Press Release No. 09/329

Press Release: IMF Executive Board Approves First Review Under Costa Rica's Stand-By Arrangement

September 25, 2009

The Executive Board of the International Monetary Fund today completed the first review of Costa Rica’s economic performance under the 15-month, SDR 492.3 million (about US$780 million) Stand-By Arrangement approved in April 13, 2009 (see Press Release No. 09/124). Completion of the review makes an additional SDR 41.025 million (about US$65 million) available for disbursement, bringing the total resources available to Costa Rica under the arrangement to SDR369.2 million (about US$585 million). The Costa Rican authorities intend to continue treating the arrangement as precautionary.

Following the Executive Board discussion on Costa Rica, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, made the following statement:

“The Costa Rican economy has withstood the impact of the global economic and financial crisis relatively well. The authorities’ strategy to reduce the impact from external shocks through fiscal stimulus and the mobilization of contingent external financing, including the precautionary Stand-By Arrangement with the Fund, has helped sustain investor confidence and financial stability. Output, especially in sectors dependent on external conditions, has declined, but preliminary evidence suggests that the economy is bottoming out.

“The 15-month Stand-By Arrangement is expected to remain precautionary and will continue to support confidence through the availability of a substantial liquidity buffer. The program has been revised to partly accommodate lower-than-expected fiscal revenues through higher deficits in 2009–10. This will help protect social spending and support domestic demand, while keeping the domestic borrowing requirement and the debt-to-GDP ratio within reasonable margins.

“Inflation has reached historical lows, providing the central bank with an opportunity to achieve durable price stability. Monetary policy will maintain its cautious, gradual easing bias conditional on a decline in inflation and exchange rate expectations.

“The banking sector remains sound. While the cyclical downturn of activity has led to a moderate increase in nonperforming loans and a decline in bank profitability, liquidity and solvency indicators remain generally adequate and banks have reduced their net foreign exposure by repaying external credit lines. The authorities will continue to monitor financial sector risks closely, and press ahead with their well-focused agenda to strengthen bank supervision, regulation, and the financial sector safety net.

“Overall, the near-term prospects for Costa Rica’s economy have improved and external vulnerabilities have declined. The incipient global recovery should boost confidence, help lift export-related activities, and restore investor risk appetite. Some downside risks remain, especially if the global recovery falters or the fiscal borrowing requirement rises more than expected. Continued strong implementation of the policies under the IMF-supported program will help insulate Costa Rica’s economic recovery from these downside risks.” Mr. Portugal said.