IMF Completes Fifth Review of Costa Rica's Economic Reform Program and Approves Disbursements
The Executive Board of the International Monetary Fund has successfully completed the fifth review of Costa Rica's economic reform program, supported by the IMF's extended arrangement under the Extended Fund Facility. The completion of this review unlocked crucial financial support for Costa Rica, making available SDR 206.23 million (about US$ 276 million) and bringing the total disbursements under the arrangement to SDR 1.03115 billion (about US$ 1.4 billion). Additionally, the Board concluded the second review under Costa Rica's Resilience and Sustainability Facility arrangement, making further financial resources available.
The three-year extended arrangement under the EFF was approved on March 1, 2021, in the amount of SDR 1.23749 billion (approximately US$1.8 billion at the time of approval). The completion of the fifth review allows for the disbursement of SDR 206.23 million, bringing the total disbursements to SDR 1.03115 billion.
The Resilience and Sustainability Facility arrangement, approved on November 14, 2022, in the amount of SDR 554.1 million (about US$ 725 million), is linked to the EFF. The completion of the second review under RSF makes available SDR 184.7 million associated with this review, and an additional SDR 184.7 million from the first review.
Costa Rica is expected to achieve around 5 percent real GDP growth in the current year, supported by robust exports and recovering domestic demand. Growth is projected to moderate to 3½ percent in 2024.
Headline inflation has been negative due to falling global commodity prices and a stronger currency. Inflation is expected to rise back within the Central Bank of Costa Rica's tolerance band by mid-2024.
The value of the colón has stabilized near its historical average, and international reserves buffers are strong.
Banking sector capital and liquidity metrics are comfortable, and provisioning is adequate, although dollarization remains high.
The ratio of gross debt-to-GDP has continued to decline, and Costa Rica's debt reduction efforts remain on track.
Following the Executive Board's discussion on Costa Rica, Mr. Bo Li, Deputy Managing Director and Acting Chair of the Board, issued a statement commending Costa Rica for its strong implementation of the Fund-supported programs. The statement emphasized the benefits derived from Costa Rica's home-grown reform program, contributing to restored confidence, robust growth, and fiscal outturns surpassing expectations.
The central bank is advised to return to a neutral stance by mid-2024, allowing the exchange rate to respond flexibly to market conditions. A more flexible exchange rate and greater transparency in central bank FX operations are recommended.
Efforts to improve the central bank's governance and autonomy should be pursued, with particular emphasis on institutionalizing practices through legislation.
Ongoing spending restraint is encouraged to reduce debt and interest burdens. Passage of income and value-added tax bills is recommended to enhance the equity and efficiency of the tax system.
Efforts to make productivity gains more broad-based, green the economy, and improve female labor force participation are emphasized. Reforms to boost digital connectivity, reduce electricity costs, and enhance educational outcomes are highlighted.
The importance of continuing efforts to make the Costa Rican economy greener and more resilient is underscored. Reform measures to assess the climate impact of public projects, introduce a vehicle feebate scheme, and evaluate climate change-related credit risks are considered crucial.
The successful completion of the reviews and the disbursement of additional financial support underscore the positive impact of Costa Rica's reform program. The IMF's ongoing engagement emphasizes the importance of fiscal prudence, monetary policy flexibility, and structural reforms to ensure sustainable and inclusive growth. Costa Rica's commitment to addressing challenges and implementing necessary reforms positions the country on a path towards economic resilience and sustainability.
