Costa Rica to begin IMF negotiations on January 11

Costa Rica has said it will cut public spending by 1.5% of GDP; generate new income through taxes, representing 0.8% of GDP; eliminate some tax exemptions; and collect 0.2% of GDP via redistribution of surpluses from public institutions. The Presidency has not announced the specific fiscal policies that would achieve these goals.

“Costa Rica needs, yes or yes, an adjustment,” President Carlos Alvarado said last month about the country’s planned IMF negotiations. “If we do nothing, the adjustment will be given by itself and will be like that of the 1980s. And it’s very painful. So, yes or yes, we need that adjustment.”

Alvarado had originally planned for Costa Rica to negotiate with the IMF last year, but following public backlash, the Presidency in October withdrew related economic measures.

Costa Rica facing debt challenge

Even if Costa Rica secures the IMF loan, it “would still face [a] debt challenge,” according to Fitch Ratings.

“Costa Rica’s wide fiscal deficit, high borrowing costs and post-pandemic economic recovery challenges could increase pressure on debt sustainability even if the country secures an IMF deal,” the U.S. credit-rating agency said.

Fitch expects interest payments to reach 5.4% of GDP, the third-highest ratio in Latin America behind only Jamaica and Suriname.

“Without significant consolidation, debt dynamics will remain adverse due to a subdued economic recovery coupled with high borrowing costs, increasing risks to debt sustainability,” Fitch Ratings says.