1. Background

Since the mid-1980s Costa Rica has been implementing programs of fiscal consolidation and structural reform (supported by the Fund and the World Bank) aimed at achieving financial stability and placing the economy on a path of sustained economic growth. The combined public sector deficit (including the operating losses of the Central Bank) was reduced from 7 percent of GDP in 1985 to an annual average of 3 ½ percent of GDP in 1987–88. However, by 1990 financial imbalances had reemerged as the combined public sector deficit widened to 5 percent of GDP, inflation accelerated sharply to 27 percent from 10 percent in the previous year, and net international reserves fell by US$515 million.

To address these imbalances the Government that took office in May 1990 initiated an economic program for 1991–92 aimed at lowering inflation, strengthening the balance of payments, and setting the stage for sustained economic growth. These objectives were to be achieved through restrained financial policies, an exchange rate policy aimed at maintaining export competitiveness, and liberalization of prices, international trade, and the exchange system.

2. Developments during 1991–92

Real GDP growth slowed from an average rate of 4 ½ percent in 1989–90 to 2 ½ percent in 1991 but rose sharply by 7.7 percent in 1992, led by private investment in construction, tourism, and services, and a sharp buildup in stocks, partly related to the trade liberalization which began in 1991. The unemployment rate fell from 5.5 percent in 1991 to 4 percent in 1992, and the rate of increase of consumer prices slowed from 25 percent in 1991 to 17 percent in 1992 reflecting the impact of tighter financial policies and lower import tariffs related to ongoing trade reforms.

The combined public sector deficit narrowed to 2 percent of GDP in 1991, mainly on account of the introduction of temporary tax measures ^1/ and an increase in prices and rates charged by state enterprises. On the expenditure side, central government transfers were reduced and the wage bill declined due to a reduction in public sector employment. The combined deficit fell further to 1 percent of GDP in 1992 reflecting strong growth in import-based revenues, a strengthening of tax administration, and a decline in the operating losses of the Central Bank from an average of 2 percent of GDP a year in 1990–91 to 1.7 percent of GDP in 1992 (Table 1).

Table 1.

Costa Rica: Summary Public Sector Operations

(Cumulative flows)

^1/Excluding transfer to cover intervention of Banco Anglo Costarricense.

^2/Includes rescheduling.

^3/Including capital gains and interest arrears.

Table 1.

Costa Rica: Summary Public Sector Operations

(Cumulative flows)

							1993		1994
			1989	1990	1991	1992	Jan.-Jun.	Jan.-Dec.	Jan.-Jun. Prel.
			(In billions of colones)
Central Government			−17.3	−23.1	−21.2	−17.4	−4.3	−20.7	−30.0
	Revenue		65.1	76.0	102.2	140.9	83.0	167.5	88.6
	Expenditure		82.4	99.1	123.4	158.3	87.3	188.2	118.6
Major public entities			5.9	6.0	17.7	19.9	9.7	23.6	1.5
	RECOFE		0.5	0.7	6.8	6.5	1.3	6.9	1.9
	ICE		2.8	3.3	8.6	4.2	2.5	7.0	−5.8
	CCSS		3.1	2.7	3.1	8.7	7.2	10.9	8.6
	CUP		−0.5	−0.7	−0.8	0.5	−1.3	−1.2	−3.2
Other public entities			−0.8	1.8	2.4	3.6	3.2	3.1	6.4
Nonfinancial public sector surplus/deficit			−12.2	−15.3	−1.1	6.1	8.6	6.0	−22.1
Financing (net)			12.2	15.3	1.1	−6.1	−8.6	−6.0	22.1
	External borrowing (net)		3.7	1.5	1.4	5.2	−4.5	−0.2	1.0
		Disbursements 2/	6.8	7.3	18.4	22.0	12.9	25.3	18.9
		Amortisation	−4.5	−8.4	−17.7	−22.9	−10.6	−20.1	−19.1
		Change in arrears	1.4	2.6	0.7	6.1	−6.8	−5.4	1.2
	Domestic financing		8.5	13.8	−0.3	−11.2	−4.2	−5.8	21.1
		Central Bank	4.8	16.0	−9.9	−6.7	−8.3	−8.7	−3.1
		Rest of banking system	3.7	−2.2	9.6	−15.9	−8.8	−6.5	−10.1
		Bonds	—	—	—	15.1	4.7	17.8	26.5
		Float and other 3/	—	—	—	−3.7	8.2	−8.4	7.8
Memorandum items
Central bank losses			−11.7	−10.5	−12.7	−15.8	−7.8	−15.9	−9.6
Combined public sector balance			−23.9	−25.8	−13.8	−9.7	—	−9.9	−31.7
			(In percent of GDP)
Central Government			−4.1	−4.5	−3.1	−1.9	−0.8	−1.9	−4.7
	Revenue		15.4	14.6	14.8	15.6	15.6	15.6	13.9
	Expenditure		19.5	19.1	17.9	17.5	16.4	17.5	18.6
Public entities			1.4	1.2	2.6	2.2	1.8	2.2	0.2
Other public entities			−0.2	0.3	0.4	0.4	0.6	0.3	1.0
Nonfinancial public sector surplus/deficit			−2.9	−3.0	−0.2	0.7	1.6	0.6	−3.5
Financing (net)			2.9	3.0	0.2	−0.7	−1.6	−0.6	3.5
	External		0.9	0.3	0.2	0.6	−0.8	−0.1	0.2
	Domestic		2.0	2.7	—	−1.2	−0.8	−0.5	3.2
Memorandum items
Central bank losses			−2.8	−2.0	−1.9	−1.7	−1.5	−1.5	−1.5
Combined public sector balance			−5.7	−5.0	−2.1	−1.1	0.1	−0.9	−5.0
Combined public sector savings			2.6	1.7	1.5	1.6	4.5	4.7	0.7

^1/Excluding transfer to cover intervention of Banco Anglo Costarricense.

^2/Includes rescheduling.

^3/Including capital gains and interest arrears.

View Table

Table 1.

Costa Rica: Summary Public Sector Operations

(Cumulative flows)

							1993		1994
			1989	1990	1991	1992	Jan.-Jun.	Jan.-Dec.	Jan.-Jun. Prel.
			(In billions of colones)
Central Government			−17.3	−23.1	−21.2	−17.4	−4.3	−20.7	−30.0
	Revenue		65.1	76.0	102.2	140.9	83.0	167.5	88.6
	Expenditure		82.4	99.1	123.4	158.3	87.3	188.2	118.6
Major public entities			5.9	6.0	17.7	19.9	9.7	23.6	1.5
	RECOFE		0.5	0.7	6.8	6.5	1.3	6.9	1.9
	ICE		2.8	3.3	8.6	4.2	2.5	7.0	−5.8
	CCSS		3.1	2.7	3.1	8.7	7.2	10.9	8.6
	CUP		−0.5	−0.7	−0.8	0.5	−1.3	−1.2	−3.2
Other public entities			−0.8	1.8	2.4	3.6	3.2	3.1	6.4
Nonfinancial public sector surplus/deficit			−12.2	−15.3	−1.1	6.1	8.6	6.0	−22.1
Financing (net)			12.2	15.3	1.1	−6.1	−8.6	−6.0	22.1
	External borrowing (net)		3.7	1.5	1.4	5.2	−4.5	−0.2	1.0
		Disbursements 2/	6.8	7.3	18.4	22.0	12.9	25.3	18.9
		Amortisation	−4.5	−8.4	−17.7	−22.9	−10.6	−20.1	−19.1
		Change in arrears	1.4	2.6	0.7	6.1	−6.8	−5.4	1.2
	Domestic financing		8.5	13.8	−0.3	−11.2	−4.2	−5.8	21.1
		Central Bank	4.8	16.0	−9.9	−6.7	−8.3	−8.7	−3.1
		Rest of banking system	3.7	−2.2	9.6	−15.9	−8.8	−6.5	−10.1
		Bonds	—	—	—	15.1	4.7	17.8	26.5
		Float and other 3/	—	—	—	−3.7	8.2	−8.4	7.8
Memorandum items
Central bank losses			−11.7	−10.5	−12.7	−15.8	−7.8	−15.9	−9.6
Combined public sector balance			−23.9	−25.8	−13.8	−9.7	—	−9.9	−31.7
			(In percent of GDP)
Central Government			−4.1	−4.5	−3.1	−1.9	−0.8	−1.9	−4.7
	Revenue		15.4	14.6	14.8	15.6	15.6	15.6	13.9
	Expenditure		19.5	19.1	17.9	17.5	16.4	17.5	18.6
Public entities			1.4	1.2	2.6	2.2	1.8	2.2	0.2
Other public entities			−0.2	0.3	0.4	0.4	0.6	0.3	1.0
Nonfinancial public sector surplus/deficit			−2.9	−3.0	−0.2	0.7	1.6	0.6	−3.5
Financing (net)			2.9	3.0	0.2	−0.7	−1.6	−0.6	3.5
	External		0.9	0.3	0.2	0.6	−0.8	−0.1	0.2
	Domestic		2.0	2.7	—	−1.2	−0.8	−0.5	3.2
Memorandum items
Central bank losses			−2.8	−2.0	−1.9	−1.7	−1.5	−1.5	−1.5
Combined public sector balance			−5.7	−5.0	−2.1	−1.1	0.1	−0.9	−5.0
Combined public sector savings			2.6	1.7	1.5	1.6	4.5	4.7	0.7

^1/Excluding transfer to cover intervention of Banco Anglo Costarricense.

^2/Includes rescheduling.

^3/Including capital gains and interest arrears.

The reduction in the combined public sector deficit in 1991 was accompanied by a tightening of monetary policy and interest rates (on three-month central bank bonds) rose from 24 percent in mid-1990 to 30 percent by December 1991. However, following large private capital inflows interest rates declined in the first half of 1992 and credit to the private sector began to accelerate sharply. ^1/ The Central Bank responded by speeding up the issue of Stabilization Bonds to mop up excess liquidity, and raising the reserve requirement on demand deposits by a total of 6 percentage points in August-November 1992. Effective September 1992, steps were taken to increase competition in the banking system. Private banks were permitted to accept all types of deposits, except demand deposits (which remained the monopoly of the state banks) and to make loans in foreign exchange.

Reflecting the tightening of financial policies the external current account deficit (excluding balance of payments transfers) fell from 9 percent of GDP in 1990 to about 2 percent of GDP in 1991 (Table 7). The reduction in the external current account deficit together with debt rescheduling operations allowed for a marked recovery of net international reserves. The external current account deficit widened to 5.6 percent of GDP in 1992 as import volumes recovered following the liberalization of the trade system. ^2/ Also, private capital inflows increased sharply and net international reserves rose further by US$145 million. The ratio of external public debt to GDP declined from 58 percent in 1990 to 49 percent of GDP in 1992, and the debt service ratio (after rescheduling) fell from 35 percent to 20 percent in the same period.

The Costa Rican currency (the colón) depreciated in real effective terms by 9 percent in 1991, as the authorities sought to boost exports, and offset the effects on imports and import competing industries of the decline in average import tariffs (from 45 percent to 40 percent) and the elimination of the 10 percent import surcharge. In March 1992 the crawling peg system was replaced by a managed exchange rate float, and for the year as a whole the colón appreciated in real effective terms by 2 percent (Chart 1).

View Full Size

Costa Rica: Exchange Rate Developments

(1987=100)

Citation: IMF Staff Country Reports 1995, 002; 10.5089/9781451809565.002.A001

Source: IMF Information Notice System.1/ Trade-weighted index of nominal exchange rates deflated by seasonally adjusted relative consumer prices. An increase (decrease) indicates appreciation (depreciation).

• Download Figure
• Download figure as PowerPoint slide

3. Developments during 1993–94

Economic activity continued to be buoyant in 1993. Real GDP expanded by 6.4 percent as private consumption and investment—especially in manufacturing, tourism and construction—remained strong. Partial indicators through the first half of 1994 point to a real GDP growth of 4.3 percent for the year as a whole. Inflation declined to 9 percent during 1993 but rose to 16 percent in the year ended September 1994. In May 1994 the new Government ^1/ introduced a system of monitoring closely a basket of 49 basic commodities with a view to ensuring that prices fully reflect market conditions. ^2/

As economic growth accelerated in 1992–93, labor market conditions tightened especially in the agricultural sector, resulting in occasional shortages of labor, for example during coffee and banana harvesting. These shortages have been met largely by importing temporary labor from neighboring countries. After declining by a yearly average of 2 percent in 1990–92, average real wages rose by 11 ½ percent in 1993, with the increase in private sector wages lagging that in the public sector. In the latter sector wage increases reflected adjustments to restore real wages which had declined in previous years, and large pay increases to employees in certain agencies of the government.

Fiscal consolidation continued through the first half of 1993 with the operations of the combined public sector yielding a small surplus reflecting mainly buoyant import-based revenues in the Central Government. However, in the second half of 1993 the combined public sector position shifted to a deficit of 2 percent of GDP (on an annual basis) as expenditures on wages and salaries and central government transfers to the private sector rose sharply while revenue remained unchanged relative to GDP. For the year as a whole the combined public sector deficit was 0.9 percent of GDP, with a surplus in the nonfinancial public sector only partially offsetting the operational losses of the Central Bank equivalent to 1.5 percent of GDP. The nonfinancial public sector surplus permitted a reduction in external payment arrears from 1.2 percent of GDP in 1992 to 0.5 percent of GDP in 1993.

The combined public sector deficit widened to 5 percent of GDP (on an annual basis) in the first half of 1994, and public sector savings fell by 4 percentage points of GDP to 0.7 percent of GDP. The deficit of the Central Government rose to 4.7 percent of GDP from 0.8 percent of GDP in the same period in 1993, reflecting mainly a decline in import-based revenue and a lowering of the sales tax rate from 11 percent to 10 percent effective January 1994. At the same time, government expenditure increased by 2.2 percentage points of GDP over the level in the same period of 1993. The government wage bill rose by 29 percent in the year ended June 1994 reflecting mainly increased employment, automatic wage adjustments to maintain parities, and wage increases committed in previous years. In addition, pension payments increased sharply following a court decision to allow additional government employees to enrol in the pension plan of the Ministry of Finance which has relatively more generous benefits than the pension plan of the social security scheme. ^1/ Higher interest payments reflected increases in interest rates since mid-1993, and in the domestic indebtedness of the Central Government (Table 2).

Table 2.

Costa Rica: Summary Central Government Operations

Sources: Ministry of Finance; and Fund staff estimates.

Table 2.

Costa Rica: Summary Central Government Operations

						1993		1994
		1989	1990	1991	1992	Jan.-June	Jan.-Dec.	Jan.-June
(In millions of colones)
Total revenue		65,100	76,010	102,150	140,900	82,996	167,500	88,595
Tax revenue		61,444	73,233	99,053	136,984	81,024	164,345	80,908
	Direct taxes	11,336	13,884	17,089	23,567	16,670	34,018	14,254
	Indirect taxes	50,108	59,349	81,964	113,417	64,354	130,327	66,654
Nontax revenue		3,656	2,777	3,097	3,916	1,972	3,155	7,687
Total expenditure		82,430	99,143	123,388	158,336	87,334	188,244	118,564
Currant expenditure		69,627	87,977	113,471	142,475	75,882	167,144	102,796
Wages and salaries		23,734	30,204	37,437	45,888	24,739	57,845	31,906
Goods and services		4,300	4,763	5,664	6,491	4,052	7,754	5,550
Interest payments		12,540	17,450	28,572	32,994	13,909	33,297	25,109
Transfers		29,053	35,560	41,798	57,102	31,182	68,248	40,231
	Public sector	6,155	7,332	6,728	12,916	7,782	15,564	9,175
	Private sector	22,658	27,978	34,965	43,969	23,278	52,234	28,145
	External sector	240	250	106	217	122	450	2,911
Capital expenditure		12,803	11,165	9,917	13,861	11,451	21,100	15,768
Fixed investment		3,040	3,821	4,080	5,655	3,673	6,642	5,716
Transfers		9,610	7,207	5,488	9,868	7,528	14,013	9,780
Other		153	138	349	338	251	445	272
Overall balance (deficit -)		−17,330	−23,133	−21,238	−17,436	−4,336	−20,744	−29,969
(In percent of GDP)
Total revenue		15.5	14.6	14.8	15.6	15.6	15.6	13.9
Total expenditure		19.5	19.1	17.9	17.5	16.4	17.5	18.6
Currant expenditure		16.5	16.9	16.4	15.8	14.2	15.6	16.1
Capital expenditure		3.0	2.2	1.4	1.8	2.2	1.9	2.5
Overall balance (deficit -)		−4.1	−4.5	−3.1	−1.9	−0.8	−1.9	−4.7

Sources: Ministry of Finance; and Fund staff estimates.

View Table

Table 2.

Costa Rica: Summary Central Government Operations

						1993		1994
		1989	1990	1991	1992	Jan.-June	Jan.-Dec.	Jan.-June
(In millions of colones)
Total revenue		65,100	76,010	102,150	140,900	82,996	167,500	88,595
Tax revenue		61,444	73,233	99,053	136,984	81,024	164,345	80,908
	Direct taxes	11,336	13,884	17,089	23,567	16,670	34,018	14,254
	Indirect taxes	50,108	59,349	81,964	113,417	64,354	130,327	66,654
Nontax revenue		3,656	2,777	3,097	3,916	1,972	3,155	7,687
Total expenditure		82,430	99,143	123,388	158,336	87,334	188,244	118,564
Currant expenditure		69,627	87,977	113,471	142,475	75,882	167,144	102,796
Wages and salaries		23,734	30,204	37,437	45,888	24,739	57,845	31,906
Goods and services		4,300	4,763	5,664	6,491	4,052	7,754	5,550
Interest payments		12,540	17,450	28,572	32,994	13,909	33,297	25,109
Transfers		29,053	35,560	41,798	57,102	31,182	68,248	40,231
	Public sector	6,155	7,332	6,728	12,916	7,782	15,564	9,175
	Private sector	22,658	27,978	34,965	43,969	23,278	52,234	28,145
	External sector	240	250	106	217	122	450	2,911
Capital expenditure		12,803	11,165	9,917	13,861	11,451	21,100	15,768
Fixed investment		3,040	3,821	4,080	5,655	3,673	6,642	5,716
Transfers		9,610	7,207	5,488	9,868	7,528	14,013	9,780
Other		153	138	349	338	251	445	272
Overall balance (deficit -)		−17,330	−23,133	−21,238	−17,436	−4,336	−20,744	−29,969
(In percent of GDP)
Total revenue		15.5	14.6	14.8	15.6	15.6	15.6	13.9
Total expenditure		19.5	19.1	17.9	17.5	16.4	17.5	18.6
Currant expenditure		16.5	16.9	16.4	15.8	14.2	15.6	16.1
Capital expenditure		3.0	2.2	1.4	1.8	2.2	1.9	2.5
Overall balance (deficit -)		−4.1	−4.5	−3.1	−1.9	−0.8	−1.9	−4.7

Sources: Ministry of Finance; and Fund staff estimates.

The surplus of the public enterprises fell from 2.2 percent of GDP in the first half of 1993 to 1.2 percent of GDP in the same period of 1994 largely as a result of the adverse impact of a drought on electricity generation costs, delays in adjusting electricity tariffs and petroleum prices, and large increases in the wage bill.

As the fiscal position began to worsen in the second half of 1993, the Central Bank tightened monetary policy by intensifying open market operations and raising substantially reserve requirements on foreign and domestic currency deposits. Interest rates on three-month Stabilization Bonds increased from 13.8 percent in May 1993 to 24.5 percent in December 1993. Credit policy, however, became accommodating in the first half of 1994. Central Bank credit to the public sector grew by 3.4 percent—after 2 years of decline—and interest rates on three-month Stabilization Bonds fell to 21.7 percent in June 1994 despite the acceleration of inflation and the increase in foreign interest rates. Interest rates on three-month central bank Stabilization Bonds were subsequently raised by 2.5 percentage points in September and 2 percentage points in October.

In mid-June, the Auditor General of Financial Institutions intervened in the Banco Anglo Costarricense (BAC), the third largest state bank, which held 17 percent of total banking system liabilities in March 1994 and had accumulated losses of C 16.3 billion (1.3 percent of GDP) by June 1994. Following the publication of the Auditor General’s report in September, the authorities moved quickly to close the bank and strengthen supervision over the financial system.

The external current account deficit widened to 6.3 percent of GDP in 1993 as a strong growth in imports more than offset the expansion in export and tourism earnings. Export value rose by 13.5 percent in 1993 following an improvement in commodity prices and continued strength in nontraditional export volumes. Tourism receipts grew by 34 percent (1 ½ percentage points of GDP) reaching about 8 percent of GDP and surpassing bananas for the first time as the primary source of foreign exchange receipts. Private capital inflows of about the same magnitude as in 1992 (US$390 million)—more than half of which comprised direct investment—offset a small net official capital outflow. Despite a rescheduling of debts totaling US$58 million to Paris Club creditors in June 1993, external payments arrears outstanding at the end of 1993 stood at about US$40 million. Net international reserves increased by US$95 million to the equivalent of 8.2 weeks of imports.

In the first half of 1994 a slowdown in import growth together with continued strong growth in tourism receipts led to a reduction in the external current account deficit to 5.2 percent of GDP (on an annual basis). Preliminary estimates indicate that private capital inflows in the first half of 1994 were markedly lower than in the same period of 1993, while the deficit in the official capital account widened. As a result, net international reserves fell by about US$100 million in the six months ending June to the equivalent of 6 weeks of imports.

The external public debt fell from 49 percent of GDP at end-1992 to 40 percent of GDP in June 1994, and the debt service ratio came down from 20 percent to 16 percent over the same period. Under the managed float policy, the colón depreciated against the U.S. dollar by 16 percent during 1993, with most of the depreciation occurring in the second semester. The rate of depreciation slowed to 11 percent in the 12 months through September 1994. In real effective terms, the exchange rate has depreciated by 5 percent since end-1992.

1. Reform proposals in the tax and customs areas

A tax reform package which includes some of the structural reforms supported by the program and public sector reform loans from the World Bank and the Inter-American Development Bank (IDB) has been pending before the National Assembly since 1992. The new administration which took office in May 1994 is considering the introduction of tax reforms based on measures outline below.

The tax reform aims to increase revenues and to improve the structure and efficiency of the tax system. The tax package consists of (a) immediate term measures to raise revenue to address the current fiscal imbalance and (b) medium-term steps to improve the tax structure and tax administration and to reduce the reliance on import-based taxes which accounted for 49 percent of central government revenue in 1993.

As regards revenue measures, the authorities’ proposals include (a) an increase in the sales tax rate by 3 to 5 percentage points and a broadening of the sales tax base to cover a wider range of services and some domestic transactions, but excluding some medical services; (b) increases in selective consumption taxes on petroleum products; and (c) introduction of a tax of 1 percent on the gross assets of companies.

Proposals for long-term improvements in tax administration envisage strengthening the legal framework for enforcing tax collection, including provision for the sale of businesses which fail to meet their tax obligations; and eliminating minor taxes and some low-yielding selective consumption taxes. ^1/ Tax administration and efficiency would be improved also by updating the valuation of property for tax purposes (which has already started), revising depreciation schedules used for tax purposes, and eliminating the tax deductibility of interest payments. Reliance on import based taxes would be reduced by expanding the income tax base to include all sources of income and the gross assets tax on corporations, mentioned above. The authorities estimate that the tax reform could raise revenue by some 3 percent of GDP annually over the medium term.

The customs reform is designed to modernize the customs department through increased automation, improvement in procedures for customs valuation and tax collection, and upgrading of skills. Steps were initiated in August 1994 to replace low-skilled employees with more qualified staff, and legislation has been sent to the Assembly to strengthen the Ministry of Finance’s authority to collect customs revenue, and to allow for the use of pre-shipment inspection agencies.

2. Issues in government expenditure

Central Government expenditure is heavily—and increasingly—weighted toward current expenditure. Costa Rica’s recurrent fiscal problems partly result from this inflexibility. In recent years it was possible to postpone reforms because the economic recovery combined with trade and capital market liberalization led to strong increases in tax revenue. More recently however, as economic growth and imports have slowed, revenue and expenditure reforms have become increasingly urgent.

Current expenditure accounted for some 89 percent of total outlays in 1993. Moreover, contractual payments—i.e., wages, salaries and pension payments—accounted for almost one half, and interest payments one fifth (Table 2). In addition, about one quarter of current expenditure is mandated—i.e., consists of transfers linked to earmarked revenues. ^2/ There has not been any significant change in the shares of these elements of current expenditure in recent years. This created pressures to contain capital expenditure, which has stagnated at some 2 percent of GDP since 1990, compared with an average of 3 percent of GDP in 1986–89. Reflecting this, deteriorating infrastructure has been cited as an important constraint on economic activity.

Average real wages in the Central Government, after falling by 3 percent in 1991, rose by 8 percent in 1992 and 15 percent in 1993, and are expected to increase again in 1994. These increases reflected adjustments to maintain salary differentials, wage increases committed in previous years, and substantial wage raises to employees of some agencies of the government. In 1993–94, increases in the central government wage bill also stemmed from increased employment.

Pension payments by the Government to employees under the Ministry of Finance’s pension plan have risen from 1.7 percent of GDP in 1991 to 2 percent in 1993 and the first half of 1994. This reflected legislation passed in 1992 which required pension payments by the Ministry of Finance to an additional 4,000 public sector employees not previously eligible to enrol in the Ministry’s pension plan. The Ministry’s plan offers higher benefits than those offered by the Social Security Scheme (CCSS), allowing retirement at age 55 and after 30 years of service at an annual pension equal to the latest annual salary, adjusted for annual cost of living increases. The pension offered by the CCSS permits retirement at age 65 at a pension subject to an upper limit that has no automatic adjustments.

Total interest payments fell in terms of GDP in 1993, but are expected to increase by 64 percent in 1994 (from 3.1 to 4.2 percent of GDP). Interest payments on domestic debts fell in 1993, but could rise by 78 percent this year, as a result of higher interest rates and a sharp increase in domestic debt. ^1/ External interest payments are relatively low and have fallen slightly, from 0.9 percent of GDP in the early 1990s to 0.7 percent in June 1994, as the stock of central government external debt declined.

Over the medium term it would be important to reduce the share of earmarked and automatic expenditure in total outlays so as to increase flexibility in expenditure decisions, including giving more room for capital outlays. The Government has set up a Presidential Commission to examine ways to contain the growth of the wage bill and transfer payments and to restructure government expenditure, with a view to increasing resources for needed improvements in infrastructure.

Under the program loans from the World Bank and the IDB which were approved by the National Assembly in November 1994, the Government would take steps to reduce the scope of public sector by contracting out construction and other services to the private sector, privatizing certain state enterprises, and restructuring key government ministries and agencies (see below). Implementation of these reforms would lead to a phased reduction in public sector employment.

3. Institutional reforms

1. Monetary policy

After the abandonment of formal credit limits in 1991, the main instruments of monetary policy have been open market operations and reserve requirements. However, the use of indirect monetary tools has been made more difficult because of the quasi-fiscal deficit of the Central Bank associated with open market operations in the face of large capital inflows.

In the context of assigning a greater role to market forces, the authorities replaced their crawling peg exchange rate system with a managed float in March 1992. At the same time, the foreign exchange and financial markets were liberalized, and the Central Bank started to auction Stabilization Bonds (previously offered only over-the-counter). The combination of rising nominal interest rates and a strengthening of the colón led to high premie on colón-denominated instruments that contributed to large capital inflows in the first semester of 1992. The colón appreciated in nominal terms in the first semester of 1992 and interest rates subsequently fell to 16 percent in June from 26 percent in January-February. As the private sector demand for credit strengthened in the second half of the year, nominal interest rates edged up again, reaching 19 percent by the end of 1992.

This cyclical behavior of interest rates, although partially explained by seasonal factors, was even more pronounced in 1993. Capital inflows were strong in the first semester, and efforts to sterilize these flows led to a sharp rise in the stock of Stabilization Bonds held by the private sector to C 52.6 billion in June 1993. Interest rates fell to under 14 percent in May of that year, which combined with an increase in expected depreciation—due to doubts concerning the sustainability of the external deficit—led to a reversal of capital flows in the second semester. Monetary policy was tightened and nominal interest rates increased to 27 percent in September 1993 with real rates averaging 12 percent in the second half of the year. The stance of credit policy weakened in the first half of 1994, and interest rates fell to 24.2 percent in February of 1994 and stayed at that level until early September, despite an increase in foreign interest rates.

Inadequate coordination on bond issues between the Central Bank and the Treasury has also led to difficulties in conducting monetary policy. Both institutions compete in capital markets by offering bonds of varying maturities that are close substitutes. This has high administrative costs, inhibits the deepening of secondary markets and creates coordination problems for both institutions. Monetary control, as well as the government financing needs, could be better served by centralizing bond issues in the Treasury, with the Central Bank conducting open market operations in these bonds according to the market’s liquidity needs.

Recently, some progress has been achieved in coordinating bond issues in line with recommendations made by technical missions from the Fund. ^1/ Against the background of the Central Bank’s monetary program, the Open Market Committee (COMA) has been meeting weekly during 1994, with the participation of the Treasury and commercial banks, to coordinate the timing and volume of bonds to be issued, interest rates, and commissions. The Treasury and the Central Bank have an informal agreement that any funds absorbed by government bonds in excess of the amount programmed for covering government operations will be sterilized at the Central Bank. Since July 1994, the Treasury has not participated in the market for instruments of less than 30 days maturity, as part of efforts to improve the maturity structure of its debt. ^1/ The frequency of auctions will be reduced from once a day to three times per week in the near future, and ultimately to once per week.

Reserve requirements continue to be an important instrument of credit control, although the authorities are making efforts to move toward the use of indirect monetary instruments. Reserve requirements have raised the cost of credit in domestic currency which, combined with a resolution of the Constitutional Court (Sala IV) guaranteeing the right of commercial banks to transfer to borrowers the foreign exchange risk on loans denominated in foreign exchange, led to an almost tripling of private sector credit in foreign currency in 1993. In response, the Central Bank equalized reserve requirements on foreign and domestic currency deposits between August and October 1993, ^2/ which resulted in a marked slowdown in the growth of foreign currency deposits, compared to quasi-money (Statistical Appendix Table 26). High reserve requirements have also led to the development of mutual funds issued by brokerage firms which provide an attractive mix of liquidity and yield, and have contributed to the disintermediation in the banking system. ^3/

The expansion of credit from the Central Bank to assist the liquidity needs of BAC has posed a further challenge to the conduct of monetary policy. To reduce the scale of open market operations needed to sterilize that liquidity as well as to slow down the growth of private sector credit, the Central Bank recently announced indicative, nonbinding credit targets for individual banks.

2. Financial sector structure and reforms

The financial sector in Costa Rica is dominated by the banking system and, in particular, by large public banks. Although financial markets were substantially liberalized in 1992, capital markets are still underdeveloped and a large fraction of foreign exchange transactions are carried out outside the banking system. Distortionary taxes ^4/ and regulations that do not apply uniformly to all intermediaries contribute to the inefficiency of the financial system. This has led, in turn, to the development of domestic instruments and off-shore transactions that reduce the effectiveness of bank supervision.

3. Operational losses of the Central Bank of Costa Rice

The operational losses of the Central Bank have been a cause of concern both for their quasi-fiscal nature and for the constraints they impose on monetary policy. These losses have declined steadily from 5.3 percent of GDP in 1985 to 2.5 percent in 1990 and 1.5 percent in December of 1993 (Table 4). Preliminary estimates indicate that operating losses could reach 1.6 percent of GDP in 1994. Rising interest rates due to continuing fiscal pressures indicate that a further reduction in operational losses of the Central Bank in the near future is unlikely. A recapitalization of the bank with government bonds—as recommended by technical assistance missions from the Fund—would transfer the losses to the Central Government and would give more transparency to the bank’s operations. However, such a solution would require a sharp improvement in the finances of the nonfinancial public sector.

Table 3.

Costa Rica: Interest Rates

(In percent, annual basis)

Source: Central Bank of Costa Rica; and staff estimates.

^1/Ex-post real rate.

^2/Ex-post excess return of colón bonds vis-à-vis LIBOR plus depreciation.

^3/BNCR base lending minus deposit rates.

Table 3.

Costa Rica: Interest Rates

(In percent, annual basis)

	Nominal Rates			Real Rate 1/	Premium 2/	Spread 3/
	Stabilisation Bond (6 mths)	Government Bond (6 mths)	BNCR Base Loading Rate	Stabilisation Bond (6 mths)	Stabilisation Bond (6 mths)	BNCR
1990
Dec.	34.00	35.60	41.50	2.84	−12.61	9.50
1991
March	34.50	33.50	41.50	6.44	−0.97	11.50
June	30.50	30.50	39.75	8.28	2.00	10.25
Sept.	31.50	31.50	39.75	4.48	19.64	10.25
Dec;	29.75	29.75	39.00	3.38	26.15	11.50
1992
March	20.00	20.00	33.00	7.29	9.91	13.00
June	16.00	16.00	25.00	6.41	6.54	14.00
Sept.	17.25	16.25	28.00	7.99	9.78	11.50
Dec.	18.90	18.95	29.50	8.50	9.80	11.00
1993
March	15.95	15.70	29.50	6.17	0.87	13.50
June	17.94	17.95	29.50	8.79	−1.85	12.75
Sept.	27.17	27.15	38.00	12.20	10.35	16.00
Dec.	26.09	26.10	37.00	8.91	14.71	16.00
1994
March	24.18	24.20	34.00	8.51	10.47	14.00
June	24.18	24.20	34.00	9.22	7.64	14.00

Source: Central Bank of Costa Rica; and staff estimates.

^1/Ex-post real rate.

^2/Ex-post excess return of colón bonds vis-à-vis LIBOR plus depreciation.

^3/BNCR base lending minus deposit rates.

View Table

Table 3.

Costa Rica: Interest Rates

(In percent, annual basis)

	Nominal Rates			Real Rate 1/	Premium 2/	Spread 3/
	Stabilisation Bond (6 mths)	Government Bond (6 mths)	BNCR Base Loading Rate	Stabilisation Bond (6 mths)	Stabilisation Bond (6 mths)	BNCR
1990
Dec.	34.00	35.60	41.50	2.84	−12.61	9.50
1991
March	34.50	33.50	41.50	6.44	−0.97	11.50
June	30.50	30.50	39.75	8.28	2.00	10.25
Sept.	31.50	31.50	39.75	4.48	19.64	10.25
Dec;	29.75	29.75	39.00	3.38	26.15	11.50
1992
March	20.00	20.00	33.00	7.29	9.91	13.00
June	16.00	16.00	25.00	6.41	6.54	14.00
Sept.	17.25	16.25	28.00	7.99	9.78	11.50
Dec.	18.90	18.95	29.50	8.50	9.80	11.00
1993
March	15.95	15.70	29.50	6.17	0.87	13.50
June	17.94	17.95	29.50	8.79	−1.85	12.75
Sept.	27.17	27.15	38.00	12.20	10.35	16.00
Dec.	26.09	26.10	37.00	8.91	14.71	16.00
1994
March	24.18	24.20	34.00	8.51	10.47	14.00
June	24.18	24.20	34.00	9.22	7.64	14.00

Source: Central Bank of Costa Rica; and staff estimates.

^1/Ex-post real rate.

^2/Ex-post excess return of colón bonds vis-à-vis LIBOR plus depreciation.

^3/BNCR base lending minus deposit rates.

Table 4.

Costa Rica: Central Bank Operating Losses

Source: Central Bank of Costa Rica.

^1/In billions of colones.

Table 4.

Costa Rica: Central Bank Operating Losses

			December			June.	Dec.	June.
			1990	1991	1992	1993	1993	1994 Prel.
(In millions of current colones)
A. Income			17,966	20,265	17,445	7,472	15,618	7,730
	1. Interest		13,627	15,593	13,668	5,316	11,635	6,263
	2. Commissions		646	612	755	493	920	515
	3. Other		3,691	4,060	3,002	1,663	3,063	952
B. Expenditures			30,639	32,939	33,314	15,294	31,486	17,373
	a. Interest on domestic liabilities		8,268	10,140	11,128	5,473	11,240	6,885
		1. Stabilisation Bonds	6,011	5,673	6,602	3,240	6,899	4,814
		2. SICP	1,298	1,318	1,819	1,123	2,193	879
		3. Other	2,979	3,149	2,507	1,110	2,148	1,192
	b. Insterest on foreign liabilities		20,392	19,641	18,184	7,878	15,791	8,030
		1. Deposits	5,351	6,833	6,343	2,357	4,373	2,073
		2. External debt	15,061	12,808	11,641	5,521	11,418	5,957
	c. Other expenditure		2,159	3,158	4,002	1,943	4,455	2,458
C. Operating Losses (A-B)			(12.873)	(12,674)	(15,869)	(7,822)	(15,868)	(9,644)
(In percent of total expenditures)
A. Income			58.3	61.5	52.4	48.9	49.6	44.5
	1. Interest		46.8	47.3	41.1	34.6	37.0	36.1
	2. Commissions		2.1	1.9	2.3	3.2	2.9	3.0
	3. Other		11.3	12.3	9.0	10.9	9.7	5.5
B. Expenditure			100.0	100.0	100.0	100.0	100.0	100.0
	a. Interest on domestic liabilities		26.9	30.6	33.4	35.8	35.7	39.6
		1. Stabilisation Bonds	13.0	17.2	20.4	21.2	21.9	27.7
		2. SICP	4.2	4.0	5.5	7.3	7.0	5.1
		3. Other	9.7	9.6	7.5	7.3	6.8	6.9
	b. Interest on foreign liabilities		66.1	59.6	54.6	51.5	50.2	46.2
		1. Deposits	17.4	20.7	19.0	15.4	13.9	11.9
		2. External debt	48.8	36.9	35.5	36.1	36.3	34.3
	c. Other expenditure		7.0	9.6	12.0	12.7	14.1	14.1
C. Operating Losses (A-B)			−47.7	−38.5	−47.6	−51.1	−50.4	−55.5
Memorandum Items:
	Losses as percent of GDP		−2.5	−1.8	−1.8	−1.5	−1.5	−1.6
	Stabilisation Bonds (Stock at and of period) 1/		27,726	32,164	37,541	96,103	42,603	55,420
	Interest rate on Stabilisation Bonds		34.0	29.8	18.9	17.9	26.1	24.2

Source: Central Bank of Costa Rica.

^1/In billions of colones.

View Table

Table 4.

Costa Rica: Central Bank Operating Losses

			December			June.	Dec.	June.
			1990	1991	1992	1993	1993	1994 Prel.
(In millions of current colones)
A. Income			17,966	20,265	17,445	7,472	15,618	7,730
	1. Interest		13,627	15,593	13,668	5,316	11,635	6,263
	2. Commissions		646	612	755	493	920	515
	3. Other		3,691	4,060	3,002	1,663	3,063	952
B. Expenditures			30,639	32,939	33,314	15,294	31,486	17,373
	a. Interest on domestic liabilities		8,268	10,140	11,128	5,473	11,240	6,885
		1. Stabilisation Bonds	6,011	5,673	6,602	3,240	6,899	4,814
		2. SICP	1,298	1,318	1,819	1,123	2,193	879
		3. Other	2,979	3,149	2,507	1,110	2,148	1,192
	b. Insterest on foreign liabilities		20,392	19,641	18,184	7,878	15,791	8,030
		1. Deposits	5,351	6,833	6,343	2,357	4,373	2,073
		2. External debt	15,061	12,808	11,641	5,521	11,418	5,957
	c. Other expenditure		2,159	3,158	4,002	1,943	4,455	2,458
C. Operating Losses (A-B)			(12.873)	(12,674)	(15,869)	(7,822)	(15,868)	(9,644)
(In percent of total expenditures)
A. Income			58.3	61.5	52.4	48.9	49.6	44.5
	1. Interest		46.8	47.3	41.1	34.6	37.0	36.1
	2. Commissions		2.1	1.9	2.3	3.2	2.9	3.0
	3. Other		11.3	12.3	9.0	10.9	9.7	5.5
B. Expenditure			100.0	100.0	100.0	100.0	100.0	100.0
	a. Interest on domestic liabilities		26.9	30.6	33.4	35.8	35.7	39.6
		1. Stabilisation Bonds	13.0	17.2	20.4	21.2	21.9	27.7
		2. SICP	4.2	4.0	5.5	7.3	7.0	5.1
		3. Other	9.7	9.6	7.5	7.3	6.8	6.9
	b. Interest on foreign liabilities		66.1	59.6	54.6	51.5	50.2	46.2
		1. Deposits	17.4	20.7	19.0	15.4	13.9	11.9
		2. External debt	48.8	36.9	35.5	36.1	36.3	34.3
	c. Other expenditure		7.0	9.6	12.0	12.7	14.1	14.1
C. Operating Losses (A-B)			−47.7	−38.5	−47.6	−51.1	−50.4	−55.5
Memorandum Items:
	Losses as percent of GDP		−2.5	−1.8	−1.8	−1.5	−1.5	−1.6
	Stabilisation Bonds (Stock at and of period) 1/		27,726	32,164	37,541	96,103	42,603	55,420
	Interest rate on Stabilisation Bonds		34.0	29.8	18.9	17.9	26.1	24.2

Source: Central Bank of Costa Rica.

^1/In billions of colones.

The main sources of these losses are interest rate subsidies on loans intermediated by the Central Bank, together with the costs of sterilization operations. Interest rate subsidies derive mainly from external debts incurred by the Central Bank after the balance of payments crisis of 1980–82, which were on-lent to commercial banks and public entities at below-market interest rates. As a result, while roughly half of the bank’s foreign liabilities carry market interest rates, only 6 percent of foreign assets pay similar rates. Similarly, while half of the Central Bank’s domestic liabilities are serviced at market interest rates, only 7 percent of domestic assets pay market yields.

The bulk of domestic interest expenses derive from the issue of Stabilization Bonds that are used for sterilization purposes. These expenses have more than doubled—as a percent of total expenditures—between 1990 and 1994, indicating the rising cost of open market operations. Also, the interest burden remains high on short-term instruments (i.e., SICF, “Sistema de Inversiones de Corto Plazo”) introduced by the Bank in 1989 for liquidity management, and on account of incentives offered to state banks for attracting foreign exchange deposits. ^1/

The Central Bank has taken a series of measures since 1991 to further reduce its operational losses. In June 1991, it was agreed that the Central Bank would provide financing to the Government at market interest rates (more specifically, the rate of Stabilization Bonds plus 3 percentage points). Also, in 1991 the rediscount rate was set at “Tasa Básica” (a weighted average of six-month rates on Stabilization Bonds, government bonds, and commercial bank deposits) plus 12 percentage points. In 1992 the debt owed by the Consejo Nacional de Producción to the Bank (that carried an interest rate of 4 percent) was taken over by the Central Government which now pays a rate related to “Tasa Básica.” In addition, since October 1992 the interest rate charged for on-lending of foreign loans to commercial banks has been set at “Tasa Básica” plus 3.5 percentage points for domestic currency loans, and at a minimum margin of 11 percent for foreign currency-denominated loans. Finally, effective August 1993, the commission paid to commercial banks for attracting foreign currency deposits was reduced from 2 percent to 1 percent (for deposits of less than 12 months’ maturity).

1. Overview

Since the balance of payments crises in the early 1980s, the authorities’ macroeconomic adjustment policies have been accompanied by an aggressive export-oriented strategy. Measures to support this strategy included trade reforms to remove the anti-export bias, incentives for export diversification, exchange rate flexibility, and expansion of trade ties beyond Central America.

Costa Rica has made significant progress toward these goals. Nontraditional exports have surpassed traditional exports in importance; tourism has become a major source of foreign exchange receipts; the trade regime has been substantially liberalized; new trading agreements have been signed; and the foreign exchange and capital markets have been largely freed of restrictions.

2. Trade reforms

Supported by structural adjustment loans from the World Bank, and with the aim of promoting export-led growth, Costa Rica embarked in the mid-1980 on a path of rapid and sustained reform of its trade regime, most of it accomplished within the framework of the Central American Common Market (CACM). In the early 1990s, these efforts were accompanied by the liberalization of the foreign exchange and capital markets.

Under a 1985 CACM agreement, which began to take effect in 1986, Costa Rica moved to improve the import tariff regime by converting specific tariff rates to ad valorem tariffs, and reducing the level and dispersion of tariffs. The maximum tariff on most products was reduced from 220 percent in 1985 to 100 percent in 1986 and gradually to 20 percent by 1993. Exceptions to these rates included higher tariffs on competing (e.g., textiles) and luxury goods, and tariff exemptions for inputs used by exporters of nontraditional goods. The weighted average tariff fell from 18.1 percent in 1986 to 13.7 percent by the end of 1991 and 9.5 percent in September 1994. If imports exempted from tariffs are included in the calculations, the weighted average tariff decreased from 10.8 percent in 1986 to 8.0 percent in 1994. Import surcharges were reduced from 30 percent in 1985 to 3 percent by 1991 and eliminated in 1992. The import deposit and most import licensing requirements were abolished in 1991. The average weighted rate of effective protection as measured by the Central Bank was 8.9 percent in mid-1994, compared with an average of 16 percent in 1991. ^1/

Most export licenses were eliminated by 1989 and export subsidies began to be phased out in 1991. However, licensing requirements from a range of government agencies, and with varying degrees of automaticity, remain in effect for some 15 different product groups. ^2/ Legislation to abolish remaining export licenses is under consideration.

The pace of reform slowed in 1993, but under CACM commitments and Uruguay Round agreements, further trade reform is planned. Under the Uruguay Round, most of the remaining import licenses which have effectively barred entry to selected goods, particularly agricultural products, will be replaced by tariffs ranging from 10–55 percent. Regarding incentives to nontraditional exports, Costa Rica will eliminate tax exemption certificates (CATs) in 1999 and income tax exemptions in 1996, ahead of the Uruguay Round mandated schedule.

3. Foreign exchange market

Significant reform of the foreign exchange market took place in 1992. In March 1992, commercial banks and authorized financial institutions were allowed to trade foreign exchange at freely negotiated rates for current transactions (including debt service payments). All controls on capital transactions were eliminated in June 1992. Public institutions are still required to conduct foreign exchange transactions through the central bank’s foreign exchange system at the official reference rate (MONED). ^{1/ 2/}

The export proceeds surrender rate has been reduced steadily from 90 percent in March 1992 to 40 percent in April 1994, but in August 1994 the coverage was extended to all current foreign exchange receipts—including those from tourism and other services. The commercial banks are required to transfer to the Central Bank 25 percent of the total amount of foreign exchange proceeds surrendered to them.

A tax of 0.68 colones per dollar (equivalent to 0.4 percent at the exchange rate of 158 colones per dollar) applies to all foreign exchange transactions, and provides an incentive for transactions to take place outside the official market. As of June 1994, the Central Bank announced that the differential between buying and selling rates could not exceed 1 percent (down from 5 percent initially). Authorized foreign exchange trading institutions are not allowed to take open positions in foreign exchanges in excess of 1 percent of their initial position on a daily basis, or in excess of $50,000 on a weekly basis.

Throughout 1985–92 exchange rate policy comprised a crawling peg system together with periodic devaluations reflecting the differential between domestic and trading partner inflation, and occasional step devaluations to offset the effects of tariff reductions. In March 1992 this system was replaced by a managed float under which the Central Bank influences the exchange rate through intervention, in part aimed at maintaining export competitiveness. Since the end of 1992 the exchange rate has depreciated by 5 percent in real effective terms.

4. Export diversification

Against the background of the balance of payments difficulties in the 1980s and the susceptibility of Costa Rica’s key traditional exports (bananas, coffee, sugar and meat) to exogenous factors (such as the weather, crop cycles, price swings, and restrictions in export markets), the authorities initiated an export diversification policy through a combination of special incentives and exchange rate policy (discussed above).

Export incentives introduced in 1985 included tax credits based on the f.o.b. value of exports (CATs), tax credits based on annual volume increases (CIEX), income tax exemptions, accelerated depreciation allowances, duty-free imports of inputs, indirect tax exemptions and investment financing for export production. In addition, maquila and free trade zone arrangements were set up. ^1/ Export incentives remained an important policy instrument to promote nontraditional exports throughout the second half of the 1980s, but as budgetary costs rose to over 1 percent of GDP a year in the first five years of operation, the authorities began to phase them out in 1991. In mid-1994, remaining export incentives included income tax exemptions and CATs, which, as noted above, the Government is committed to eliminating in 1996 and 1999, respectively.

The impact of these policies, together with exchange and trade liberalization, on nontraditional exports was substantial. In the mid-1980s, nontraditional exports were less than 40 percent of total exports and mainly consisted of light manufactured goods sold to other countries in the region. By 1993, nontraditional exports amounted to over 55 percent of total exports, of which 64 percent were manufactured products and 60 percent were exported to industrial countries (Statistical Appendix Table 29). Since 1989, nontraditional agricultural exports, such as pineapples, melons, and flowers, have shown particular strength, increasing by 107 percent between 1989 and 1993 (compared with a 35 percent increase in manufactured exports). These exports have been boosted by foreign demand over this period, as well as increased cultivation of these crops due to a shift of agricultural production out of coffee due to lower prices, and the entry into production of previously unused land.

The new administration announced in the summer of 1994 a new export promotion effort with the goal of raising total exports plus tourism to US$5 billion by the year 2000 (compared with an estimated US$2.8 billion in 1994). The authorities’ aim is to redirect domestic attention to Costa Rica’s export potential. Specific policy details remain to be worked out, but the announced intent is to reduce costs to exporters by improving domestic infrastructure and financial markets, introducing enabling legislation, and maintaining an appropriate exchange rate policy.

5. Tourism sector

In parallel with the promotion of nontraditional exports in the mid-1980s, Costa Rica also began to encourage the growth of tourism sector, particularly eco-tourism.

Tourism receipts began to grow rapidly in 1988 and in 1993 surpassed bananas as the primary source of foreign exchange receipts in Costa Rica. The share of tourism in total exports in goods and services increased from 11 percent in 1985 to 24 percent in 1993. The annual increase in tourist arrivals has averaged about 20 percent in the past five years while tourism revenue has increased at an annual average rate of 28 percent. By comparison, over the same period in the rest of Central America the annual increase in arrivals has averaged 13 percent, and growth in receipts has averaged 9 percent (Statistical Appendix Table 34).

Factors explaining the increase in tourism in Costa Rica include the reduction in armed conflict throughout Central America since 1990, increased investment in the tourism sector, higher hotel capacity, and improved domestic organization and transportation. Also, in 1990, the Government began to more aggressively promote Costa Rica as an “eco-tourism” destination—a market niche that may have helped Costa Rica avoid the slump in the early 1990s in much of the Caribbean and the rest of the world. In 1993, the authorities measured hotel capacity in Costa Rica at about 9,700 rooms, with a year-round average occupancy rate of about 70 percent. The large tourist resort project of Papagayo could add an additional 2,500 rooms by 1996.

The fastest growing market for tourism in Costa Rica has been Europe, the share of which rose from 12 percent of total arrivals in 1989 to 17 percent in 1993. The United States accounted for about one-third of total arrivals over the period, while the share of tourists from Central and South America declined.

The 1990–94 National Development Plan—as agreed by the three main agencies involved in tourism (National Park Service, Ministry of Transportation, and Costa Rican Tourism Institute)—highlights ecologically sustainable tourism as an important potential source of foreign exchange and employment. The authorities intend to monitor the tourism market for indications of oversupply of accommodation and over-crowding of national parks.

6. Regional, bilateral, and multilateral trade agreements

An important objective of trade policy since the mid-1980s has been to expand and deepen bilateral and multilateral trade agreements; The focus on new trade agreements reflected, in part, an acknowledgement that the previous protectionist policies within CACM were not conducive for sustainable growth and the objective of diversifying export markets for nontraditional products. The authorities have sought to lower regional trade barriers within the CAGM, obtain wider market access through participation in multilateral trade agreements, such as the Uruguay Round, and pursue bilateral trade negotiations with Mexico.

1. Social indicators

Based on latest available data, social indicators in Costa Rica are generally equal to or better than those of most other countries in the Latin American and Caribbean (LAC) region despite the fact that per capita GNP (in 1992) was about 80 percent of the LAC region average (Table 6). ^2/ For example, infant mortality was 14 per thousand live births, compared with an average of 43 per thousand live births in the LAC region. Life expectancy at 76 years was 8 years longer than the regional average. The illiteracy rate in Costa Rica declined from 12 percent in 1975 to 7 percent in 1992, compared with a reduction from 26 percent to 15 percent over the same period in the LAC region.

Table 5.

Costa Rica: Summary Balance of Payments, 1989–94

(In millions of U.S. dollars)

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

^1/Includes buybacks at par value.

^2/Overdue payments to multilateral institutions within grace period. These adjustments are not reflected in the data on net international reserves in the monetary accounts

Table 5.

Costa Rica: Summary Balance of Payments, 1989–94

(In millions of U.S. dollars)

							Est.	1994
			1989	1990	1991	1992	1993	Jan-June
Current account
Excluding BOP transfers			−408.9	−498.2	−106.4	−376.2	−470.0	−213.2
Including all transfers			−343.9	−428.2	−82.4	−366.2	−470.0	−213.2
Trade balance			−383.0	−643.7	−386.8	−726.2	−956.1	−502.1
Exports			1,331.7	1,346.0	1,489.7	1,713.8	1,944.6	1,012.5
Imports			−1,714.7	−1,989.7	−1,876.6	−2,440.0	−2,900.7	−1,514.6
Services			−152.4	23.6	162.8	189.6	333.2	219.7
Factor payments			−328.3	−233.8	−190.2	−208.4	−179.8	−86.0
	Official interest due		−298.3	−246.8	−189.4	−197.8	−190.4	−86.9
	Other		−30.0	24.9	−0.8	−10.6	10.6	0.9
Nonfactor services			175.9	257.4	353.0	398.0	513.0	305.7
	Of which: tourism		205.0	275.2	336.9	430.7	577.4	350.8
Transfers			191.5	191.9	141.6	170.4	152.9	69.2
Balance of payments			65.0	70.0	24.0	10.0	—	—
Other			126.5	121.9	117.6	160.4	152.9	69.2
Capital account			−131.8	−188.5	324.7	394.5	387.7	119.5
Official capital			−319.1	−344.8	50.1	2.0	−4.7	−37.8
	Disbursements		117.5	191.8	297.5	329.7	346.1	128.4
		BOP support	40.0	35.0	81.4	128.4	15.0	—
		Other	77.5	156.8	216.1	201.4	331.1	128.4
	Amortisation 1/		−436.6	−541.6	−247.4	−327.7	−350.8	−166.2
Private capital			187.3	156.3	274.6	392.5	392.4	157.3
Errors and omissions			125.8	−38.5	88.0	70.4	64.4	—
Overall balance (pre debt relief)			−349.9	−655.3	330.3	98.8	−17.9	−93.7
Rescheduling			229.7	1,023.4	293.8	11.8	166.7	—
Arrears (+ increase)			203.0	−883.1	−107.1	13.1	−59.9	—
Capital gain from buybacks			—	—	—	21.2	6.2	—
Overall balance (post debt relief)			−82.8	−515.0	517.0	144.9	−95.1	−93.7
Net international reserves			−82.8	515.0	−517.0	−144.9	95.1	93.7
Nonfinancial arrears (+ increase)			−67.7	209.5	−210.4	15.4	−37.6	7.9
Other BOP financing 2/			—	—	—	—	8.3	−13.4
Net official reserves (- increase)			−15.1	305.5	−306.6	−160.3	−65.8	99.2
	Net use of Fund credit		−35.9	−24.2	70.0	−1.5	—	—
	Other net official reserve		20.8	329.7	−376.6	−158.8	−65.8	99.2
Memorandum items
Trade balance/GDP			−7.3	−11.3	−6.8	−10.8	−12.9	−12.3
Tourism/GDP			4.0	4.8	6.0	6.4	7.8	8.6
Currant account/GDP
	Excluding BOP transfers		−7.8	−8.8	−1.9	−5.6	−6.3	−5.2
	Including BOP transfers		−6.6	−7.5	−1.5	−5.4	−6.3	−5.2
Net international reserves			215.4	−299.6	217.4	362.3	457.3	363.7
In weeks of imports			6.5	−7.8	6.0	7.7	8.2	6.2

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

^1/Includes buybacks at par value.

^2/Overdue payments to multilateral institutions within grace period. These adjustments are not reflected in the data on net international reserves in the monetary accounts

View Table

Table 5.

Costa Rica: Summary Balance of Payments, 1989–94

(In millions of U.S. dollars)

							Est.	1994
			1989	1990	1991	1992	1993	Jan-June
Current account
Excluding BOP transfers			−408.9	−498.2	−106.4	−376.2	−470.0	−213.2
Including all transfers			−343.9	−428.2	−82.4	−366.2	−470.0	−213.2
Trade balance			−383.0	−643.7	−386.8	−726.2	−956.1	−502.1
Exports			1,331.7	1,346.0	1,489.7	1,713.8	1,944.6	1,012.5
Imports			−1,714.7	−1,989.7	−1,876.6	−2,440.0	−2,900.7	−1,514.6
Services			−152.4	23.6	162.8	189.6	333.2	219.7
Factor payments			−328.3	−233.8	−190.2	−208.4	−179.8	−86.0
	Official interest due		−298.3	−246.8	−189.4	−197.8	−190.4	−86.9
	Other		−30.0	24.9	−0.8	−10.6	10.6	0.9
Nonfactor services			175.9	257.4	353.0	398.0	513.0	305.7
	Of which: tourism		205.0	275.2	336.9	430.7	577.4	350.8
Transfers			191.5	191.9	141.6	170.4	152.9	69.2
Balance of payments			65.0	70.0	24.0	10.0	—	—
Other			126.5	121.9	117.6	160.4	152.9	69.2
Capital account			−131.8	−188.5	324.7	394.5	387.7	119.5
Official capital			−319.1	−344.8	50.1	2.0	−4.7	−37.8
	Disbursements		117.5	191.8	297.5	329.7	346.1	128.4
		BOP support	40.0	35.0	81.4	128.4	15.0	—
		Other	77.5	156.8	216.1	201.4	331.1	128.4
	Amortisation 1/		−436.6	−541.6	−247.4	−327.7	−350.8	−166.2
Private capital			187.3	156.3	274.6	392.5	392.4	157.3
Errors and omissions			125.8	−38.5	88.0	70.4	64.4	—
Overall balance (pre debt relief)			−349.9	−655.3	330.3	98.8	−17.9	−93.7
Rescheduling			229.7	1,023.4	293.8	11.8	166.7	—
Arrears (+ increase)			203.0	−883.1	−107.1	13.1	−59.9	—
Capital gain from buybacks			—	—	—	21.2	6.2	—
Overall balance (post debt relief)			−82.8	−515.0	517.0	144.9	−95.1	−93.7
Net international reserves			−82.8	515.0	−517.0	−144.9	95.1	93.7
Nonfinancial arrears (+ increase)			−67.7	209.5	−210.4	15.4	−37.6	7.9
Other BOP financing 2/			—	—	—	—	8.3	−13.4
Net official reserves (- increase)			−15.1	305.5	−306.6	−160.3	−65.8	99.2
	Net use of Fund credit		−35.9	−24.2	70.0	−1.5	—	—
	Other net official reserve		20.8	329.7	−376.6	−158.8	−65.8	99.2
Memorandum items
Trade balance/GDP			−7.3	−11.3	−6.8	−10.8	−12.9	−12.3
Tourism/GDP			4.0	4.8	6.0	6.4	7.8	8.6
Currant account/GDP
	Excluding BOP transfers		−7.8	−8.8	−1.9	−5.6	−6.3	−5.2
	Including BOP transfers		−6.6	−7.5	−1.5	−5.4	−6.3	−5.2
Net international reserves			215.4	−299.6	217.4	362.3	457.3	363.7
In weeks of imports			6.5	−7.8	6.0	7.7	8.2	6.2

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

^1/Includes buybacks at par value.

^2/Overdue payments to multilateral institutions within grace period. These adjustments are not reflected in the data on net international reserves in the monetary accounts

Table 6.

Costa Rica: Comparative Social Indicators

Source: International Economics Department, World Bank.

^1/In percent of school age population. Last year for which data are available is 1991.

^2/In percent of population above 15 years of age. Last year for which data are available is 1991.

^3/Par thousand live births.

^4/In percent of population.

^5/In percent of age group under five.

Table 6.

Costa Rica: Comparative Social Indicators

		Costa Rica			Latin America 1/
		1975	1985	1992	1975	1985	1992
GNP per capita ($)		950	1,330	1,960	1,192	1,836	2,693
Primary enrollment 1/		107	97	103	99	107	106
	Male	108	98	103	100	…	…
	Female	106	96	102	98	…	…
Secondary enrollment 1/		42	40	43	35	48	47
Illiteracy 2/		12	8	7	26	18	15
	Female	…	8	7	…	20	17
Infant mortality 3/		38	19	14	78	56	43
Life expectancy (years)		68	74	76	61	65	68
Access to safe water 4/		72	90	94	54	73	80
	Urban	100	100	100	77	84	91
	Rural	56	82	84	25	53	64
Child malnutrition 5/		…	6	6	…	…	11
Population per hospital bed		253	302	…	563	…	508

Source: International Economics Department, World Bank.

^1/In percent of school age population. Last year for which data are available is 1991.

^2/In percent of population above 15 years of age. Last year for which data are available is 1991.

^3/Par thousand live births.

^4/In percent of population.

^5/In percent of age group under five.

View Table

Table 6.

Costa Rica: Comparative Social Indicators

		Costa Rica			Latin America 1/
		1975	1985	1992	1975	1985	1992
GNP per capita ($)		950	1,330	1,960	1,192	1,836	2,693
Primary enrollment 1/		107	97	103	99	107	106
	Male	108	98	103	100	…	…
	Female	106	96	102	98	…	…
Secondary enrollment 1/		42	40	43	35	48	47
Illiteracy 2/		12	8	7	26	18	15
	Female	…	8	7	…	20	17
Infant mortality 3/		38	19	14	78	56	43
Life expectancy (years)		68	74	76	61	65	68
Access to safe water 4/		72	90	94	54	73	80
	Urban	100	100	100	77	84	91
	Rural	56	82	84	25	53	64
Child malnutrition 5/		…	6	6	…	…	11
Population per hospital bed		253	302	…	563	…	508

Source: International Economics Department, World Bank.

^1/In percent of school age population. Last year for which data are available is 1991.

^2/In percent of population above 15 years of age. Last year for which data are available is 1991.

^3/Par thousand live births.

^4/In percent of population.

^5/In percent of age group under five.

Income distribution was more even than in other countries, with a Gini coefficient of 0.46 compared with a regional average of 0.50 in 1989. ^3/ Reflecting the more than doubling of income per capita between 1975 and 1992, the relatively even income distribution, and a low unemployment rate, 1.6 percent of the population was in extreme poverty (earning less than US$25 per month) in 1993. Of the key social indicators only those of primary and secondary school enrollment had measurements lower than the regional average, by 3 and 4 percentage points, respectively.

2. Social support

The Government provides direct support for the poor primarily through FODESAF. FODESAF is funded by a 5 percent tax on the wage bill in the private and public sectors and by 20 percent of the revenues from the domestic sales tax. It provides a wide range of noncontributory social services to the poor, covering health, education, social assistance, employment programs, and housing. According to a World Bank study, ^1/ these programs provide substantial help to the poorest segments of society.

The Costa Rican Social Security Scheme (CCSS) provides old age, disability, and death benefits. The CCSS also provides wide ranging health benefits through hospitals and clinics (see below). The pension scheme is funded by a 7.25 percent payroll tax (and a government contribution of 0.25 percent), with employers paying 4.75 percent, and workers contributing 2.5 percent. The scheme provides for a pension of between 60 percent and 100 percent of the final salary, depending on the number of years of contribution (normally between 20 and 40 years). A disabled person may be eligible for a minimum pension of 60 percent of final salary after only three years of contributions. Almost 40 percent of pensions are claimed under the disability category.

The CCSS pension scheme covers some 54 percent of the economically active population in the formal sector and is supplemented by 19 smaller schemes, of which the most important cover teachers, justice workers, and employees of the Ministry of Finance. A court decision in 1992 declared that public sector workers are eligible to the same pension benefits as those offered by the Ministry of Finance scheme, under which a worker with 30 years of service and 55 years of age can retire with a pension equal to 100 percent of the last year’s salary.

Current reserves of the CCSS pension system are equal to about 2.7 years of pension liabilities. However, these reserves are declining—some estimates point to reserves of only two years’ pension liabilities by 1999—and according to the World Bank, measures including raising contribution rates and the minimum number of years of contribution for pension eligibility, will need to be taken to keep the pension scheme on a financially sound basis.

3. Health care

The main health care providers in Costa Rica are: (i) the Ministry of Health (MOH); (ii) the CCSS; and (iii) the National Insurance Institute (INS). The MOH is responsible for preventive and primary health care, developing health policy, and coordinating health services. The CCSS has a mandate to provide universal health care services, and provides sickness and maternity benefits. The CCSS maintains and operates all the nation’s hospitals and an extensive system of clinics providing outpatient services. The INS provides cash benefits as with as treatment and rehabilitation for those with occupational injuries, car injuries, and certain diseases.

In recent years Costa Rica’s health system has been affected by inadequate financial management, inefficiencies in the allocation of physical and human resources, and shortages of resources which reflected mainly the fiscal imbalances discussed in Chapter II above. These problems have been compounded by the demands of an aging population accustomed to relatively high quality care at low cost.

To address these problems, the authorities, with the support of the World Bank and the IDB, have developed a Health Sector Reform Plan. ^1/ The plan seeks, inter alia, to (i) allocate more efficiently scarce resources and improve the quality of services, particularly primary health care and outpatient services; (ii) improve coverage for low-income groups; (iii) deal more adequately with emerging health problems of an aging population; and (iv) eliminate duplication of functions between the MOH and the CCSS, in particular, giving the MOH a greater leadership role in setting sector policies, and transferring all primary health care programs to the CCSS. In addition, the plan aims to decentralize services by devolving to the regions and national hospitals the management and operation of health services, and improve the financial soundness of the health system by reducing evasion from social security contributions and considering increases in the rate of social security contributions. The IDB loan aims at supporting institutional restructuring of the MOH, while the IBRD loan would support a similar reform in the CCSS.