Statement by the IMF Staff Representative July 30, 2001

This 2001 Article IV Consultation highlights that the economic performance of Costa Rica weakened in 2000. Real GDP growth slowed to 1.7 percent, from more than 8 percent a year in 1998–99, reflecting in part deterioration in terms of trade, the end of the construction phase of a large foreign direct investment project by Intel, and the effect of high real interest rates on domestic demand. Inflation remained at 10 percent during the year. In the structural area, the assembly approved legislation to open up the telecommunications and electricity sectors to private investment.

Abstract

This 2001 Article IV Consultation highlights that the economic performance of Costa Rica weakened in 2000. Real GDP growth slowed to 1.7 percent, from more than 8 percent a year in 1998–99, reflecting in part deterioration in terms of trade, the end of the construction phase of a large foreign direct investment project by Intel, and the effect of high real interest rates on domestic demand. Inflation remained at 10 percent during the year. In the structural area, the assembly approved legislation to open up the telecommunications and electricity sectors to private investment.

1. This statement presents information that became available after the staff report was issued on June 27. This information does not change the broad thrust of the staff appraisal.

2. At end-June, the authorities revised their 2001 economic program to incorporate the effect of the deterioration in the external environment since December 2000, when they first prepared the 2001 program. The authorities now expect real GDP in 2001 to rise by 0.6 percent, compared with the rate of 3 percent they had projected earlier, owing to weak demand for computer chips made by INTEL. Inflation is now targeted to rise slightly to 11 percent during the year (10 percent in the staff report), owing to larger than expected increases in electricity prices earlier in 2001. The authorities project the external current account deficit at 5.3 percent of GDP (5.5 percent of GDP in the previous program), as lower exports are offset partly by weaker import demand and a sharp cut in profit remittances by INTEL. Net international reserves are targeted to decline by US$75 million, compared with an original target of no loss in reserves, reflecting the repayment of a loan to Taiwan Province of China. In the staff report it was envisaged that this loan would be rolled over. The authorities expect the slower economic growth to have a limited effect on fiscal revenues, which are closely linked to GDP excluding INTEL, and project the overall public sector deficit to amount to about 4 percent of GDP, broadly as expected in the original program.1 The central bank does not expect to increase its open market interest rates above their current level of 14.5 percent, and intends to keep its net domestic assets target virtually unchanged for the year as a whole. The central bank has announced that it will accelerate the rate of crawl of the colon in the second semester to achieve a depreciation of 7.2 percent for the year, compared with a rate of 6.6 percent in the original program. If inflationary pressures are greater than envisaged, the central bank will stand ready to tighten its credit policy as needed.

3. On July 2, the National Assembly approved the tax simplification package, as envisaged in the report.

4. The staff report identified a statistical discrepancy of 1.1 percent of GDP in the measurement of the overall public sector deficit in 2000. The authorities have now eliminated such discrepancy, so the financing also shows that the overall deficit amounted to 4.2 percent of GDP in 2000.

1

This includes an estimate of trust fund spending by the state electricity enterprise of 0.7 percent of GDP.