Caribbean & Central America - September 2022

President Rodrigo Chaves has made initial moves to deliver on his campaign promises, but he faces a tough task implementing reforms to cut the cost of living while addressing worsening public finances.

Sworn in on 8 May for a four-year term [EB-22-05], Chaves inherited a country that had suffered a raft of corruption scandals, worsening inequality, high rates of unemployment, and social unrest which increasingly threatened its image as a safe and prosperous nation. The new leader promised that he would deal with the soaring cost of living, as well as improving the terms of an International Monetary Fund (IMF) loan agreed by his predecessor that had sparked street protests. However, he is also facing soaring inflation, which was running at an annual rate of 11.48% in July 2022 – the highest annual rate in a decade, increasing energy costs and slowing GDP growth, which is causing further damage to public finances badly affected by the coronavirus (Covid-19) pandemic.

Among his first moves designed to fight poverty, Chaves cut taxes on imported rice from 36% to 4%, he said in a report on his first 100 days in office published in local media outlet El País. He also signed a decree stating that Costa Rica would recognise regulatory approvals for medicines and agrochemicals from other nations, with the aim of facilitating imports and therefore reducing prices. Other measures include a bill to cap the price of fuel, presented on 24 August, and electricity prices are set to fall in October, said Chaves, who also announced a food programme worth ¢20bn (US$31m) for those living in poverty.

In the longer term, Chaves plans to fight tax avoidance by digitalising the finance ministry and simplifying the tax regime. He also wants Costa Rica to join both the Pacific Alliance trade bloc (comprising Chile, Mexico, Colombia, and Peru) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which launched in March 2018, as well as to deepen relations with Israel and sign a free trade deal with Ecuador. Chaves announced plans to bolster state coffers by selling off assets such as the state-owned banks Banco Internacional de Costa Rica (BICSA) and the Banco de Costa Rica (BCR), which he says will raise ¢1.2trn, the equivalent of 2.8% of GDP, as well as auctioning the 5G mobile internet spectrum. He plans to reform the pension system; seek to issue Eurobonds, or external bonds, which Chaves said would improve borrowing conditions; and sell 49% of shares in the state-owned insurance company Instituto Nacional de Seguros (INS), which would raise ¢595bn. Other plans include continued investment in infrastructure, such as improvements to the road and railway network; reforms to the law governing public contracts to combat corruption; and bringing the national telecommunications fund (Fonatel) under the ministry of science, with the aim of improving internet connectivity throughout the country.

Unfortunately for Chaves, the Costa Rican economy is forecast to slow for the rest of this year and into next. Central bank forecasts published at the end of July predict that economic activity will grow 3.4% in 2022 and 3.2% in 2023, and inflation is predicted to remain high. According to a survey published 24 August by local pollster Universidad de Costa Rica’s Centro de Investigación y Estudios Políticos (Ciep), the cost of living is the biggest concern for Costa Ricans, cited by 42% of respondents. This could make life difficult for Chaves given his limited wiggle room, but he should be encouraged by the fact that 79% of survey respondents think he is doing a good job so far. Renegotiating the US$1.78bn agreement with the IMF could give Chaves more breathing space, but there have been no recent announcements in that regard.

•  2023 budget proposal

On 1 September Costa Rica’s finance ministry presented its proposed 2023 budget proposal for ¢12.3trn (US$19.26bn), up 6.5% on the previous year. Finance Minister Nogui Acosta said that the increase owed principally to servicing the country’s debt and interest payments, and that when this was excluded, the increase was just ¢383.9m compared with the 2022 budget proposal. He said that 59.1% of the budget would be financed with taxes and 40.9% with more debt, and that 47% of the proposed budget would go on servicing the country’s debt. The budget proposal now goes to the finance commission before being sent to the 57-member unicameral legislature, which has until 30 November to approve it.