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Costa Rica expects fiscal deficit to increase to 9.7% of GDP due to pandemic

July 9, 2020

The Costa Rican government predicts a fiscal deficit of up to 9.7% of GDP as a result of falling revenues and expenses related to the COVID-19 pandemic, Finance Minister Elián Villegas said Thursday.

The minister warned of the forecast in a letter addressed to the Legislative Assembly, in which he urged deputies to consider government funding whenever they approve a tax exemption for any sector affected by the coronavirus.

“According to estimates by the Finance Ministry, the total income of the Central Government would fall by at least 21% compared to the budget (planned for) 2020, while spending would decrease by just 4.5%,” the minister said.

“As a result, a financial deficit of 9.7% of GDP and a debt level of 68.8% of GDP are estimated,” he added.

Costa Rica closed 2019 with a fiscal deficit of 6.96% of GDP, already the highest of the last three decades.

It came despite the country approving a tax reform in 2018 to contain expenses and increase tax revenues.

As the coronavirus crisis unfolded, the government granted exemptions in the payment of taxes and social charges to minimize dismissals in the private sector.

At the same time, the Legislative Assembly hopes to exempt the 1% value-added tax (VAT) on the canasta básica and the 4% VAT on various tourism and construction services. This raised the minister’s concern; he argued the Legislative Assembly must consider ways to compensate for the fall in tax revenue.

“The rating agencies and investors are attentive to the decisions that both the Executive Branch and the Legislative Branch make in tax matters, so it is essential that any decrease in income, such as that contained in these projects, be accompanied by compensation for tax revenues,” Villegas said in the letter.

He added that not doing so “would have negative implications for fiscal stability and the country’s risk rating.”

Costa Rica has registered 6,485 known coronavirus cases and 25 deaths.

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