Costa Rica's economy proven resilient: IMF

The Executive Board of the International Monetary Fund (IMF) today concluded the Article IV consultation with Costa Rica.

Costa Rica's economy has proven resilient to the adverse shocks of recent years. A proactive policy response, supported by a high-access precautionary Stand-By arrangement with the Fund (that expired in mid-2010), helped Costa Rica to maintain macroeconomic and financial stability and mitigate the effects of the global financial crisis of 2008-09. After falling by 1 percent in 2009, output recovered quickly. Real Gross Domestic Product (GDP) grew at an average pace of 4½ percent per annum in 2010-12, while inflation stood within the 4-6 percent official target range. A sizable rise in capital inflows more than offset a modest increase in the current account deficit (estimated at about 5½ percent of GDP in 2012).

The resulting balance of payments surplus placed strong appreciating pressure on the local currency. Net international reserves rose to US$6.9 billion at end-2012 (from US$4.8 billion at end2011), reflecting large foreign exchange purchases by the central bank and the government's placement of a US$1 billion bond in international capital markets in late 2012. This notwithstanding, competitiveness, which eroded significantly in recent years, may pose a risk to external stability in the long term. The reversal of this tendency requires enhancing productivity while improving fiscal sustainability and maintaining prudent monetary and exchange rate policies.

The overall public sector deficit stayed broadly unchanged at about 4½ percent of GDP in 2012. Efforts to contain expenditure growth and strengthen tax administration continued, while enactment of an ambitious tax reform approved by Congress was voided by the Constitutional Court owing to procedural problems. The consolidated public sector debt rose to 38 percent of GDP at end-2012, up from 27 percent of GDP at end-2008. The authorities are preparing a fiscal consolidation plan that will be discussed with all sectors of society. Once consensus is reached, the plan would be submitted to Congress aiming for approval before the next administration takes office in May 2014.

Financial sector indicators remained healthy, with adequate levels of liquidity and capitalization. Although the authorities maintained the policy rate unchanged, other interest rates rose significantly, particularly during the first half of 2012. Financial conditions began to ease toward the end of year. Credit to the private sector increased by about 13 percent (y/y) in nominal terms, with stronger growth in the foreign-currency denominated segment.

Real GDP growth is expected to slow from about 5 percent in 2012 to about 4¼ percent in 2013 and hover at around its estimated potential rate of 4½ percent over the medium term. In the absence of significant fiscal consolidation, inflation is projected to remain above that of trading partners, at about 5 percent, while the external current account deficit is anticipated to rise to about 6 percent of GDP through 2018.

The economic outlook is generally positive, but the balance of risks is tilted to the downside amid external uncertainties and domestic policy challenges. Weaker-thanexpected growth in the United States, a global financial shock, or a rise in world oil prices are the main sources of external risk. Risks also arise from an eventual resumption of large private capital inflows, which would call for a combination of tighter fiscal and monetary policies and greater exchange rate flexibility to avoid overheating. Finally, lack of fiscal consolidation would lead to a steady rise in public debt, which would increase vulnerabilities and may erode the underpinnings of macroeconomic stability. Directors welcomed Costa Rica's strong economic recovery since the global financial crisis and the continued favorable outlook for growth.