Costa Rica’s economy has performed well in 2006, supported by large foreign direct investment, improved business confidence, and robust domestic consumption, the IMF said in its annual review. Real GDP growth could reach at least 6½ percent for the year, while inflation would fall. The overall public sector deficit declined in 2005 and fell further in the first half of 2006, thanks to buoyant tax receipts.
The IMF Executive Board welcomed Costa Rica’s continued strong performance but noted challenges posed by double-digit inflation, high public debt, and financial dollarization. Directors commended the authorities for their commitment to a comprehensive reform program, including implementation of CAFTADR, a substantive tax reform, greater exchange rate flexibility, recapitalization of the central bank, and a strengthening of financial regulations and supervision. Implementation of these policies will go a long way toward laying the foundation for faster growth and poverty reduction.
Tax reform, Directors emphasized, is critical to reduce public debt; allow higher spending on education, infrastructure, and social needs; and provide needed support to monetary policy. They encouraged the authorities to focus the reform on the value-added tax and income tax. While recognizing the need for increased spending in priority areas, Directors urged the authorities to limit expenditure growth until the benefits of the tax reform materialize.
|GDP at constant prices||4.1||5.9||6.5||5.0|
|Consumer price inflation (average)||13.1||14.1||12.0||9.0|
|(percent of GDP)|
|Total public debt||55.8||52.0||48.8||46.8|
|External account balance||-4.3||-4.7||-4.9||-4.8|
Directors endorsed the central bank’s recent move to a crawling band regime and welcomed the decision to allow for a gradual widening of the band. They also supported the planned recapitalization of the central bank, which, combined with a prudent fiscal stance and greater exchange rate flexibility, would help bring inflation gradually down to low single digits.
Finally, Directors encouraged the authorities to foster regional cooperation and, in particular, to pursue efforts to achieve consensus on a code of conduct in tax incentives for investment, which would help forestall harmful tax competition in the region.