OECD urges Costa Rica to maintain fiscal discipline in recovery after pandemic

The Organization for Economic Cooperation and Development (OECD) on Wednesday urged Costa Rica to maintain rigorous fiscal discipline as seeks economic recovery once it overcomes the COVID-19 pandemic.

In its third evaluation of Costa Rica, the OECD warned of the deterioration that the pandemic will cause in the Central American country in fiscal, social and economic matters, and that overcoming those challenges will require fiscal discipline and significant reforms.

The Mexican Angel Gurría, Secretary General of the OECD, stressed that as a first priority, the country should focus on fighting the new coronavirus to avoid loss of life.

Second, he said, “the implementation of the tax reform will have to be accelerated because money will be needed in the post-COVID era. The economic consequences will last longer than the pandemic itself.”

Costa Rica adopted in 2018 a fiscal reform that included tax increases and a rule that forces the government to limit its expenses to what it collects each year.

Gurría presented the report in a virtual conference in which President Carlos Alvarado and the Portuguese economist Alvaro Pereira, director of OECD country studies, participated.

Pereira noted that the pandemic slowed any momentum that Costa Rica had taken with the fiscal reform, which was aimed at containing a deficit of more than 6% of GDP.

With the pandemic, the Costa Rican economy will contract between 4.1% and 4.9% this year compared to 2019, depending on the severity of the health crisis, according to the OECD.

It also anticipated that unemployment will be 15.9% this year, while public debt will reach 69.7% of GDP.

“Once the pandemic is overcome, it is critical that the fiscal reform be fully implemented,” Pereira insisted.

“If the fiscal reform and the fiscal rules are fully implemented, the sustainability of the debt is guaranteed,” he added.

Otherwise, he warned, Costa Rica will face difficulties in obtaining financing under adequate conditions.

Pereira also urged a public-employment reform to better manage wages, which currently comprise 50% of the budget, the highest such figure in the OECD.

He also called for reducing regulations to stimulate investment.

“If public employment and regulatory reforms are made, we calculate that the fiscal situation will improve more,” the Portuguese economist said.

In May, Costa Rica became the first Central American country invited to join the OECD.

“I know that as members of the OECD, we will build a better route for post-pandemic recovery,” President Alvarado said.