Caribbean & Central America - October 2018

With a fiscal deficit this year forecast at 7.2% of GDP, the centre-left Partido Acción Ciudadana (PAC) administration of President Carlos Alvarado insists that tax reform is essential. Public sector employees’ unions, however, are protesting the measures put forward by his government, resulting in the shuttering of schools, universities and some hospitals as well as blockades on some of the country’s major highways.

Proposals

The government needs to boost 2019 revenues via tax reform, which is also a pre-condition to securing congressional approval for external financing. President Alvarado has described his measures as a “bitter pill” to swallow but “the only way to save this country”.

Costa Rica faces a “critical fiscal situation” as financing the government’s widening budget deficit pushes interest rates higher and threatens to hurt economic growth, central bank (BCCR) president Rodrigo Cubero said in an interview. Cubero sees the US$57bn economy slowing this year to post 3.2% growth as consumption declines.

Looking to 2019, growth will decelerate further if congress fails to approve the bill to strengthen public finances, aimed at reforming both the revenue and spending side of the ledger. Uncertainty around the government’s fiscal deficit is also contributing to economic cooling as companies hold off on investing and families slow spending, he warned.

Unions argue that the tax-reform bill unnecessarily burdens the underprivileged. The government disagrees, arguing that 80% of the revenue collected through this new proposal will come from the top 20% of earners in Costa Rica. The president of the 57-member unicameral legislature, Carolina Hidalgo, presided over a meeting on 17 September where lawmakers discussed the tax-reform bill and said she was confident that the bill will pass before the end of September. As the strike continued into its second week, however, the government said the bill would probably not be approved until October.

One of the most contentious proposals at the centre of the tax reform is the replacement of the current 13% sales tax for a value-added tax of the same value. This new value-added tax, however, would tax services.

The strike by Costa Rica’s public employee unions against fiscal reform which began on 10 September (and which was ongoing at the time of writing) “could have a visible impact on economic growth if it continues”, Cubero said during an interview with local business newspaper El Financiero. The strike is already affecting economic activity and anecdotal evidence suggests it is having a negative impact on tourism, exports, transportation, and commerce, Cubero said.

So far talks between the government and the unions have failed to resolve the stand-off. On 21 September, the president forecast an agreement “within hours” but negotiations broke down once again, with the government accusing union leaders of lying about the impact of the tax reform to prolong the industrial action.

• New Central Bank chief

Cubero took the helm of Costa Rica’s central bank on 1 August after 12 years as an economist at the International Monetary Fund (IMF). Previously, Cubero taught at the Latin America Centre at the University of Oxford. Public debt levels will climb to 58.4% of GDP next year from 53.8% this year, according to the bank. Moody’s Investors Service warned of the government’s heavy reliance on short-term financing. The central bank increased its benchmark interest rate by 3.25 percentage points to 5% in less than a year to stem a decline in the currency. The yield on Costa Rica’s bonds coming due in 2023 is up 51 basis points this September due to the greater perception of risk fomented by the deteriorating fiscal situation.