CR cenbank chief urges lawmakers to take IMF deal

The president of Costa Rica’s central bank, Rodrigo Cubero, sees dire consequences for interest rates and the nation’s reputation in international markets, should congress refuse to accept the terms of a US$1.75bn IMF loan proposal for a second time.

More than a needed cash injection, the agreement carries with it an invaluable “seal or endorsement” from the multilateral lender that “allows the markets to have greater peace of mind and confidence,” said Cubero, in an interview with daily La Nación.

“For a country like Costa Rica ... [the fact] that the fund supports and endorses the program of economic policies in general, and fiscal policies in particular, means for the markets a reassurance that these policies make sense, are coherent and have a path towards sustainability in the medium term,” said Cubero.

Costa Rican officials and the IMF reached a staff-level agreement January 22 requiring the country to adopt economic and structural policies and reforms that would underpin a three-year arrangement under the IMF's extended fund facility (EFF) for about US$1.75bn.

President Carlos Alvarado now faces the difficult, if not impossible, task of getting opposition lawmakers on board with the proposal, after the leader’s initial attempt to push through a similar IMF deal in September failed spectacularly, with proposed tax hikes sparking weeks of street protests and roadblocks.

Alvarado, however, returned to the IMF plan as the only viable solution after weeks of multilateral discussions – borne out of the social unrest – failed to find alternatives solutions to the country’s severe fiscal woes, made worse by the COVID-19 pandemic. 

For Cubero, rejecting the plan a second time would be disastrous.

"It is extremely important that these approvals are given," Cubero said, adding that a second rejection would exact punishment from the markets with immediate impacts on interest rates, on domestic and foreign investment and on the economic outlook in general. 

“These expectations are key to moving real investment, consumption and thus economic growth,” said Cubero. “Therefore, it would be an impact on credibility, confidence and expectations in general with very negative implications for growth.

He added, “What we are looking for with this agreement, as the fund and the government have said, is a [primary budget] surplus of one point of GDP by 2023; that's the goal.”

The deal also seeks to cut the debt-to-GDP ratio to 50% by 2035, after it reached 67.5% at the end of 2020.

To get there, lawmakers would have just five months under the plan to approve a host of legislative reforms, including a new raft of tax hikes – a task arriving just as politicians are gearing up for the general election on February 6, 2022.

Revenue boosters include an added 0.5% levy on “luxury homes”, and a plan to temporarily channel as much as 30% of profits at 14 state-owned enterprises (SOEs) directly to the treasury, a provision designed to boost revenue by 0.2% of GDP for each of the four years it is in force.

Congress is also discussing a public employment bill to regulate public employees’ salaries, whose relatively high pensions are seen as causing much of the current crisis.

Finance minister Elián Villegas has said the package does not include proposals to privatize SOEs or increase VAT, currently at 13%, nor does it require a tax on commissions taken in the nation’s obligatory pension scheme. 

RATINGS AGENCIES SKEPTICAL

Ratings agency analysts, also cited by La Nación, expressed strong doubts that the government would succeed in following the IMF plan. 

All three major ratings agencies, Moody’s, Fitch and S&P, took negative action on Costa Rica's credit ratings last year, largely due to the added stress on the nation’s finances from the pandemic. 

And Fitch warned last month that the US$1.75bn IMF loan might not be enough to solve the country’s immediate problems, if it is approved.  

"Any IMF program will require initial congressional approval… This is where more political uncertainties and pressure can arise, as the government needs to build and maintain formal political support," said Lisa Schineller, an analyst at S&P. 

Noting that Costa Rica ended 2020 with a fiscal deficit of 8.34% of GDP, Moody’s senior analyst Gabriel Torres said the country “still has a long way to go” to stabilize the trend of public debt and reduce the fiscal deficit. 

“We don’t know if this government is going to approve the plan. Nor do we know if the next government is going to keep it and in what way,” added Torres. 

“The risk of a shock is enormous, both in the debt and in the exchange rate,” said Torres. “The fund is the last chance Costa Rica has before the big crisis and possibly the default. If this is not approved, the market will freak out.”

Pictured: People hold signs railing against the IMF and tax evaders. Ezequiel BECERRA / AFP