Abstract
The Costa Rican economy has grown at rapid rates in the last three years, underpinned by a robust world expansion, sound economic policies, and strong business and consumer confidence. Economic policies have been well oriented. The fiscal position has substantially improved. The exchange rate level and policies are consistent with the maintenance of external stability. IMF staff supports the neutral policy stance envisaged in the 2008 central government budget and plans for a substantive tax reform. The authorities should push ahead with financial system reforms.
1. This supplement provides an update of economic and policy developments since the release of the staff report.
2. Recent information confirms that fiscal performance was strong in 2007 and that inflation remains high.
According to the latest though still preliminary figures, the central government posted a surplus of 0.4 percent of GDP in 2007, its best performance since the mid-1950s, while the overall public sector closed with a surplus of 0.6 percent of GDP.
Headline inflation fell slightly from 10.8 percent (year-on-year) in December 2007 to 10.6 percent in January 2008, helped by a fall in transportation and clothing prices. Core inflation also moderated a bit to 8.5 percent. Inflation expectations for the 12 months ahead rose to 9.4 percent in January, compared to 9.1 percent in December.
Progress has been made in passing CAFTA-DR implementation bills, but fewer than half of the 12 bills have been approved as of now. The government will ask other signatory countries for an extension of the end-February deadline.
3. Growth prospects for 2008 are somewhat weaker than previously expected.
In its 2008–09 macroeconomic framework released on January 31, the central bank forecast a 3.8 percent real GDP growth for 2008.
Staff also revised down its 2008 growth projections from 5 to 4.5 percent. This takes into account the recent revision to the U.S. outlook but also the continued boom in production for the local market. The monthly index of economic activity (IMAE) showed a slight upward trend in the fourth quarter of 2007 to a growth rate of 7.0 percent (year-on-year)
4. On January 31, 2008, the central bank announced its inflation objectives for 2008–09 and reduced substantially the interest rates on its deposit facilities.
Mid-point inflation objectives for 2008 and 2009 were set at 8 and 6 percent respectively, with a range of ±1 percent around these figures.
Interest rates on the central bank’s one-night deposit facility were cut from 6 to 3½ percent. Rates on other deposit facilities were similarly reduced.
In the first days following this central bank decision, commercial bank deposit rates fell by 180 basis points to 5.2 percent, while the rate on six-month sovereign bills came down from 6.4 percent to 4.8 percent.
The exchange rate has remained at the floor of the crawling band (the most appreciated side).
5. The authorities emphasized that an interest rate cut was necessary given rapidly increasing foreign inflows, which could undermine their disinflation strategy.
This interest rate cut took place following high levels of foreign exchange intervention: during the first four weeks of January, the central bank bought US$422 million (2.9 percent of GDP), the highest level since the exchange rate band was introduced in October 2006. In the authorities’ views, this was due to two recent and mutually reinforcing developments, the successive reductions in the U.S. Fed funds rate to 3 percent and increased expectations of a colon appreciation, which greatly widened yield differentials between domestic and foreign currency instruments. This compounded the underlying pressure from sustained large FDI inflows into manufacturing, tourism, and real estate.
In the authorities’ view, if left unaddressed, this situation would have undermined their disinflation strategy, given the public perception that high levels of foreign exchange intervention translate into an inability to control monetary creation and inflation. Furthermore, in an environment where the central bank’s quasi-fiscal losses continue to affect monetary conditions, the central bank saw a trade-off between the monetary impact of quasi-fiscal losses from sterilized intervention and the potential impact of lower interest rates.
Costa Rica: Weekly Intervention Oct 16, 2006-Feb 8, 2008
(In million US dollars)
Citation: IMF Staff Country Reports 2008, 097; 10.5089/9781451809688.002.A002
Costa Rica: Weekly Intervention Oct 16, 2006-Feb 8, 2008
(In million US dollars)
Citation: IMF Staff Country Reports 2008, 097; 10.5089/9781451809688.002.A002
Costa Rica: Weekly Intervention Oct 16, 2006-Feb 8, 2008
(In million US dollars)
Citation: IMF Staff Country Reports 2008, 097; 10.5089/9781451809688.002.A002
6. While the thrust of the staff appraisal is unchanged, the staff is concerned about the inflationary impact of this interest rate cut, especially given the context of still high inflation, rapid private sector credit growth, and a tight labor market.
The reduction in interest rates will create additional pressures on nontradable inflation, which, absent further macroeconomic policy adjustments, may push it up to levels inconsistent with the achievement of the 2008 headline inflation target.
The authorities and staff agree that fiscal policy is key to containing demand pressures under the current monetary and exchange rate framework. In this period, staff recommends that the central government’s fiscal position should at a minimum be as strong as the 2007 outcome, which implies a tightening of around 1 percent of GDP on an annual basis compared to the 2008 budget to be done through expenditure reductions, and every effort should be made to achieve an even stronger outcome.
In addition, the authorities and staff also agree that there is greater urgency to move toward a regime that would allow greater exchange rate flexibility and the use of interest rates to bring down inflation. To that end, priority actions include the issuance of regulations for foreign exchange derivative instruments, the application of stricter regulatory standards for foreign currency lending to nonforeign-currencyearners, the introduction of liquidity requirements on short-term foreign-currency lines of credit, and further recapitalization of the central bank.
Costa Rica: Selected Social and Economic Indicators
As of September 2007 for REER, and as end-December 2007 for interest rates.
Gross public debt minus central government debt held by the nonfinancial public sector.
Excludes maquila exports.
In 2007 one-off adjustment of 175 million dollars for reclassification of capital contribution to FLAR.
Costa Rica: Selected Social and Economic Indicators
| I. Social Indicators | |||||||||
| Per capita income (2007, in U.S. dollars) | 5,905 | Unemployment rate (2007, percent of labor force) | 4.6 | ||||||
| Population (July 2007, millions) | 4.5 | Poverty (2007, percent of households) | 16.7 | ||||||
| Life expectancy (2005, years) | 79.1 | Extreme poverty (2007, percent of households) | 3.3 | ||||||
| II. Economic Indicators | |||||||||
| Proj | |||||||||
| 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | ||||
| (Annual percentage change, unless otherwise noted) | |||||||||
| National income and prices | |||||||||
| GDP at constant prices | 6.4 | 4.3 | 5.9 | 8.8 | 6.8 | 4.5 | |||
| Implicit deflator | 8.3 | 11.9 | 10.3 | 11.3 | 10.2 | 10.0 | |||
| Consumer prices (end of period) | 9.9 | 13.1 | 14.1 | 9.4 | 10.8 | 8.0 | |||
| Consumer prices (average) | 9.4 | 12.3 | 13.8 | 11.5 | 9.4 | 9.5 | |||
| External sector | |||||||||
| Exports of goods, excl. goods for processing (f.o.b.) | 8.3 | 8.6 | 10.2 | 17.4 | 11.4 | 6.4 | |||
| Imports of goods, excl. goods for processing (c.i.f.) | 12.2 | 12.5 | 17.6 | 13.8 | 20.3 | 12.5 | |||
| Terms of trade (-) deterioration | -0.6 | -3.8 | -5.1 | -4.1 | -1.4 | -1.8 | |||
| Real effective exchange rate eop (depreciation -) 1/ | -6.6 | -3.1 | 0.0 | 0.9 | 1.8 | .. | |||
| Banking system | |||||||||
| Net domestic assets | 12.6 | 24.8 | 7.7 | 14.6 | 20.2 | 16.0 | |||
| Of which: Credit to private sector | 20.5 | 18.9 | 30.6 | 28.7 | 38.8 | 19.0 | |||
| Broad money | 18.2 | 32.9 | 22.2 | 22.8 | 15.3 | 15.0 | |||
| Lending interest rate (end of period) 1/ | 23.7 | 23.3 | 24.0 | 20.7 | 16.3 | .. | |||
| (In percent of GDP) | |||||||||
| Public Sector | |||||||||
| Overall primary public sector balance | 0.6 | 0.8 | 2.0 | 3.0 | 4.0 | 1.4 | |||
| Overall public sector balance | -4.9 | -4.2 | -3.1 | -0.5 | 0.6 | -1.0 | |||
| Nonfinancial public sector balance | -3.3 | -2.9 | -1.7 | 0.7 | 1.3 | -0.5 | |||
| Central government | -3.4 | -3.4 | -2.8 | -1.4 | 0.4 | -0.7 | |||
| Total revenue and grants | 13.9 | 13.6 | 13.9 | 14.2 | 15.5 | 15.5 | |||
| Total expenditure | 17.3 | 17.0 | 16.7 | 15.7 | 15.1 | 16.3 | |||
| Rest of nonfinancial public sector | 0.1 | 0.6 | 1.1 | 2.1 | 0.9 | 0.2 | |||
| Central bank losses (-) | -1.6 | -1.3 | -1.4 | -1.1 | -0.7 | -0.5 | |||
| Gross domestic investment | 20.6 | 23.1 | 24.8 | 26.4 | 25.6 | 26.6 | |||
| Gross national savings | 17.1 | 18.8 | 20.1 | 21.9 | 19.6 | 20.0 | |||
| External current account balance | -3.6 | -4.3 | -4.6 | -4.5 | -6.0 | -6.5 | |||
| Total public debt (gross) | 60.3 | 59.7 | 55.7 | 50.3 | 43.0 | 40.1 | |||
| Total public debt (net) 2/ | 54.6 | 54.1 | 50.4 | 44.5 | 37.6 | 35.4 | |||
| Of which: | |||||||||
| External public debt (end of period) | 16.0 | 13.1 | 13.2 | 11.2 | 9.3 | 8.0 | |||
| (In percent of exports of goods and services) | |||||||||
| External public debt service 3/ | 18.5 | 12.9 | 9.2 | 7.2 | 6.6 | 7.6 | |||
| Of which: interest 3/ | 3.5 | 2.9 | 2.5 | 2.7 | 2.3 | 2.2 | |||
| (In millions of U.S. dollars, unless otherwise specified) | |||||||||
| Change in net international reserves (increase -) | -339 | -80 | -393 | -1,037 | -1,000 | -750 | |||
| Net international reserves (NIR) 4/ | 1,604 | 1,684 | 2,078 | 3,114 | 4,114 | 4,864 | |||
| NIR (months of nonmaquila imports) | 3.6 | 3.2 | 3.4 | 4.2 | 5.0 | 5.5 | |||
| Memorandum items: | |||||||||
| GDP (in billions of colones) | 6,982 | 8,144 | 9,512 | 11,515 | 13,554 | 15,580 | |||
| GDP (in millions of U.S. dollars) | 17,513 | 18,598 | 19,909 | 22,522 | 26,238 | 31,686 | |||
As of September 2007 for REER, and as end-December 2007 for interest rates.
Gross public debt minus central government debt held by the nonfinancial public sector.
Excludes maquila exports.
In 2007 one-off adjustment of 175 million dollars for reclassification of capital contribution to FLAR.
Costa Rica: Selected Social and Economic Indicators
| I. Social Indicators | |||||||||
| Per capita income (2007, in U.S. dollars) | 5,905 | Unemployment rate (2007, percent of labor force) | 4.6 | ||||||
| Population (July 2007, millions) | 4.5 | Poverty (2007, percent of households) | 16.7 | ||||||
| Life expectancy (2005, years) | 79.1 | Extreme poverty (2007, percent of households) | 3.3 | ||||||
| II. Economic Indicators | |||||||||
| Proj | |||||||||
| 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | ||||
| (Annual percentage change, unless otherwise noted) | |||||||||
| National income and prices | |||||||||
| GDP at constant prices | 6.4 | 4.3 | 5.9 | 8.8 | 6.8 | 4.5 | |||
| Implicit deflator | 8.3 | 11.9 | 10.3 | 11.3 | 10.2 | 10.0 | |||
| Consumer prices (end of period) | 9.9 | 13.1 | 14.1 | 9.4 | 10.8 | 8.0 | |||
| Consumer prices (average) | 9.4 | 12.3 | 13.8 | 11.5 | 9.4 | 9.5 | |||
| External sector | |||||||||
| Exports of goods, excl. goods for processing (f.o.b.) | 8.3 | 8.6 | 10.2 | 17.4 | 11.4 | 6.4 | |||
| Imports of goods, excl. goods for processing (c.i.f.) | 12.2 | 12.5 | 17.6 | 13.8 | 20.3 | 12.5 | |||
| Terms of trade (-) deterioration | -0.6 | -3.8 | -5.1 | -4.1 | -1.4 | -1.8 | |||
| Real effective exchange rate eop (depreciation -) 1/ | -6.6 | -3.1 | 0.0 | 0.9 | 1.8 | .. | |||
| Banking system | |||||||||
| Net domestic assets | 12.6 | 24.8 | 7.7 | 14.6 | 20.2 | 16.0 | |||
| Of which: Credit to private sector | 20.5 | 18.9 | 30.6 | 28.7 | 38.8 | 19.0 | |||
| Broad money | 18.2 | 32.9 | 22.2 | 22.8 | 15.3 | 15.0 | |||
| Lending interest rate (end of period) 1/ | 23.7 | 23.3 | 24.0 | 20.7 | 16.3 | .. | |||
| (In percent of GDP) | |||||||||
| Public Sector | |||||||||
| Overall primary public sector balance | 0.6 | 0.8 | 2.0 | 3.0 | 4.0 | 1.4 | |||
| Overall public sector balance | -4.9 | -4.2 | -3.1 | -0.5 | 0.6 | -1.0 | |||
| Nonfinancial public sector balance | -3.3 | -2.9 | -1.7 | 0.7 | 1.3 | -0.5 | |||
| Central government | -3.4 | -3.4 | -2.8 | -1.4 | 0.4 | -0.7 | |||
| Total revenue and grants | 13.9 | 13.6 | 13.9 | 14.2 | 15.5 | 15.5 | |||
| Total expenditure | 17.3 | 17.0 | 16.7 | 15.7 | 15.1 | 16.3 | |||
| Rest of nonfinancial public sector | 0.1 | 0.6 | 1.1 | 2.1 | 0.9 | 0.2 | |||
| Central bank losses (-) | -1.6 | -1.3 | -1.4 | -1.1 | -0.7 | -0.5 | |||
| Gross domestic investment | 20.6 | 23.1 | 24.8 | 26.4 | 25.6 | 26.6 | |||
| Gross national savings | 17.1 | 18.8 | 20.1 | 21.9 | 19.6 | 20.0 | |||
| External current account balance | -3.6 | -4.3 | -4.6 | -4.5 | -6.0 | -6.5 | |||
| Total public debt (gross) | 60.3 | 59.7 | 55.7 | 50.3 | 43.0 | 40.1 | |||
| Total public debt (net) 2/ | 54.6 | 54.1 | 50.4 | 44.5 | 37.6 | 35.4 | |||
| Of which: | |||||||||
| External public debt (end of period) | 16.0 | 13.1 | 13.2 | 11.2 | 9.3 | 8.0 | |||
| (In percent of exports of goods and services) | |||||||||
| External public debt service 3/ | 18.5 | 12.9 | 9.2 | 7.2 | 6.6 | 7.6 | |||
| Of which: interest 3/ | 3.5 | 2.9 | 2.5 | 2.7 | 2.3 | 2.2 | |||
| (In millions of U.S. dollars, unless otherwise specified) | |||||||||
| Change in net international reserves (increase -) | -339 | -80 | -393 | -1,037 | -1,000 | -750 | |||
| Net international reserves (NIR) 4/ | 1,604 | 1,684 | 2,078 | 3,114 | 4,114 | 4,864 | |||
| NIR (months of nonmaquila imports) | 3.6 | 3.2 | 3.4 | 4.2 | 5.0 | 5.5 | |||
| Memorandum items: | |||||||||
| GDP (in billions of colones) | 6,982 | 8,144 | 9,512 | 11,515 | 13,554 | 15,580 | |||
| GDP (in millions of U.S. dollars) | 17,513 | 18,598 | 19,909 | 22,522 | 26,238 | 31,686 | |||
As of September 2007 for REER, and as end-December 2007 for interest rates.
Gross public debt minus central government debt held by the nonfinancial public sector.
Excludes maquila exports.
In 2007 one-off adjustment of 175 million dollars for reclassification of capital contribution to FLAR.
