. The strategic orientations of this project have been defined in 2015.
Amend the rating system for prompt corrective actions, to include new directives that allow the SUGEF to take an appropriate range of remedial actions and supervisory decisions.The authorities intend to amend the rating system once risk-based supervision is fully in place (currently expected in 2017, with major reforms to be conducted in 2015 and 2016).1 SUGEF has been carrying pilot visits to various financial entities which will allow defining the focus of the rating system in the context of risk-based supervision.
Improve the early warning system, to allow the adoption of remedial actions in a timely manner.The authorities will review the possibility of taking a broader range of remedial actions within the scope of the existing law.
Eliminate the emergency loan window and improve the design and operational arrangements of the ordinary rediscount window, including by establishing prudential limits in terms of regulatory capital.The emergency line introduced during the 2008-09 crisis was discontinued and two high-access rediscount windows were created in 2011: (i) using bonds already included in the money market collateral pool; and (ii) using commercial credit portfolio as collateral (with strict rules on quality and haircuts). Both lines are available in US dollars and in colones. However,
the rediscount windows are activated only when a central bank committee considers that there is a systemic risk; operational procedures need to be further streamlined; and repo operations are still to be linked to prudential limits in terms of regulatory capital
Establish a deposit insurance scheme, in line with international best practices.SUGEF is working on a draft law with the assistance of the IMF’s TA.
Amend the bank resolution legal framework to include purchase and assumption type techniques.Improvements to the bank resolution framework are being developed as a complement to the deposit guarantee scheme.
Enable voluntary, extra-judicial corporate restructuring agreements.Approval of the Law on Execution in October 2007 did not address the weaknesses of the current procedural rules.

Staff’s preliminary assessment based on updated information provided by the authorities. Source: Superintendence of Financial Institutions.

Staff’s preliminary assessment based on updated information provided by the authorities. Source: Superintendence of Financial Institutions.

Annex II. Costa Rica: Summary of Recommendations in the WHD Cluster Surveillance Report on Financial Integration in CAPDR
Micro-prudential Regulation
Regulatory Perimeter
  • Designate a Lead Supervisor in each country.

  • Adopt a broad definition of financial conglomerate and economic group.

  • Develop and periodically update a map of existing financial conglomerates. Empower supervisors to regulate holding corporations.

  • Agree on a common scope of supervision to minimize regulatory arbitrage.

Capital Adequacy
  • Bridge existing different capital definitions across countries.

  • Adopt common definition of capital consistent with international best practice.

  • Harmonize the calculation of financial conglomerates’ capital on a consolidated basis.

  • Adopt common loan classification criteria, at least applicable to regional entities.

Corporate Governance
  • Regulate the organization structure of conglomerates to facilitate their supervision.

  • Reinforce legal authorities for the identification of ultimate ownership of financial conglomerates and economic groups.

  • Harmonize regulations on market entry and participation.

  • Establish minimum regional standards on risk management systems.

Credit Limits
  • Adopt common thresholds on credit concentration and exposures to related parties.

  • Empower supervisors to inquire about ultimate owners’ identities beyond financial corporations that are part of the financial conglomerates.

  • Grant sufficient legal protection to supervisors.

Macro-financial Regulation and Instruments
Regional Supervision
  • Implement a Regional Financial Stability Council with a broad mandate for regional financial stability, building from existing forums and Ministries of Finance.

  • Extend responsibility of supervising regional conglomerates to principal supervisors.

  • Harmonize financial data exchange in line with international accounting standards.

Macro-prudential Regulation
  • Ensure full integration of systemic risk in the regulatory and supervisory frameworks.

  • Develop national and regional frameworks to identify SIFIs.

  • Calibrate micro-financial regulatory instruments to address macro-prudential risk.

  • Agree on a common set of macro-prudential instruments to be used to induce a reduction of systemic risk from financial conglomerates.

  • Reinforce regional macro-prudential surveillance, including by regional authorities.

Lender of Last Resort
  • Adopt minimum country requirements on LOLR facilities.

  • Re-examine regulation for ring-fencing to ensure it addresses liquidity pressures transmitted across borders through financial conglomerates.

  • Develop macro-prudential metrics for liquidity in foreign exchange.

  • Reassess national frameworks on reserve requirements for foreign currency liabilities.

Remedial Actions and Resolution
  • Extend legal regimes for corrective and remedial actions to non-bank financial institutions, and also specifically for SIFIs and financial conglomerates.

  • Adapt resolution frameworks to take into account regional implications.

Deposit Insurance
  • Harmonize deposit insurance facilities.

  • Establish explicit coverage of deposits in off-shore banks with a specific regime.

Annex III. Costa Rica: Public Debt Sustainability Analysis (Higher Scrutiny Case)

The DSA highlights Costa Rica’s unsustainable debt dynamics. The debt stock is projected to rise to 55 percent of GDP by 2021 under the baseline scenario, driven mostly by high fiscal deficits. There are substantial upside risks to the projected debt path from plausible macro shocks. Risks from relatively high financing needs are somewhat mitigated by the existence of a stable domestic investor base.

A. Key Assumptions

Debt definition. The public debt sustainability analysis focuses on the central government level where the worsening of the fiscal situation has taken place in recent years. The rest of the consolidated public sector has been broadly in balance in recent years as the cash surplus of the social security system broadly offset the small central bank deficit—resulting from its liquidity management operations—while public enterprises are broadly in balance.1 The additional adjustment needed—about 1½ percent of GDP—to close the actuarial deficit that opens up over the medium and long-term is estimated separately.

Growth and fiscal policy assumptions. The baseline reflects the estimated growth potential of 4 percent. The baseline scenario also assumes fiscal adjustment of about 2¼ of GDP based on the staff’s assessment of measures already submitted to Congress that have a higher probability of being approved. The improvement in the primary balance is smaller due to the projected deterioration in the fiscal position under a passive scenario, driven mostly by increases in expenditure on education to reach expenditure targets defined under the constitution.

Debt target. In theory it is difficult to justify a unique threshold for debt-to-GDP ratio as the government is deemed solvent if it can generate future primary surpluses sufficient to service its outstanding debt. Hence, protracted large budget deficits are not necessarily inconsistent with sustainability, provided that primary surpluses can be generated in the future. In practice, however, such an approach may require large future adjustments, which may not be feasible or desirable, economically and politically. A more operational definition of public debt sustainability offered in the 2003 WEO suggests that a given public debt level is sustainable if it implies that the government’s budget constraint (in NPV terms) is satisfied without unrealistically large future corrections in the primary balance. It also emphasizes the importance of liquidity conditions, because even if a government satisfies its present value budget constraint, it may not have sufficient assets and financing available to meet or roll over its maturing liabilities. As practical guidance, empirical evidence indicates that, for emerging market economies, sustaining a debt-to-GDP ratio above 50 percent of GDP may be difficult. For example, the WEO (2003) finds that the median public debt-to-GDP ratio for emerging markets in the year before a default was about 50 percent of GDP. This study also concludes that, on average, the conduct of fiscal policy in emerging market economies is not consistent with ensuring sustainability once public debt exceeds a threshold of 50 percent of GDP. Therefore, targeting an upper bound to the public debt ratio below 50 percent of GDP or so appears justifiable in the case of Costa Rica.

B. Results and Assessment

Results. In the baseline, the headline deficit remains around 5½ percent of GDP in 2021, as the higher interest bill from rising public debt—which reaches 55 percent of GDP in 2021 and stays on an upward trajectory thereafter—largely offsets the improvement in the primary balance. The average gross financing needs would be almost 9 percent of GDP in 2016-21. In the adjustment scenario, additional measures of 1½ of GDP as part of a gradual but frontloaded consolidation plan suffice to stabilize debt by 2021 at a level below 50 percent of GDP. This outcome assumes tightening in credit spreads driven by favorable market reaction to a frontloaded adjustment plan with credible measures.

Assessment. While most standard indicators are not at “danger” levels (see heat-map), the debt and gross financing needs approach the benchmarks for medium-risk assessment under stressed scenarios, and the market perception indicators are approaching the high-risk assessment. In particular, debt rises above 65 percent of GDP under the combined macro-fiscal shock–compared to 70 percent benchmark for medium risk in the heat map—with particularly high sensitivity to growth and fiscal shocks. Debt profile indicators also highlight medium risks from relatively high spreads on external bonds, with spreads approaching the 600 basis point benchmark for upper risk assessment.

Mitigating factors. A stable investor base is an important mitigating factor. Notwithstanding the medium risk ratings for external and FX debt in the debt profile indicators heat map, the share of these types of debt are at the low end of the reference range for moderate risk countries—external and FX debt represent less than 25 and 35 percent of total debt, respectively, compared to benchmark ranges of 15 to 45 for external debt and 20 to 60 for FX debt. Moreover, about 60 percent of domestic debt is held by captive local institutional investors, including the social security system, nonfinancial public sector institutions, and banks.

Costa Rica: Central Government Debt Sustainability Analysis (DSA)—Baseline Scenario

(In percent of GDP unless otherwise indicated)

Source: Fund staff estimates and projections.

1/ Public sector is defined as central government.

2/ Based on available data.

3/ EMBIG.

4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

5/ Derived as [(r - π(1+g) - g + ae(1 + r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1 + g) and the real growth contribution as -g.

7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Costa Rica: Central Government DSA—Composition of Public Debt and Alternative Scenarios

Source: Fund staff estimates and projections.

Costa Rica: Public DSA—Realism of Baseline Assumptions

Source: Fund staff estimates and projections.

1/ Plotted distribution includes program countries, percentile rank refers to all countries

2/ Projections made in the spring WEO vintage of the preceding year

3/ Not applicable for Costa Rica, as it meets neither the positive output gap criterion nor the private credit growth criterion.

4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

Costa Rica: Central Government DSA—Stress Tests

Source: Fund staff estimates and projections.

Costa Rica: Central Government DSA Risk Assessment

Source: Fund staff estimates and projections.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

4/ EMBIG, an average over the last 3 months, 30-Dec-15 through 29-Mar-16.

5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

Costa Rica: Consolidated Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(In percent of GDP unless otherwise indicated)

Source: Fund staff estimates and projections.

1/ Public sector is defined as consolidated public sector.

2/ Based on available data.

3/ EMBIG.

4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

5/ Derived as [(r - π(1+ g) + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.

7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Annex IV. Costa Rica: External Debt Sustainability Analysis
ActualEst.Projections
201320142015201620172018201920202021Debt-stabilizing
non-interest
current account 6/
Baseline: External debt35.638.838.436.534.932.630.428.326.2−4.8
Change in external debt3.73.2−0.4−1.9−1.5−2.4−2.2−2.1−2.10.0
Identified external debt-creating flows (4+8+9)−2.40.3−2.9−3.2−2.8−2.8−2.6−2.5−2.50.0
Current account deficit, excluding interest payments4.23.73.03.23.23.13.23.23.34.8
Deficit in balance of goods and services3.21.80.00.00.0−0.10.00.00.0
Exports35.535.332.231.631.731.731.831.731.5
Imports38.737.232.231.731.731.731.831.731.5
Net non-debt creating capital inflows (negative)−5.4−4.4−4.5−4.7−4.7−4.7−4.8−4.8−4.8−4.8
Automatic debt dynamics 1/−1.21.0−1.4−1.7−1.3−1.2−1.0−0.9−0.90.0
Contribution from nominal interest rate0.81.01.01.01.01.11.11.11.11.0
Contribution from real GDP growth−0.5−1.1−1.3−1.5−1.5−1.4−1.3−1.1−1.1−1.0
Contribution from price and exchange rate changes 2/−1.5
Residual, incl. change in gross foreign assets (2–3) 3/6.02.92.51.31.20.40.40.40.40.0
External debt-to-exports ratio (in percent)100.3109.8119.2115.4110.3102.695.689.383.3
Gross external financing need (in billions of US dollars) 4/6.86.35.85.85.85.85.84.95.0
in percent of GDP13.812.610.910.29.59.08.46.66.3
Scenario with key variables at their historical averages 5/34.932.429.426.523.821.3−6.6
For debt
Key Macroeconomic Assumptions Underlying Baselinestabilization
Real GDP growth (in percent)1.83.03.74.24.34.44.34.04.04.0
GDP deflator in US dollars (change in percent)4.9−2.82.93.22.42.52.72.93.3
3.3
Nominal external interest rate (in percent)2.82.82.82.83.03.43.83.94.04.0
Growth of exports (US dollar terms, in percent)3.9−0.5−2.75.66.97.27.26.86.7
Growth of imports (US dollar terms, in percent)1.7−4.0−7.75.96.77.17.46.76.8
Current account balance, excluding interest payments−4.2−3.7−3.0−3.2−3.2−3.1−3.2−3.2−3.3
Net non-debt creating capital inflows5.44.44.54.74.74.74.84.84.8
Source: National authorities and Fund staff estimates.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Source: National authorities and Fund staff estimates.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Costa Rica: External Debt Sustainability—Bound Tests 1/2/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2016.

Intel’s closure resulted in both lower real GDP and lower potential output of ¾ percent of GDP in 2014–15, without any effect on the output gap in the short run.

After a substantial decline in 2014 reflecting in part the end of reinvestment of retained earnings by Intel, FDI remained steady in 2015, suggesting limited impact of the exit on broader FDI trends.

Moody’s downgraded Costa Rica’s external sovereign debt by one notch in 2014 with a negative outlook on its current Ba1 rating. S&P downgraded the sovereign by one notch to BB- in 2016, while Fitch has a negative outlook on its BB+ rating since 2015.

The effect of Intel’s manufacturing closure on the growth rate of potential GDP is estimated to be less than ¼ percentage points. The withdrawal is not expected to have significant impact on fiscal revenue as Intel operated in the free trade zone.

The authorities and the financial community confirmed that any requests for additional information on AML/CFT procedures and readiness from correspondent banks had been satisfactorily met and that there had not been any loss of correspondent accounts. Moreover, domestic banks had remained active in monitoring possible AML/CFT activity, as demonstrated by a recent case currently under investigation raised by one of the public banks.

Adjusted for targets in the medium-term framework (published together with the budget law) that have generally been more aligned with the authorities’ intended fiscal stance.

According to the October 2015 Global Financial Stability Report, private sector debt of emerging markets increased from just over 60 percent of GDP in 2005 to almost 125 percent of GDP in 2014.

GAFILAT is the FATF-style regional body of which Costa Rica is a member.

The basics output table for the DSA at the consolidated public sector level shows that the estimated sustainability gap in 2021 is lower than at the central government level, given lower actual and projected primary deficits and average interest rates at the consolidated level.

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