Caribbean & Central America - November 2021

Costa Rica’s fiscal deficit has fallen over the course of the year, earning praise from the International Monetary Fund (IMF), but some worry progress may not last.

On 18 October the finance ministry released figures showing a fiscal deficit of 3.89% of GDP from January to September 2021. This represents a substantial decrease from the 6.43% deficit recorded for the same period in 2020 and is also slightly lower than the 4.53% deficit to September 2019. The figures also show a primary surplus of 0.26%, compared to -2.57% in 2020 and -1.39% in 2019. “Achieving a primary surplus in September 2021 demonstrates that fiscal adjustment is on the right path and clearly shows the commitment of the executive branch to fiscal sustainability,” said finance minister Elian Villegas. “This commitment must be complemented by the approval of measures that are currently being discussed in the legislative assembly.”

These encouraging signs follow praise from the IMF in its first review of the US$1.76bn three-year arrangement under the Extended Fund Facility (EFF), which was approved by Costa Rica’s 57-member unicameral legislature in July. The deal “focuses on implementing equitable fiscal reforms to ensure debt sustainability,” according to the IMF, which hailed the country’s progress following a virtual mission to Costa Rica on the first review of the programme from 22 September- 6 October.

In a statement published on 7 October, the IMF hailed the authorities’ proactive response to the coronavirus (Covid-19) pandemic, underlining that “positive external developments are supporting a robust economic recovery”. It adds that with strong export growth and a vigorous vaccination campaign the outlook has improved, and real GDP is now projected to grow by 4.7% in 2021, compared with 2.6% at the time of the EFF request.

According to the IMF “all of the end-July programme targets were comfortably met in part due to a strong revenue performance, prudent spending, and improving market conditions” and “authorities are on track to meet their fiscal goals under the programme”. The IMF joins Villegas in underlining the importance of implementing the additional revenue measures under discussion in the legislature, which it says are “essential to keeping the authorities’ programme on track to achieve a primary surplus target of 1% of GDP by 2023 and ensure public debt-GDP is firmly put on a downward path”. Among those measures is a public employment bill which would introduce a single pay scale and eliminate other salary components.

However, it is far from certain that these measures will come into force. In a 9 September statement, international credit ratings agency Fitch also praises Costa Rica’s efforts while noting that further action is “imperilled by political gridlock”. While the bill did return to the legislative assembly on 3 October following an analysis by the constitutional court, which concluded that it was constitutional, Fitch notes that Costa Rica has a long record of “not passing or delaying approval of fiscal measures”.

On 3 October local news outlet El Financiero said that sending the bill back to the legislature is a “fundamental step” in the process, but the prospects of it becoming law are uncertain because it is not clear if enough legislators will vote in favour of it. El Financiero also warns that “political tensions are likely to increase when election campaigning begins in October”, ahead of a presidential election scheduled for 6 February 2022. There are currently 27 candidates for the presidency, although President Carlos Alvarado is banned from running for re-election due to constitutional rules.

Before he leaves office Alvarado has to get a new budget approved by the legislature, and his government has implored lawmakers not to propose more spending or tax exemptions which would take the proposed budget beyond the limits of the fiscal rule and undo progress towards reducing the deficit.

First presented on 1 September, the bill received only minor alterations from the congressional finance committee and was due to be sent to the legislature on 1 November. It must be approved by the end of that month at the latest, and it will cover the first four months of the new administration. However, jockeying for position in preparation for the election could lead to tensions over the budget, spelling trouble for Costa Rica’s efforts to maintain public services during a period of austerity.