Deficit and Debt: Great Challenges for the New President of Costa Rica

The fiscal deficit and the growing debt of the State are seen as two of the great challenges that the new president of Costa Rica, Rodrigo Chaves, will have to face, who will also have to decide on the future of a current financial agreement with the International Monetary Fund (IMF).

An economist by profession and Minister of Finance for six months between 2019 and 2020, Chaves is well aware of the fiscal deficit situation that the country has had since 2009 and that forced the outgoing president, Carlos Alvarado, to promote unpopular measures such as a tax reform as soon as he began his mandate in 2018, as well as other initiatives to cut spending.

Since 2009, Costa Rica began to register a financial deficit and over the years it grew without the governments attempting reforms, with the exception of President Laura Chinchilla (2010-2014) whom the Constitutional Chamber declared a tax law unconstitutional.

It was not until the end of 2018, with a deficit above 6% of the Gross Domestic Product, that President Carlos Alvarado obtained the approval in Congress of a tough reform that created the value added tax, a fiscal rule and other provisions of spending reduction.

Reform just beginning its implementation

With the reform just beginning its implementation, the Covid-19 pandemic arrived at the beginning of 2020 and the strong restrictions on economic activities to curb contagion, with which the deficit exceeded 8% of GDP. For 2021, the deficit closed at 5.08% of GDP and with the lowest primary deficit in more than a decade, but the debt remains at high levels: 68% of GDP.

“Although there have been improvements in spending containment, the deficit and debt figures remain at high levels. For the new government, it will be a real challenge to keep finances stable and promote an economic reactivation after the pandemic, also taking into account the difficult scenario that it will face in the Legislative Assembly,” economist José Pablo Gamboa told Efe.

Chaves will govern with a Congress dominated by the opposition and in which his Social Democratic Progress Party barely has 10 of the 57 deputies that make up the Legislative.

One of the first decisions that Chaves will have to make as president is whether to promote a renegotiation of a current financial agreement with the International Monetary Fund (IMF), as he announced during the campaign that he would do so.

The agreement is for 1,778 million dollars of financing and in exchange Costa Rica promised to achieve a series of goals in the short, medium and long term in reducing spending and increasing income.

Promoting a series of legislative initiatives

To this end, the Government is promoting a series of legislative initiatives, the most controversial of which is a reform of the Public Employment Law already approved by Congress, which introduces a global salary for public sector workers and reduces salary bonuses.

Chaves has said that the agreement with the IMF is necessary and he agrees with the goals proposed by the country, but he differs in the ways of achieving them, since he considers that they can be achieved without new laws by simply improving collection and fighting tax evasion. .

Historically Costa Rica has been one of the most prosperous nations in Latin America with first world indicators in health and education, but in recent years it has been suffering a deterioration in its public finances and in poverty and unemployment rates.

Unemployment in the pandemic reached a historic figure of 24%, but in 2021 it began to decline, reaching 13.3% at the beginning of 2022, still above the 12% registered in the country before the health emergency. In the last decade, Costa Rica has not managed to lower poverty to 20% and in 2021 the indicator reached 26% of households.

In his proposal, Chaves has said that he will eliminate obstacles to investment and entrepreneurship, and also that he will reduce social charges and modify the Labor Code to adjust it to the current times.

Lowering the cost of living

Another promise of Chaves is to lower the cost of living through decrees that reduce the price of products such as rice and medicines, and promote actions to lower the price of electricity.