The Legislative Assembly approved, during an initial debate, the loan of $ 1.778 billion from the International Monetary Fund (IMF) to Costa Rica.
Thirty-eight lawmakers voted for, six against and 13 abstained in Thursday’s vote. The bill must pass a second vote by the same legislative body; it’s scheduled for July 12, after the mid-year vacation.
“I thank the 38 deputies who approved the credit with the IMF during an initial debate,” President Carlos Alvarado said. “[It is] a firm and necessary step, which brings us closer to its final approval and allows us to move forward on the fiscal consolidation program, which provides an indispensable basis for economic recovery.
In March, the The IMF has approved a 36-month credit agreement for $ 1.778 billion with Costa Rica.
The money will be used to help “support Costa Rica’s recovery and stabilize its economy,” in addition to ensuring debt sustainability, the agency said in a statement from its Washington headquarters.
“The IMF-backed local program focuses on implementing fair tax reforms to ensure debt sustainability, while protecting the most vulnerable,” the agency said.
“Going forward, the government’s reform agenda is designed to help promote inclusive and sustainable growth, including through innovative digitization, climate change mitigation and building resilience. “
The country hopes the credit facility will help it reduce a large budget deficit of 8.3 percent of GDP. The last time Costa Rica recorded a budget deficit of this magnitude was in 1981, when it reached 9.1% of GDP.
The government also announced that the primary deficit, which excludes debt service, reached 3.5% of GDP, below the 4% projected by the Central Bank, although it still has to adjust downward.
Consequences of the pandemic
In January, Costa Rica and the International Monetary Fund announced that the agreement to balance the country’s finances would rule out privatizations or increases in consumption taxes or pensions, proposals rejected by the population.
This possibility sparked public fury in September and October 2020, with street protests, in a country whose economy was already hit by the lack of tourism due to the Covid-19 pandemic.
Costa Rica “has made significant progress in recent years in its fiscal and structural reform program as part of the process of joining the Organization for Economic Co-operation and Development (OECD),” the IMF said.
However, “the pandemic has hit the economy hard and exacerbated pre-existing vulnerabilities, undermining the expected returns of the ambitious tax reform launched in late 2018 and generating a significant funding gap,” he said.
The multilateral organization predicts an economic recovery for Costa Rica in 2021, with 2.6% GDP growth.
Although the country was one of the first in Latin America to start vaccination against Covid-19, “the risks to the outlook remain high given the uncertainty surrounding the pandemic.”
Faced with this situation, the IMF loan “aims to ensure macroeconomic stability and advance the authorities’ internal reform program”.
Costa Rica plans to increase tax revenues through a 0.5% tax on luxury homes, and the transfer to the treasury of up to 30% of the profits of 14 state-owned companies, a measure that will be in effect. force for four years to collect 0.2% of GDP each year.
The measures envisaged in the agreement provide for a budget adjustment of 5% of GDP to reduce the deficit and reach a primary surplus in 2023 “to put the debt on a downward trajectory”.
Congress is also discussing a public employment bill to regulate wages in the public sector, which is responsible for much of Costa Rica’s fiscal imbalance.
As part of its savings efforts, the country enacted a law that significantly reduces state contributions to political parties for the 2022 election campaign.
Central government debt reached the equivalent of 69.7% of GDP in 2020, slightly below the initial forecast of 70.1%.