Caribbean & Central America - December 2015 (ISSN 1741-4458)

There are only so many times that the term ‘fiscal emergency’ can be applied to the state of Costa Rica’s finances before the words start to lose their impact. Costa Rica’s finance minister, Vice-President Helio Fallas, was using the term again in late November, insisting that fiscal reform could not be put off anymore. This has been the case for several years now and yet it is constantly put off: governments insist that the legislative assembly must implement its proposed tax reforms; legislators respond that the government must cut wasteful spending.

Costa Rica’s fiscal deficit reached 4.8% of GDP in the first 10 months of the year, up from 4.5% over the same period in 2014. Fallas said that unless the legislative assembly approved imminently the tax reforms set by the government, allowing a fresh source of income to enter state coffers, the infrastructure and social spending budget would suffer. In this way, he sought to hold legislators indirectly responsible for any popular protests due to enforced government spending cuts.

Fallas said that unless the fiscal reform was approved, international credit rating agencies would reduce Costa Rica’s rating, leading to higher interest rates on loans. “If a tax reform is not approved at the start of 2016, it will be impossible to sustain low interest rates. There will be an increase in spending on interest which will mean more debt and a deterioration in social services,” Fallas said.

In the first 10 months of the year, the fiscal deficit reached US$2.50bn, a 12.3% increase on the same period last year. State revenue over this period totalled US$6.00bn, up 8.5%, but it was outstripped by expenditure, which amounted to US$8.50bn, up 9.6%. Official projections are for the fiscal deficit to widen to 5.9% of GDP by the end of 2015, up from 5.7% in 2014.

• OECD

Costa Rica’s economy will grow by 2.9% in 2015 and 3.5% in 2016, according to the Organisation for Economic Co-operation and Development (OECD), which Costa Rica is hoping to join. The OECD also predicted that exports would recover next year “following the slump in 2015, which was caused mainly by the closure of a large electronics plant [Intel’s microprocessor assembly plant]”. It also forecast that “inflation will pick up in the next two years”, as the effects of falling oil prices wear off, and that unemployment will remain close to 10%.