Costa Rica obtains $500 million from CAF for fiscal support

The Development Bank of Latin America (CAF) on Friday granted a $500 million credit to Costa Rica to support the country’s fiscal sustainability efforts.

The 18-year term financing will improve debt management by covering Costa Rica’s financing needs without having to resort to the local market, which will relieve pressure on interest rates in the country, according to authorities.

It is a “source of alternative financing, reducing interest rates, lengthening terms, improving the debt profile, which will result in greater liquidity space for the domestic market,” said Luis Carranza, CAF’s executive president.

Carranza signed the loan agreement with the Costa Rican Minister of Finance, Rocío Aguilar. The agreement must be approved by the Legislative Assembly to take effect.

“These resources are not debt in addition to what is already programmed in the budget; it is debt that is contracted in better conditions of terms and interest rates,” Aguilar explained at the signing ceremony of the agreement.

For his part, President Carlos Alvarado commented that the financing “allows us to alleviate the burden [of debt], lower interest rates and reactivate the economy to generate more employment opportunities.”

Alvarado has called the unemployment rate — recently tallied at 11.3% of the economically active population — as the most serious economic problem in Costa Rica.

On July 1, the fiscal reform approved last December will come into effect. It replaces the current sales tax with a value-added tax.

Both taxes are 13%, but the one that will take effect in July covers additional services that were excluded in the previous tax.

The reform was adopted to address the fiscal deficit that reached 6% at the end of 2018.