Costa Rica: Staff Report for the 2014 Article IV Consultation
Author:
International Monetary Fund. Western Hemisphere Dept.
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Publication Date:
04 Feb 2015
eISBN:
9781484337905
Language:
English
Keywords:
ISCR; CR; GDP; break; government; current account; percent of Gdp; trade balance; output gap; broad money; Public sector; Fiscal consolidation; Fiscal stance; Global; Central America; real GDP
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The economy recovered quickly from the global crisis of 2008–09, with healthy growth and low inflation. Growth has, however, slowed recently and is expected to remain subdued in the short run, since gains from recovery in the U.S. will be offset by the closure of the Intel manufacturing plant. Inflation is elevated, owing primarily to exchange rate (XR) depreciation triggered by global repricing of emerging market assets in early 2014. Risks to the outlook are tilted to the downside. Absent consolidation, large fiscal deficits would make public debt dynamics unsustainable in the long-run.

Abstract

The economy recovered quickly from the global crisis of 2008–09, with healthy growth and low inflation. Growth has, however, slowed recently and is expected to remain subdued in the short run, since gains from recovery in the U.S. will be offset by the closure of the Intel manufacturing plant. Inflation is elevated, owing primarily to exchange rate (XR) depreciation triggered by global repricing of emerging market assets in early 2014. Risks to the outlook are tilted to the downside. Absent consolidation, large fiscal deficits would make public debt dynamics unsustainable in the long-run.

Overview

1. Costa Rica bounced back quickly from the 2008–09 global crisis, but momentum is now slowing 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 moderated below potential, with the latter also on a declining trend. 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 been creeping up further since then, placing the public-debt-to-GDP ratio on an unsustainable upward trajectory, which is fast approaching levels shown to increase risks of disorderly adjustment for emerging economies. A fairly inflexible XR has contributed to exacerbate vulnerabilities associated with dollarization in the financial sector, rendering even more important further improvements in regulation and supervision.

A01ufig01

Average Potential Growth

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Source: Fund staff estimates.

Recent Economic Developments and Outlook

A. Recent Developments

2. Growth decelerated in 2013 and has remained stable in 2014, opening a small output gap. After expanding by about 5 percent in 2012, activity rose by 3½ percent in 2013, largely on account of weaker domestic consumption (Figure 1) and net exports, the latter mirroring slower growth in the U.S.—Costa Rica’s major export market (Analytical Note (AN) 2, Figure 6). Growth is reckoned to have stayed the same in 2014, as activity was dampened by closure of Intel manufacturing, announced in April. With growth below its trend rate of 4¼ percent (AN 1), output has now fallen slightly short of potential. The unemployment rate has been elevated since the global crisis and increased further in early 2014, reflecting new and returning entrants into the labor force.

Figure 1.
Figure 1.

Costa Rica: Long-Term Fiscal Sustainability

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Source: Fund staff estimates and projections.1/ This path is the baseline through 2019, with a constant primary balance thereafter.2/ The immediate and gradual adjustment scenarios aim at closing the same initial sustainability gap with consolidation starting in 2015 in both scenarios. The debt stabilizing primary balance is calculated based on medium-term baseline projections of real interest and growth rates that are maintained constant over the projection period in line with the requirements of the optimization model (AN 3). The gap is then measured relative to the 2014 projected fiscal outturn.3/ The gradual scenario assumes that the authorities place 90 percent weight on the growth objective. Impact of growth is based on fiscal multiplier of 0.3, with a self-correction parameter for the output gap of 0.5, implying that the effect on the output gap of a fiscal adjustment of 1 percent of GDP almost dissipates—is less than 0.1 percent of GDP—in the second year following the adjustment.4/ The immediate adjustment scenario assumes that the full fiscal adjustment takes place in 2015 and has no impact on growth.
Figure 2.
Figure 2.

Costa Rica: Recent Developments and Prospects, Real Sector

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: National authorities and Fund staff estimates.1/ Selected Central American countries include Costa Rica, Honduras, Nicaragua, El Salvador and the Dominican Republic.2/ The impact of a one percent point of domestic demand growth shock in trading partner countries on growth in Costa Rica.
Figure 3.
Figure 3.

Costa Rica: Recent Developments, Nominal Exchange Rate and Inflation

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: Bloomberg, Haver Analytics, national authorities and Fund staff estimates and projections.
Figure 4.
Figure 4.

Costa Rica: Recent Developments, External Sector

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: WITS, UN Comtrade, national authorities and Fund staff estimates.1/ Increase implies appreciation.2/ The REER based on ULC was calculated with data for 73 percent of the trading partners.3/ Excludes China and Asian Tigers (Hong-Kong, Singapore, Korea, Taiwan, Indonesia, Malasia, Philippines, and Thailand.4/ Knowledge intensive products include transport electrical equipment machinery and chemicals.
Figure 5.
Figure 5.

Costa Rica: Recent Developments and Prospects, Fiscal Sector

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: National authorities and Fund staff estimates.1/ 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).
Figure 6.
Figure 6.

Costa Rica: Recent Developments, Financial Sector

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: National authorities and Fund staff estimates.
A01ufig02

Unemployment Rate

(Percent)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: WEO and Fund staff estimates.

Potential GDP Growth Rate

article image
Source: Fund staff estimates.

Estimate for 2013.

3. Inflation remained within the target range in 2013, but rose sharply and breached its new upper limit in 2014. Inflation at end-2013 was 3.7 percent. To signal commitment to lower inflation, the central bank (BCCR) lowered its target range from 4–6 percent to 3–5 percent in early 2014. However, owing mainly to the pass-through to domestic prices from XR depreciation (AN 5) and sticky inflation expectations which persist above the target range, inflation reached 5.7 percent in October 2014 and is anticipated to have finished 2014 above the upper limit of the target range. To contain the second-round effects from depreciation, the authorities have raised monetary policy rates twice since the beginning of the year (to 5.25 percent in May), undoing the reductions effected in the second half of 2013.

A01ufig03

Exchange Rate Pass-Through

(Percentage points)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: National authorities and Fund staff estimates.1/ Average elasticity from three specifications, ranging from 0.16 to 0.36.

4. The private capital inflows of 2012 have reversed and the exchange rate depreciated markedly in early 2014. The current account deficit declined slightly to 5 percent of GDP in 2013 and is expected to remain broadly stable in 2014. Private capital inflows combined with government tapping of international capital markets in 2012–13 kept the XR at the bottom of the band, with strong accumulation of reserves by the BCCR (Figure 2). However, in the wake of U.S. monetary policy (USMP) normalization, the colón lost 10 percent of its value between January and March 2014, as private inflows and government use of its FX deposits ceased, while domestic residents adjusted their portfolios toward FX assets. It has since recovered somewhat, with year-to-date depreciation standing at 7 percent in mid-November. The BCCR intervened in an attempt to smooth excessive XR fluctuations, selling about 6 percent of its end-2013 NIR stock, but reserves were boosted by government Eurobond issuance in April and resumed purchases by the BCCR towards year-end. Thus, reserves remained well within the IMF adequacy metric at end-2014 (Box 1).

A01ufig04

Reserve coverage

(Percent of GDP, end-2013)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: National authorities and Fund staff estimates.1/ Composite Metric (floating exchange rate) = 5% × Exports + 5% × Broad Money + 30% × Short-term Debt + 10% × Other LiabilitiesComposite Metric (fixed exchange rate)= 10% × Exports + 10% × Broad Money + 30% × Short-term Debt + 15%× Other Liabilities2/ El Salvador and Panama are dollarized economies. Panama does not have a Central Bank. Hence the interpretation of reserve adequacy might be different for these countries.3/ 3 months of imports refers to the following year’s imports of non-maquila goods. The composite metric was calculated based on Dabla-Norris, Kim, and Shirono (2011), ‘“Optimal Precautionary Reserves for Low-Income Countries: A Cost-Benefit Analysis,” IMF Working Paper 11/249.
A01ufig05

Costa Rica: Composition of the Financial Account in the BOP

(Billions USD)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: National authorities and Fund staff estimates.

5. Competitiveness has improved as a result of colón devaluation. The real effective exchange rate (REER) rose by over 30 percent between 2005 and 2013, largely due to high inflation differentials (Figure 3). Some of this appreciation was undone in 2014, as the REER declined by 4 percent with nominal depreciation outpacing a growing inflation differential. However, multilaterally consistent estimates under the EBA and CGER approaches (Box 1) suggest that Costa Rica’s current account and REER are broadly in line with fundamentals. Nonetheless, there are some signs of competitiveness problems (Box 1) suggesting that productivity-enhancing reforms (¶29) and wage restraint would help Costa Rica maintain a competitive edge. This is especially important in light of Intel’s exit which may generate negative “signaling effects”, although its direct impact on Costa Rica’s competitiveness is likely small. Fiscal consolidation (¶18) would also support long-term external stability.

Costa Rica: External Stability Assessment

Costa Rica’s real effective exchange rate (REER) is generally in line with medium-term fundamentals. Staff used various approaches to assess the external balance and exchange rate. These included changes in the CPI-based REER, regression-based methods to evaluate the appropriateness of the current account balance, and stability conditions for net foreign assets.

A large nominal depreciation in 2014 combined with only a modest inflation increase partially reversed the REER appreciation of the last 10 years. The 30 percent appreciation in the CPI-based REER since 2003 has been mostly driven by inflation differential with the main trading partner, the U.S. With year-to-date depreciation at 7 percent in mid-November and outpacing inflation (below 6 percent in October), the REER has declined by 4 percent.

Nonetheless the current account deficit has remained broadly stable and the market share has improved. The current account deficit has hovered close to 5 percent of GDP, as a strong positive services balance partly offsets a negative non-oil trade balance. Costa Rica has gained export market share during the same period in contrast to other emerging markets (Figure 3).

The financing structure of the current account and relatively low external liabilities mitigate risks. The current account is mostly financed by FDI inflows, which have hovered at around 5 percent of GDP. As a result, while the IIP is negative at over 35 percent of GDP, FDI comprises more than 60 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 with a low share of short-term debt. Net international reserves stood at 5.6 months of non-maquila imports of goods and services at end-2013 and are within the Fund’s composite reserve adequacy metric.

Costa Rica: Implied undervaluation (“+” = Overvaluation)

article image
Source: Fund staff estimates.

For details see “Current Account Imbalances: Can Structural Policies Make a Difference?” by Anna Ivanova, https://www.imf.org/external/pubs/cat/longres.aspx?sk=25750.0

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

  • The macro balance approach in the External Balance Assessment (EBA) is estimated on the basis of existing fundamentals and desirable policies. It points to a sustainable cyclically-adjusted current account deficit of 5.4 percent of GDP, which is about 1¼ percentage point larger than the actual cyclically-adjusted deficit of 4.2 percent, implying and undervaluation of 4¾ percent. Identified policy gaps are a significant contributor to Costa Rica’s relatively large estimated current account norm, in particular health expenditures which are higher than the world average.

  • The macro balance approach in the CGER methodologies (which rely on medium term fundamentals) points to an estimated REER undervaluation of barely less than 1 percent.

  • The CGER benchmark external sustainability approach, on the other hand, finds a moderate overvaluation of 13¼ percent. However, in order to interpret appropriately these estimates, the significant proportion of FDI in Costa Rica’s total external liabilities should be taken into account. Thus, if FDI is excluded from NFA, an undervaluation of little less than 6 percent is assessed.

  • The WHD staff model is based on a current account regression that is similar to the CGER macro balance approach, but includes an additional variable capturing the speed of aging, the youth dependency ratio instead of population growth, changes in oil price for oil producers instead of the oil balance, and a measure of trade openness. This method suggests the REER is broadly in line with fundamentals, with an undervaluation of about 1½ percent, in line with EBA estimates.

In staff’s view, the macro-balance-type approaches—which all point to a small undervaluation—are most reliable, while a simple average across the different reliable methodologies implies virtually no over- or under- valuation. Given model uncertainty and standard errors, staff concludes that Costa Rica’s REER is broadly in line with fundamentals.

Nevertheless, there are some signs of competitiveness problems. In contrast to the other countries in the region, Costa Rica has gained market share over the past decade. Nonetheless, further steps to improve competiveness may be needed. Costa Rica lost five positions in the 2015 Doing Business Survey partly driven by a dteterioration in the “starting a business” category where the country lost ten positions. Moreover, according to the Global Competitiveness Index, inadequate infrastructure, difficulty in accessing finance, and concerns over inefficient government spending weigh on the country’s competitiveness.

6. The achievements in containing public spending of 2011 came to a halt in 2012–2013, with public debt continuing to climb (Figure 4). The efforts to restrain government outlays, mainly through capital expenditure cuts in 2011, were undermined by the rising transfers and interest bill in 2012–2013. While expenditures continued climbing, revenues stagnated. As a result, the central government (CG) deficit increased by 1¼ percentage points of GDP in 2012–13 to 5½ percent of GDP and debt reached 36 percent of GDP in 2013.

7. The new government acknowledges the need for fiscal consolidation and is developing a strategy focused on strengthening revenue. After nullification of the 2012 tax reform by the Supreme Court due to procedural irregularities, the previous administration prepared a roadmap with measures yielding a potential adjustment of about 3½ percent of GDP over five years, broadly in line with previous staff recommendations to ensure long-term sustainability. However, no action was taken before the elections. The new administration, which took office in May 2014, has formulated a consolidation proposal of its own, initially focused on reducing tax evasion and a few exemptions. In this connection, a new draft anti-tax evasion law, which includes measures to reduce income tax expenditures as well as strengthen tax control, was submitted to Congress but the potential impact on revenues from its administrative provisions remains unclear. Since then, a more comprehensive plan has been developed (¶21).

A01ufig06

Monetary and Financial Conditions Index

(Percentage points of y-o-y real GDP growth)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: National authorities and Fund staff estimates.

8. Domestic monetary and financial conditions are broadly neutral. Following a substantial increase in domestic interest rates, driven by large government borrowing and buoyant private sector credit demand in 2012, financial conditions eased in early 2013 as the government reduced reliance on domestic financing with Eurobond placements (Figure 5). However, interest rates started rising again in the second half of 2013, as global financial conditions tightened. A broad-based index (FCI) developed by staff (featuring the influence on economic activity of interest rates, REER, house prices, equity prices, VIX, U.S. interest rate) suggests that financial conditions were neither propelling nor dragging GDP growth earlier in 2014, even before the latest policy rate raise (AN 5). At the same time, growth of credit to the private sector, excluding the impact on the stock of FX credit from the devaluation of the colón, has moderated somewhat in H2. Nonetheless, credit growth, supported by a generally healthy financial system (¶9), remains robust and consistent with continued benign financial deepening. Credit composition shifted away from foreign currency loans, while, conversely, deposits moved towards foreign currency in the wake of XR depreciation.

A01ufig07

Private Sector Credit Growth Adjusted for Exchange Rate Depreciation

(Percent, y-o-y)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: National authorities and Fund staff estimates.
A01ufig08

Deposits by Currency Denomination

(Share as a percent of total)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: National authorities and Fund staff estimates.

9. The financial system appears sound, though dollarization continues to be a source of vulnerability. Capital is well above regulatory requirements (Figure 5). Liquidity indicators are generally robust, albeit the loan-to-deposit ratio has been rising since mid-2013 and exceeds 100 percent. Non-performing loans have remained manageable. Profitability declined slightly and remains below that of regional peers. Reliance on foreign funding has increased in the past few years (Figure 5), though banks continue to have a long FX position. Staff estimates suggest that intensification of sovereign and banking strains in advanced countries would not have a large direct impact on credit in Costa Rica (Figure 5 and AN 2). Stress test exercises conducted by bank supervisors yield similar results. Nevertheless, a large depreciation of the colón may impact asset quality, given unhedged liability dollarization of households and corporations. Staff analysis indicates, however, that risks from currency and maturity mismatches are limited and concentrated in the non-financial public and financial sectors (AN 7).

A01ufig09

The Impact of 2014 Depreciation on Net Foreign Exchange Position of the Banks/Private Sector

(Percent)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: National authorities and Fund staff estimates.1/ For non-financial private sector, includes FX bank credit and deposits of non-financial corporations and households.

Financial Soundness Indicators (in percent) 1/

article image
Source: FSI Tables, April 2014, IMF, http://fsi.imf.org

As of December 2013, unless noted otherwise * As of June 2013; ** As of October 2013; *** Chile is as of November 2013; N/A, not available

Nicaragua data are from national authorities.

Comprises Costa Rica, Guatemala, El Salvador, Honduras, Dominican Republic, Nicaragua, and Panama.

Comprises Brazil, Chile, Colombia, Mexico, Peru, and Uruguay

B. Macroeconomic Outlook and Risks

10. The authorities agreed that the outlook for 2015 and the medium term will remain subdued amid deteriorating fundamentals. Growth in 2015 is expected to remain virtually unchanged as the negative impact of a gradual Intel withdrawal offsets again the positive impact of U.S. recovery (¶12 and Figure 6). The Intel closure is estimated to reduce GDP by about ½ to ¾ percentage points in 2014–15 (Figure 1 and AN 1), with temporary negative effects on the level and growth rate of potential GDP (½ and less than ¼ percentage points, respectively), and with no pronounced regional implications (AN 2).1 The baseline scenario contemplates fiscal consolidation of 2¼ percent of GDP over the medium term, thus incorporating the measures at a more advanced state of elaboration in the authorities’ stated plans (¶21). The output gap is projected to widen through 2016, then mostly closing over the medium term, with growth also converging to potential. The CG fiscal deficit would stay at about 5¾ percent of GDP and the public debt ratio would approach 51 percent of GDP by 2019. Thanks to continued prudent monetary policy, inflation is projected to hover around 4 percent after returning within the band in early 2015, while the current account deficit rises to 5¼ percent of GDP by 2019.

A01ufig10

Half Percent Point Shock in Costa Rica’s GDP Growth

(Change from baseline)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Source: Fund staff estimates.

Costa Rica: Baseline Scenario 1/

(In percent of GDP, unless otherwise indicated)

article image
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.

11. The authorities also concurred that an alternative scenario incorporating the fiscal adjustment necessary to restore debt sustainability would yield a stronger outlook. According to staff analysis, a total adjustment of about 3¾ percent of GDP would achieve the objective of stabilizing debt with only moderate short-term output costs (¶19). A tighter fiscal stance consistent with restoring debt sustainability would mitigate increases in market rates, allow for a more balanced macro policy mix to achieve the inflation target, and reduce the current account deficit.

Costa Rica: Full Fiscal Adjustment Scenario 1/

(In percent of GDP, unless otherwise indicated)

article image
Source: Fund staff estimates.

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

12. Risks to the outlook are 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. Concerning faster USMP normalization slightly upside risks prevail, absent pronounced increases in market volatility (Figure 6). Under these conditions, higher U.S. growth would have a positive impact on Costa Rican GDP given its strong trade ties with the U.S. more than offsetting the negative impact of tighter global financial conditions in the short run (AN 2). However, extreme bouts of market volatility could inflict serious damage, especially given Costa Rica’s weak fiscal position, as interest rates may rise abruptly (Figure 6 and Figure 4). Moreover, if USMP normalization leads to substantial exchange rate depreciation in Costa Rica and reduction in the availability of foreign funding, bank and private sector balance sheets could be negatively affected, with adverse implications for growth, inflation, and the balance of payments. In addition, deeper-than-expected slowdowns in advanced and emerging markets could hamper Costa Rica’s growth. The effects of global factors may be amplified by strong linkages with the U.S. (AN 2). On the other hand, further sustained declines in energy prices, triggered by deceleration of global demand and coming-on-stream of excess capacity, could have a modest positive impact on Costa Rica.

  • Domestic risks. The persistence of a large fiscal deficit (for instance, owing to political difficulties in implementing tax reform (¶22)), and the ensuing rise in the public debt ratio, 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. In addition, a slowdown in FDI due to the “signaling effect” from Intel exit could reduce growth more than expected in the short run.

A01ufig11

Costa Rica: Impact on Real GDP Growth from U.S. Real Demand Growth and Real Interest Rate Shocks 1/

(Percent points deviation from baseline)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Source: Fund staff estimates.1/ U.S. real interest rate used in VAR estimation is U.S. real 10 year government bond yield.
A01ufig12

Costa Rica: The Impact on GDP in Various Scenarios of U.S. Monetary Policy Normalization

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Source: Fund staff estimates.
A01ufig13

Costa Rica: Financial Stability Map 1/

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Source; Fund staff estimates.Note: Away from center signifies higher risks, easier monetary and financial conditions, or higher risk appetite.1/ The variables used for each category are the following. 1) Macroeconomic risks: output gap, inflation rate, unemployment rate, budget balance (percent of GDP), government debt (percent of GDP), current account balance (percent of GDP), domestic credit from banks (deviation from trend and its change as percent of GDP), real investment growth, growth in trade (imports plus exports). 2) Inward spillover risks: exports (percent of GDP), gross foreign assets of banking sector (percent of GDP), LIBOR OIS spreads, Implied volatilities, gross international reserves (in percent of short-term debt, imports and broad money), foreign exchange market pressure index. 3) Credit risks: growth in domestic credit from banks, change in the ratio of domestic credit from banks to GDP, stock market return, unemployment rate, public debt (percent of GDP). 4) Market and liquidity risks: ratio of private domestic credit to resident’s deposits, gross foreign liabilities of banking sector (percent of GDP). 5) Monetary and financial conditions: real broad money growth and growth in domestic credit from banks. 6) Risk appetite: volatility of month-to-month stock market returns over past 12 months, volatility of month-to-month exchange rate movements over past 12 months, gross portfolio inflows (percent of GDP) and gross FDI inflows (percent of GDP).

Costa Rica: Risk Assessment Matrix1

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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

13. Discussions centered on the policy mix appropriate for current cyclical conditions and mitigation of longer-term economic vulnerabilities. In particular, the latter focused 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

14. The authorities appropriately intend to begin fiscal adjustment in 2015, thereby buttressing macro-economic stability and making a head start towards long-term sustainability. There was agreement that budgetary adjustment in 2015 would contribute to mitigate risks of higher inflation, widening external imbalances, and possible adverse financial market reactions. It would also represent a first critical step to reduce the sustainability gap (¶18). Although the 2015 budget passed by Parliament envisages, in the absence of measures, a further increase in the CG deficit to about 7 percent of GDP, the government plans a correction of about 1¼ percent of GDP in 2015 (as noted, most of the supporting measures, including VAT reform and cuts in transfers (¶21) are at an advanced stage of elaboration and are included in the baseline). In staff’s view, this correction would be suitable (¶19 and AN 3), taking into consideration inflation and fiscal sustainability concerns as well as the cyclical position of the economy. It will be critical, though, to implement on a timely basis the planned measures, including speedy adoption of the VAT reform and freeze in real salaries (¶21).

15. There was agreement that the monetary stance is adequate but policy should remain nimble to guard against the risk of higher-than-anticipated inflation (¶3). At 5.25 percent, the monetary policy rate is close to the estimated neutral rate of 5.0–5.1 percent, implying a broadly appropriate stance, given output close to potential. This conclusion is also supported by indications of neutral domestic financial conditions (¶8), and, as the authorities emphasized, by moderating credit growth generally consistent with benign financial deepening. However, staff argued that higher inflation risks prevail due to: (i) higher-than-estimated pass-through and second round effects from currency depreciation; (ii) possibly faster U.S. growth; (iii) bigger-than-assumed regulated price hikes, though these are now more unlikely given recent declines in oil prices. These risks are not expected to be outweighed by larger-than-anticipated oil price drop or slowdown due to Intel withdrawal. Accordingly, staff urged the BCCR to stand ready to raise rates if inflation does not decline as anticipated, particularly if it persists above the upper limit of the target range. The authorities reiterated their readiness to adjust the policy rate depending on inflation developments.

Costa Rica: Neutral Interest Rate

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Sources: National authorities and Fund staff estimates. Notes:

All units expressed as percent points unless otherwise stated.

(bps): Basis points

B. Safeguarding Fiscal Sustainability

16. The authorities recognized that current fiscal trends are unsustainable in the long term. Without policy action, the CG deficit would be above 9 percent of GDP and debt rise above 60 percent by 2019. Even in the baseline scenario, which incorporates a fiscal adjustment of 2¼ percent of GDP, the CG deficit would persist at about 5¾ percent of GDP by 2019, owing to a mounting interest bill and constitutionally-mandated education spending. Correspondingly, CG debt would grow to 51 percent of GDP by 2019 (from 36 percent of GDP at end-2013), further raising vulnerabilities and potentially eroding the underpinnings of macroeconomic stability.

Costa Rica: Passive Scenario Without Measures 1/

(In percent of GDP, unless otherwise indicated)

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Source: Fund staff estimates.

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

17. The authorities also acknowledged that the pension system’s financial position has to be strengthened in the long run. The pension plan run by the Social Security agency (CCSS) and those of the judiciary and the teachers are actuarially imbalanced. They are projected to turn a cash deficit over the long term due to system maturation and population aging (AN 3). Preliminary projections suggest that an adjustment equivalent to about 1½ percent of GDP would be required to ensure actuarial equilibrium of all pension systems for the next 100 years. The authorities indicated that a joint study (by the CCSS and the Superintendence of Pensions) to be released in 2015 would determine the size the imbalance.

18. There was agreement on the amount of fiscal adjustment needed to stabilize the public debt ratio. In staff’s estimates, fiscal retrenchment amounting to about 3¾ percent of GDP over the medium-term would suffice to stabilize the public debt ratio below levels which are shown to pose risks for macro stability in emerging markets (Annex II). The authorities concurred and intend to consolidate public finances by about 4 percent of GDP over the medium term. The authorities also acknowledged that in the longer run further parametric adjustment would be needed to remedy the actuarial imbalance of the pension system (¶17)—including larger contributions, lower replacement rates, and higher retirement age.

19. The pace of fiscal consolidation should strike a balance between lowering the sustainability gap and limiting any adverse impact on growth. The authorities concurred that it would be appropriate to undertake about one third of the fiscal adjustment in 2015 followed by smaller steps in subsequent years. The proposed deficit reduction path would have only moderate output cost over the forecast period, even if fiscal consolidation were simultaneously undertaken by trading partners (AN 2). Staff cautioned against further postponing fiscal retrenchment, stressing that the longer the delay, the larger will be the improvement in the primary balance required to stabilize the public debt ratio. Officials were aware that failing to deliver on the fiscal consolidation plan would also increase the risk of an abrupt shift in investor sentiment and of acute financial market tensions, thus forcing a disorderly adjustment.

A01ufig14

Growth and Public Debt

(Percent)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: National authorities and Fund staff estimates.1/ Gradual adjustment scenarios based on model of fiscal adjustment based on authorities’ preferences for growth and fiscal objectives.

Fiscal Contribution to Growth Under the Recommended Fiscal Path

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Source: Fund staff estimates.

20. A common stance was also reached on the broad composition of fiscal adjustment. The authorities agreed that about two-thirds of the needed adjustment (or 2½ percent of GDP) had to rely on revenue increases. The emphasis on revenue enhancement was considered appropriate given Costa Rica’s low revenue effort compared to other upper-middle-income countries.

21. Moreover, the supporting measures identified by the government are advisable, though some important steps still need to be fleshed out.

  • The authorities have readied a legislative proposal to broaden the base of the VAT to include services and basic goods (the latter at a reduced rate), but the bill to reform the income tax (by eliminating some exemptions and moving from schedular to global determination of the tax liability) has not been finalized yet. Most of the measures for reducing expenditures also have to be fully articulated.

  • Staff acknowledged that major revenue gains may be accrued by reducing tax exemptions and other special treatments (e.g. to enlarge the base of the VAT), but stressed that the substantial budget consolidation required will also demand increases in tax rates over the medium term. Specifically, staff recommended raising the VAT rate from 13 to 15 percent gradually and increasing marginal rates on higher-income brackets. The latter could also compensate for any regressive impact of hiking VAT rates. The authorities confirmed their willingness to raise the VAT rate in steps starting in 2016, consistent with the consolidation recommended by the staff.

  • The authorities also considered important actions to strengthen tax compliance, including the draft anti-tax evasion law recently submitted to parliament. Staff agreed with the need to strengthen tax administration, but cautioned that yields from such initiatives are generally uncertain and far from immediate.

  • The authorities expressed their commitment to expenditure tightening. In particular, they concurred that efforts should start in 2015 and concentrate on containing growth of current spending, especially of the wage bill and transfers, through modifying indexation to prevent automatic real salary increases and improving efficiency of the civil service, including through a partial employment freeze. This would also support desirable increases in growth-friendly capital spending, in line with authorities’ efforts to improve project execution. In this connection, staff cautioned on the need to contain risks of contingent liabilities and additional pressures on domestic financing resulting from new off-budget investment vehicles contemplated by the authorities.

  • Staff estimates that the proposals at a more advanced stage of elaboration are likely to yield some 2¼ percent of GDP, as included in the baseline scenario (¶10). The remaining measures needed to generate the required total adjustment of 3¾ percent of GDP ought to be defined urgently, not least to obtain more reliable estimates of their impact.

A01ufig15

Tax Evasion Rates

(Percent)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: Corbacho, Fretes Cibils, and Lora (2013); CAF (2012); Cardoza (2012); Jiménez, Gómez Sabaini and Podestá (2010); Pecho, Peláez and Sánchez (2012); and Salim (2011).
A01ufig16

Tax Expenditure in Central America

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: WGTC; Sabatini, Pecho, Moran: ‘Los gastos tributarios en Honduras, 2013; national authorities and Fund staff estimates.

Costa Rica: Fiscal Consolidation Measures

(In percent of GDP)

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Source: Fund staff estimates.

The baseline scenario incorporates staff’s assessment of measures in the authorities’ fiscal plan that are at a more advanced stage of elaboration. Includes expenditure cuts equivalent to 0.3 percent of GDP, other cuts in transfers, a partial hiring freeze, broadening of the VAT base from the second half of 2015, a move towards global income tax, miscellaneous cuts in exemptions, and moderate gains from improvements in tax evasion.

The full adjustment scenario includes additional measures in the authorities’ plan that were at a less advanced stage of elaboration at the time of the Article IV mission. Includes measures as in the baseline scenario as well as measures to contain growth in the wage bill, and increases in the VAT rate and marginal income tax rates in outer years.

Includes mainly effects of 2014 anti-tax evasion law.

Includes measures envisaged in draft law that would reduce exemptions on income tax for cooperatives and public entities, as well as reinstate an excise on lottery sales.

Baseline projection includes extending VAT coverage to services sector, with basic goods and private education and health taxed at preferential rate of 2 percent. Additional measures include gradual increase from 13 to 15 percent tax rate.

Baseline projection includes move from schedular to global basis for income tax. Additional adjustment measures include gradual increase in marginal rates on higher income brackets.

Baseline projection includes partial hiring freeze. Additional adjustment measures include freezing salaries in real terms.

Baseline projection includes cuts in transfers in the 2015 budget. Additional measures include enforcement of the legal cap on pensions paid out of the budget.

Costa Rica: Fiscal Consolidation Path

(In percent of GDP)

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Source: Fund staff estimates.

22. In addition, most deficit-reducing measures require parliamentary approval, which is made difficult by a complex political situation. The new administration should take advantage of its high political capital to push forward reforms early in its mandate, not least to persuade the powerful public sector unions to accept sacrifices (the containment of wage growth in the public sector does not require parliamentary approval). Nevertheless, the government noted that it only has a minority representation in Congress, hence passage of several budget consolidation measures requires the cooperation of opposition parties. Lingering resentments from the bitter presidential campaign raise concerns about legislative approval of adjustment measures, notably the reforms of the VAT and income taxes. Nonetheless, there appears to be broad consensus across the political spectrum and society at large that fiscal retrenchment is needed. Thus, there may be scope for leveraging containment of public sector wages to bargain for revenue increases.

C. Improving the Monetary and Exchange Rate Policy Framework

23. Discussions identified areas to strengthen further the monetary policy framework. Staff commended the authorities’ achievements in lowering inflation since the global crisis. Having posted double-digit inflation for almost 30 years, Costa Rica has maintained it within the BCCR target range of 4–6 percent since 2009 (the range was further reduced to 3–5 percent in 2014). However, the recent depreciation episode illustrated that inflation expectations are not well-anchored. Moreover, perceived exchange rate stability in the past few years has encouraged dollarization, building up vulnerabilities in the balance sheets of banks and the private sector. The FX intervention rule, which aims both to avert excessive volatility and counter excessive deviations from medium-term fundamentals, remains undisclosed. Staff noted that lack of transparency may undermine confidence in the subordination of XR management objectives to the inflation target.

24. The authorities aim to move towards full-fledged inflation targeting, while maintaining a significant role for active XR management. Staff argued that allowing more XR flexibility would help establish inflation as the undisputed monetary anchor and lower XR pass-through to inflation. In particular, since appreciation pressures have now subsided, it is an opportune time for abandoning the XR band. More flexibility would enhance the role of the XR 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 elimination of the band would not preclude the BCCR from engaging in FX market interventions to smooth out short-term sharp XR fluctuations and strengthen the NIR position as long as interventions do not jeopardize the inflation target. The authorities agreed in principle, but stressed the need to remain vigilant about the impact of XR movements on financial stability and inflation expectations given the high levels of dollarization and unhedged FX borrowing. Specifically, officials noted that other “inflation-targeting” central banks intervene frequently to stem excessive XR volatility and they are likely to follow this mold. The authorities were also cautious about making the intervention rule public due to the fear of facilitating speculation.

Table 1.

Costa Rica: Extent of Preparedness for Transitioning to Greater Exchange Rate Flexibility1

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Source: Otker-Robe and others (2007) and staff analysis Note: FX = foreign exchange.

The years in parentheses refer to the period of transition to a full float

Major boom one year before the float.

Lagged behind compared to the foreign exchange markets.

For maturities less than 270 days.

The prudential framework was not in place to control the overall risk exposure of banks, with identified shortcomings mainly regarding the prudential regulation of banks’ exposure to FX risk. Corporates in general (and banks) were making active use of the futures markets to hedge their exposures or to take speculative positions. Market participants were not accustomed to assessing, as a matter of routine, the FX risks posed by regular market volatility.

For Chile, all controls were removed shortly before or with the float. For Brazil, controls were liberalized gradually during the 1990s (inflow controls of 1993-96 liberalized by 1999), with further liberalization for nonresident investments after the float.

In the Czech Republic, most inflows and outflows had been liberalized by 1997, but certain inflow transactions (including financial derivatives) were liberalized in early 1999, following a transition period to phase out the remaining controls under the agreement with the Organization for Economic Cooperation and Development (OECD), with full liberalization taking place in 2002, until which time certain transactions (including some selective derivatives operations and short-term portfolio and deposit transactions) had remained controlled.

Spot market is relatively shallow and the central bank does not comprehensively collect information on spot transactions on regular basis.

Derivatives market is unregulated. Hence, while there are no restrictions on derivatives transactions, it is not clear how the associated risks are assessed by the supervisor and how the derivatives market functions in practice.

The interbank market is underdeveloped with low degree of market depth.

The securities market is largely limited to primary market in government securities, secondary market in repos of government securities, and a very thin stock market.

While the prudential framework to control the overall FX risk exposure of the banks as well as the measures to reduce FX risks is in place, it is somewhat obsolete. The private sector does not use derivatives to hedge their exposures on routine basis and market participants in general are not accustomed to assessing the FX risks posed by regular market volatility. After the depreciation episode in 2014, the CB introduced some measures to smooth volatility in the FX market, including new requisitions for the buying/selling of FX by public sector entities. Specifically, before June 2014, the CB participated in the FX market in order to replenish NIR that was withdrawn by the public sector. Now, the CB can decide discretionally when and how to do this replenishment.

While monetary framework is largely in place, the transmission mechnism from policy rates to the market rates is rather weak.

While there are no capital controls currently in place, a recently adopted law empowers the executive, upon consultation with the Central Bank, to impose temporary restrictions on inflows of short-term capital through taxation and compulsory deposits with the Central Bank.

25. Steady progress has been made to create a favorable environment for inflation targeting, but more may be needed. The experience of countries that successfully transitioned to more flexible XR regimes (AN 6) suggests the importance of strengthening effective systems for reviewing and managing the exposure to XR risk. In this regard, staff welcomed bank supervision stipulations adopted in 2013, aimed at a more thorough assessment of credit risks related to XR exposures and associated need for higher provisions. The authorities concurred that fostering further development of the secondary market for government securities is also desirable. Finally, staff counseled to resist pressures to expand the BCCR’s mandate to include growth, which could generate confusion as to the main target of monetary policy. Additional steps to buttress BCCR credibility further, including by fortifying its balance sheet, could also be useful (AN 4).

D. Financial Stability

26. Officials acknowledged that limited progress has been made in implementing pending recommendations from the 2008 FSAP update (Annex 1). Advances have been slow, largely due to a crowded legislative agenda. In particular, legislation aimed at empowering the Superintendence of Financial Institutions to conduct consolidated supervision, providing adequate protection to bank supervisors, and strengthening bank resolution procedures has been stalled in Congress for 8 years. The authorities are preparing new proposals to replace the old draft laws but the time-frame for their completion and the degree of alignment of the new laws with the 2008 FSAP update recommendations is not clear. The authorities noted, in particular, that introduction of further legal protection for bank supervisors faces strong opposition and may run into court challenges. Staff endorsed progress made towards full implementation of risk-based supervision, but encouraged stepping up efforts to bring it up to best practices.

27. The authorities concurred that gradual adoption of Basel III standards would further improve resilience of the financial system. The authorities believe that the regulatory and risk management frameworks would benefit from gradually firming up capital quality and increasing liquidity and capital requirements in line with Basel III standards. In particular, moving towards the introduction of Basel III definitions of capital, a capital conservation buffer, and a leverage ratio as well as incorporating market and operational risk capital requirements should be immediate priorities. Staff assessment suggests that only a few banks are not yet in full compliance with Basel III standards (AN 7) and that adopting Basel III capital requirements would have negligible growth impact in Costa Rica.

28. Regional initiatives to upgrade cross-border consolidated supervision are important, but additional improvements are needed to alleviate lingering spillover risks. Effective supervision of cross-border financial operations is critical for stability, in particular because financial linkages within the region are not 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 its large conglomerate BCT operates in Panama. In this regard, officials emphasized the existence of a data sharing agreement with Panama, but staff underscored that cross-border consolidated supervision seems overall less advanced in Costa Rica compared to other countries in the region. Specifically, though it welcomed Costa Rica’s participation in the system of multilateral MoUs and in the newly created Central American Council of Banking Supervisors, staff urged speedier implementation of actions recommended in the 2008 FSAP (¶26).

A01ufig17

Risk Based Supervision, 2013

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Source: Fund staff estimates based on country assessments.1/ Scale: 100 = compliant; 75 = largely compliant; 25 = materially non-compliant; 0 = non-compliant.
A01ufig18

Consolidated Cross Border Supervision, 2013

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Source: Fund staff estimates based on country assessments.1/Scale: 100 = compliant; 75 = largely compliant; 25 = materially non-compliant; 0 = non-compliant.

E. Structural Reforms

29. The authorities support structural reforms to buttress Costa Rica’s competitiveness and promote inclusive growth. While Costa Rica has been the regional leader in attracting foreign direct investment, the recent withdrawal of Intel suggests that further steps are needed to maintain the country’s competitive edge. Within the region, the country is relatively well-positioned in the electricity market—more than 80 percent of electricity comes from renewable sources, technical losses are relatively low, and industrial tariffs are the lowest in the region. Nevertheless, the cost of electricity is high compared to Asian competitors, which are generally more efficient at electricity production. Staff recommended increasing private sector participation in the energy sector and reviewing tariff setting procedures to enhance cost discipline. While Costa Rica ranks highly on women’s educational attainment compared to other countries in the region, it lags in terms of economic participation and opportunity for women, reflected in low female labor force participation and the gender wage gap (Figure 7). With regards to human capital, the authorities agreed that improving the quality of public education spending with emphasis on quality child care and early childhood education could facilitate female return to the labor force, foster productivity improvements, and lower inequality, which has been recently on the rise. Officials also concurred that stimulating competition in the banking sector, fostering the development of the domestic capital market, addressing infrastructure bottlenecks, and streamlining business regulations could accelerate potential growth and improve financial inclusion. According to staff estimates, efficiency gains from these measures could increase trend growth by up to 2 percentage points, while reducing unemployment by 3 percent over the long run (Figure 7).

Figure 7.
Figure 7.

The Impact of U.S. Monetary Policy Normalization

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: Bloomberg, national authorities and Fund staff estimates.1/ Based on panel regression of EMBI spreads on U.S. real interest rate, a measure of domestic fundamentals, and the interaction of U.S. real rate with domestic fundamentals.2/ The simulation entails positive U.S. real GDP growth surprise of about 1 percent relative to the baseline through 2015, triggering an earlier-than-expected tightening of Fed policy. Market interest rates rise due to an increase in risk premium outside the U.S. equal to one standard deviation in each Latin American country (for Costa Rica = 100 basis points).
A01ufig19

Average Electricity Tariffs as 2011

(Residential vs. industrial, in USD cents/KwH)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: OLADE and Fund staff estimates.
A01ufig20

Technical Losses as 2011

(Percent of total output)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: OLADE and Fund staff estimates.
A01ufig21

Gini Index by Household 1/

(Income equality = 0)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: INEC and Fund staff estimates.1/ The line break in 2010 reflects a methodological change in the measurement of the Gini Index.
A01ufig22

Incidence of Poverty 1/

(Percent of households below the poverty line 2/)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: INEC and Fund staff estimates.1/ The line break in 2010 reflects a methodological change in the measurement of the poverty.2/ The poverty line is calculated according to the cost of the essential goods and services to afford minimal standards of living.

Staff Appraisal

30. Costa Rica must address existing vulnerabilities and attain long-term fiscal sustainability, while upgrading productivity and safeguarding financial stability. In the near term, a tighter fiscal policy stance and vigilance over inflation would buttress macroeconomic stability. At the same time, public finances should be placed on a sustainable path, the monetary policy framework strengthened, and banking sector supervision and regulation further enhanced. Reforms to foster competition, increase efficiency, and promote external competitiveness would accelerate long-run inclusive growth.

31. With long-term fiscal trends unsustainable, ambitious fiscal consolidation is needed, though it can be implemented at a measured pace. Excluding the pension system actuarial deficit, a permanent improvement in the fiscal primary balance of 3¾ percent of GDP is required to stabilize the public debt ratio after 2019 at a prudent level and safeguard macroeconomic stability. Given that output is close to potential, the rapid growth of public debt calls for significant upfront fiscal tightening, with about a third of the overall budget adjustment in 2015 followed by smaller steps in subsequent years. Postponing consolidation would result in larger tightening needs to stabilize debt-to-GDP and increase the probability of disorderly adjustment in the event of an adverse turn in investor sentiment. While the social security actuarial deficit could be addressed at a later stage, the longer the correction is delayed, the larger it will be.

32. Thus, the authorities’ fiscal adjustment plan of about 4 percent of GDP is suitable, but supporting measures still need to be fully developed and implemented. The plan’s emphasis on revenue enhancement is well-founded, given Costa Rica’s low revenue effort compared to other upper-middle-income countries. However, the proposals at a more advanced phase of elaboration are likely to yield only some 2¼ percent of GDP. Other measures still need to be fleshed out and virtually all have to be enacted. On the revenue side, it is advisable to broaden the VAT base and raise the VAT rate from 13 to 15 percent, as well as to increase marginal tax rates on higher income brackets as part of the introduction of a global income tax, thereby addressing also distributional concerns. Efforts to contain growth of current outlays, particularly the wage bill and transfers, should be stepped up, thus creating space for much needed infrastructural spending. Although recent actions to strengthen tax compliance are positive, associated revenue gains are likely to materialize only in the longer term.

33. The monetary stance is broadly appropriate, but the authorities should complete the transition to inflation targeting. Current monetary policy is expected to support the reentry of inflation within the target band, though vigilance is warranted in case inflation does not decline in line with projections. Elimination of the XR band and concurrent adoption of a more transparent intervention rule would establish the inflation target as the undisputed bearing of monetary policy, while still allowing for smoothing out exchange rate volatility. At the same time, higher XR flexibility would help lower the XR pass-through to inflation and force market participants to internalize currency risks, discouraging dollarization. It is important to foster development of the tools necessary to underpin greater XR flexibility, including hedging instruments and a deeper secondary market for government securities. The authorities should also avoid expanding the BCCR’s mandate to include growth, which could generate confusion as to the true target of monetary policy.

34. Enactment of the pending FSAP recommendations, a gradual move towards Basel III standards, and strengthening cross-border supervision are important. In particular, greater urgency is required in empowering the Superintendence of Financial Institutions to conduct consolidated and transnational supervision, providing adequate protection to bank supervisors, and enhancing bank resolution procedures. Progress made towards the full implementation of risk-based supervision is welcome, but more efforts are needed to bring it in line with best practices. The regulatory and risk management frameworks would greatly benefit from introducing gradually Basel III standards.

35. Structural reforms offer the opportunity to boost productivity and foster long-run inclusive growth. It would be desirable to step up private sector participation in the energy sector and review tariff setting procedures to strengthen cost controls. Ameliorating efficiency and efficacy of education spending, with the focus on early childhood, could raise women’s labor force participation, stimulate productivity, and reduce inequality in the long term. Promoting competition in the banking sector, facilitating capital market development, alleviating infrastructure bottlenecks, and simplifying the regulatory environment would also buttress competitiveness and accelerate potential growth.

36. It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

Figure 8.
Figure 8.

Costa Rica: Labor Market Structure and Growth Potential

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: WDI Household Surveys and Fund staff estimates.
Table 2a.

Costa Rica: Selected Social and Economic Indicators, Baseline Scenario, Partial Fiscal Adjustment 1/

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

Includes expenditure cuts equivalent to 0.3 percent of GDP, other cuts in transfers, a partial hiring freeze, broadening of the VAT base from the second half of 2015, a move towards global income tax, miscellaneous cuts in exemptions, and moderate gains from improvements in tax evasion.

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 2b.

Costa Rica: Selected Social and Economic Indicators, Full Fiscal Adjustment Scenario 1/ 2/

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

Includes measures as in the baseline partial adjustment scenario (table 1.1) as well as measures to contain growth in the wage bill, and increases in the VAT rate and marginal income tax rates in outer years.

The inflation adjustment of the principal of TUDES (inflation indexed bonds) was recorded as interest expenditure. In 2014, such inflation adjustment was equivalent to 0.3 percent of GDP.

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 3.

Costa Rica: Balance of Payments, Baseline Scenario, Partial Fiscal Adjustment 1/

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

Includes expenditure cuts equivalent to 0.3 percent of GDP, other cuts in transfers, a partial hiring freeze, broadening of the VAT base from the second half of 2015, a move towards global income tax, miscellaneous cuts in exemptions, and moderate gains from improvements in tax evasion.

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

Includes public and private sector debt.

Table 4a.

Costa Rica: Central Government Balance, Baseline Scenario, Partial Fiscal Adjustment 1/

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Sources: Ministry of Finance and Fund staff estimates.

Includes expenditure cuts equivalent to 0.3 percent of GDP, other cuts in transfers, a partial hiring freeze, broadening of the VAT base from the second half of 2015, a move towards global income tax, miscellaneous cuts in exemptions, and moderate gains from improvements in tax evasion.

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 4b.

Costa Rica: Central Government Balance, Full Fiscal Adjustment Scenario 1/

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Sources: Ministry of Finance and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario (table 3.1) as well as measures to contain growth in the wage bill, and increases in the VAT rate and marginal income tax rates in outer years.

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. In 2014, such inflation adjustment was equivalent to 0.3 percent of GDP

Table 5a.

Costa Rica: Summary Operations of the Central Government, GFSM 2001 Classification, Baseline Scenario, Partial Fiscal Adjustment 1/

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Sources: Ministry of Finance and Fund staff estimates.

Includes expenditure cuts equivalent to 0.3 percent of GDP, other cuts in transfers, a partial hiring freeze, broadening of the VAT base from the second half of 2015, a move towards global income tax, miscellaneous cuts in exemptions, and moderate gains from improvements in tax evasion.

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 5b.

Costa Rica: Summary Operations of the Central Government, GFSM 2001 Classification, Full Fiscal Adjustment Scenario 1/

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Sources: Ministry of Finance and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario (table 4.1) as well as measures to contain growth in the wage bill, and increases in the VAT rate and marginal income tax rates in outer years.

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 6a.

Costa Rica: Consolidated Public Sector Operations, Baseline Scenario, Partial Fiscal Adjustment 1/ 2/

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Sources: Ministry of Finance and Fund staff estimates.

Includes expenditure cuts equivalent to 0.3 percent of GDP, other cuts in transfers, a partial hiring freeze, broadening of the VAT base from the second half of 2015, a move towards global income tax, miscellaneous cuts in exemptions, and moderate gains from improvements in tax evasion.

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 6b.

Costa Rica: Consolidated Public Sector Operations, Full Fiscal Adjustment Scenario 1/ 2/

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Sources: Ministry of Finance and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario (table 5.1) as well as measures to contain growth in the wage bill, and increases in the VAT rate and marginal income tax rates in outer years.

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 7a.

Costa Rica: Summary Operations of the Consolidated Public Sector, GFSM 2001 Classification, Baseline Scenario, Partial Fiscal Adjustment 1/ 2/

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Sources: Ministry of Finance and Fund staff estimates.

Includes expenditure cuts equivalent to 0.3 percent of GDP, other cuts in transfers, a partial hiring freeze, broadening of the VAT base from the second half of 2015, a move towards global income tax, miscellaneous cuts in exemptions, and moderate gains from improvements in tax evasion.

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 7b.

Costa Rica: Summary Operations of the Consolidated Public Sector, GFSM 2001 Classification, Full Fiscal Adjustment Scenario 1/ 2/

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Sources: Ministry of Finance and Fund staff estimates.

Includes measures as in the baseline partial adjustment scenario (table 6.1) as well as measures to contain growth in the wage bill, and increases in the VAT rate and marginal income tax rates in outer years.

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 8.

Costa Rica: Public Sector Debt, Baseline Scenario, Partial Fiscal Adjustment 1/

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Sources: Ministry of Finance and Fund staff estimates.

Includes expenditure cuts equivalent to 0.3 percent of GDP, other cuts in transfers, a partial hiring freeze, broadening of the VAT base from the second half of 2015, a move towards global income tax, miscellaneous cuts in exemptions, and moderate gains from improvements in tax evasion.

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

Caja Costarricense del Seguro Social (social security agency).

Table 9.

Costa Rica: Monetary Survey, Baseline Scenario, Partial Fiscal Adjustment 1/

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

Includes expenditure cuts equivalent to 0.3 percent of GDP, other cuts in transfers, a partial hiring freeze, broadening of the VAT base from the second half of 2015, a move towards global income tax, miscellaneous cuts in exemptions, and moderate gains from improvements in tax evasion.

Table 10a.

Costa Rica: Medium-Term Framework, Baseline Scenario, Partial Fiscal Adjustment 1/

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

Includes expenditure cuts equivalent to 0.3 percent of GDP, other cuts in transfers, a partial hiring freeze, broadening of the VAT base from the second half of 2015, a move towards global income tax, miscellaneous cuts in exemptions, and moderate gains from improvements in tax evasion.

External current account deficit.

Table 10b.

Costa Rica: Medium-Term Framework, Full Fiscal Adjustment Scenario 1/

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

Includes measures as in the baseline partial adjustment scenario (table 9.1) as well as measures to contain growth in the wage bill, and increases in the VAT rate and marginal income tax rates in outer years.

External current account deficit.

Table 11.

Costa Rica: Banking Sector Indicators

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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)

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

Annex II. 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 51 percent of GDP by 2019 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.

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 4.3 percent. The baseline scenario assumes fiscal adjustment of about 2¼ of GDP based on the staff’s assessment of measures at a more advanced stage of elaboration in the medium-term adjustment plan announced by the authorities. 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. Moreover, WEO (2003) argues that a sustainable debt level may be lower for countries that have relatively low revenue-to-GDP ratio, high volatility of the revenue-to-GDP, as well as a weak track record of fiscal consolidations. Given that Costa Rica has low and fairly volatile revenue-to-GDP ratio, compared to other emerging markets, and has not demonstrated the ability to achieve substantial expenditure consolidation in the past decade, the debt threshold for Costa Rica should be significantly lower than 50 percent of GDP to provide a safety margin against the risk of default or at least severe budget funding problems. This is why targeting an upper bound to the public debt ratio of 40 to 45 percent of GDP appears justifiable in the case of Costa Rica.

Results and Assessment

Results. In the baseline, the headline deficit remains close to 6 percent of GDP in 2019, as the higher interest bill from rising public debt—which reaches 51 percent of GDP in 2019 and stays on an upward trajectory thereafter—largely offsets the improvement in the primary balance. The gross financing needs would average almost 10 percent of GDP in 2014–19. In the adjustment scenario, additional measures of 1½ of GDP, as part of a gradual but frontloaded consolidation plan, suffice to stabilize debt by 2019 at a level below 45 percent of GDP. This outcome assumes significant tightening in credit spreads driven by favorable market reaction to a frontloaded adjustment plan with credible measures.

Assessment. While most standard debt profile characteristics are not at “danger” levels (see heat-map), the debt and gross financing needs approach the debt burden benchmarks under stressed scenarios. In particular, debt rises above 60 percent of GDP under the combined macro-fiscal shock, with particularly high sensitivity to growth and fiscal shocks. Debt profile indicators also highlight risks from relatively high spreads on external bonds, elevated financing needs, and significant external and FX debt. The recent loss of the sovereign’s only investment grade rating and warnings of potential downgrades by other main agencies highlight the risk that credit risk perceptions could intensify.

Mitigating factors. A stable investor base is an important mitigating factor. Notwithstanding the moderate 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 about 20 and 30 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.

Table A2.1.

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

(in percent of GDP unless otherwise indicated)

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Source: Fund staff estimates and projections.

Public sector is defined as central government.

Based on available data.

EMBIG.

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

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).

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.

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

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

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.

Table A2.2.

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

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Source: Fund staff estimates and projections.
Table A2.3.

Costa Rica: Central Government DSA – Realism of Baseline Assumptions

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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.
Table A2.4.

Costa Rica: Central Government DSA – Stress Tests

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Source: Fund staff estimates and projections.
Table A2.5.

Costa Rica: Central Government DSA – Risk Assessment

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Source: Fund staff estimates and projections.

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.

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.

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.

EMBIG, an average over the last 3 months, 15-Aug-14 through 13-Nov-14.

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.

Table A2.6.

Costa Rica: Central Government DSA – Adjustment Scenario

(in percent of GDP unless otherwise indicated)

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Source: Fund staff estimates and projections.

Public sector is defined as central government.

Based on available data.

EMBIG.

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

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).

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.

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

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

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.

Table A2.7.

Costa Rica: Consolidated Public Sector DSA – Baseline Scenario

(in percent of GDP unless otherwise indicated)

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Source: Fund staff estimates and projections.

Public sector is defined as consolidated public sector.

Based on available data.

EMBIG.

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

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).

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.

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

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

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 III. Costa Rica: External Debt Sustainability Assessment

Table A3.1.

Costa Rica: External Debt Sustainability Framework, 2011–19

(In percent of GDP, unless otherwise indicated)

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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.

Figure A3.1.
Figure A3.1.

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

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2015, 029; 10.5089/9781484337905.002.A001

Sources: International Monetary Fund, Country desk data, and Fund 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 2010.
1

The closure is not expected to have significant impact on fiscal revenue as Intel operated in the free trade zone.

1

The basics output table for the DSA at the consolidated public sector level shows that the estimated sustainability gap in 2019 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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Cover IMF Staff Country Reports
Costa Rica: Staff Report for the 2014 Article IV Consultation
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2015: Issue 029
Publisher:
International Monetary Fund
ISBN:
9781484337905
ISSN:
1934-7685
Pages:
87
DOI:
https://doi.org/10.5089/9781484337905.002

Average Potential Growth
Figure 1.

Costa Rica: Long-Term Fiscal Sustainability

(Percent of GDP)
Figure 2.

Costa Rica: Recent Developments and Prospects, Real Sector
Figure 3.

Costa Rica: Recent Developments, Nominal Exchange Rate and Inflation
Figure 4.

Costa Rica: Recent Developments, External Sector
Figure 5.

Costa Rica: Recent Developments and Prospects, Fiscal Sector
Figure 6.

Costa Rica: Recent Developments, Financial Sector

Unemployment Rate

(Percent)

Exchange Rate Pass-Through

(Percentage points)

Reserve coverage

(Percent of GDP, end-2013)

Costa Rica: Composition of the Financial Account in the BOP

(Billions USD)

Monetary and Financial Conditions Index

(Percentage points of y-o-y real GDP growth)

Private Sector Credit Growth Adjusted for Exchange Rate Depreciation

(Percent, y-o-y)

Deposits by Currency Denomination

(Share as a percent of total)

The Impact of 2014 Depreciation on Net Foreign Exchange Position of the Banks/Private Sector

(Percent)

Half Percent Point Shock in Costa Rica’s GDP Growth

(Change from baseline)

Costa Rica: Impact on Real GDP Growth from U.S. Real Demand Growth and Real Interest Rate Shocks 1/

(Percent points deviation from baseline)

Costa Rica: The Impact on GDP in Various Scenarios of U.S. Monetary Policy Normalization

Costa Rica: Financial Stability Map 1/

Growth and Public Debt

(Percent)

Tax Evasion Rates

(Percent)

Tax Expenditure in Central America

(Percent of GDP)

Risk Based Supervision, 2013

Consolidated Cross Border Supervision, 2013
Figure 7.

The Impact of U.S. Monetary Policy Normalization

Average Electricity Tariffs as 2011

(Residential vs. industrial, in USD cents/KwH)

Technical Losses as 2011

(Percent of total output)

Gini Index by Household 1/

(Income equality = 0)

Incidence of Poverty 1/

(Percent of households below the poverty line 2/)
Figure 8.

Costa Rica: Labor Market Structure and Growth Potential
Figure A3.1.

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

(External debt in percent of GDP)