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Costa Rica’s President, Carlos Alvarado Quesada: "We cannot fight climate change alone." (photo: Juan Carlos Ulate Reuters Newscom)

• IMF Country Focus

Costa Rica’s President: “No Growth and Poverty Reduction Without Economic Stability”

March 1, 2021

The International Monetary Fund approved a $1.7 billion arrangement to support Costa Rica’s recovery and stabilization from the economic damage caused by the COVID-19 pandemic. The country’s president explains how innovation and climate change mitigation are part of the new economic program.

Known for its lush tropical forests, universal health care system, and punching far above its weight in global environmental activism, Costa Rica has not been spared by COVID-19. The pandemic hit hard the vital tourism sector. While the government’s prompt response helped avoid a deeper health crisis, the fiscal impact has been significant. A new economic program, supported by the IMF’s Extended Fund Facility, aims to stabilize the economy and ensure debt sustainability, while protecting the most vulnerable.

IMF Country Focus spoke with Costa Rica’s President, Carlos Alvarado Quesada, about building consensus on fiscal efforts, boosting innovation, and becoming a net-zero emissions economy by 2050.

Costa Rica has been hit hard by the pandemic. What measures were introduced to protect lives and livelihoods?

The prompt and precise action of our first response institutions has been critical. Our social security system quickly expanded hospital capacity, allowing universal access to COVID-19 tests and treatment. We also allocated resources to support the most vulnerable, including by launching the “Bono Proteger” program that provided temporary subsidies to about 700,000 people economically affected by the crisis.

As a second step, we developed and implemented a strategy called “Costa Rica trabaja y se cuida” (Costa Rica works and takes care of itself). Rather than strict lockdowns, we imposed restrictions on vehicle mobility and limited business hours and capacity. Data and evidence have shown that these measures, accompanied by a strict face mask policy and sanitary protocols, have been very effective in reducing contagion with a lower impact on economic activity.

This combination of measures has allowed us to achieve one of the lowest lethality rates with one of the lowest economic contractions in the region.

Looking ahead, what are the key objectives of Costa Rica’s economic reform program?

The main goal is to boost growth and improve income distribution. First, though, we must address the fiscal imbalances.

We experienced a debt crisis in the early 1980s and know what it means: high inflation, a recession, and a brutal increase in poverty and inequality. Without strong public finances and macroeconomic stability, a government cannot boost growth and protect its most vulnerable citizens.

To put public debt on a decreasing trajectory and lay the foundations for economic recovery, we are targeting a primary surplus of 1 percent of GDP by 2023 and 1.7 percent by 2024.

We are also aiming to improve income distribution with strongly progressive revenue and expenditure measures and strengthening our social assistance programs. We just submitted to Congress additional social spending allocations; and we are centralizing and digitalizing cash transfers and upgrading the beneficiary registry. This will ensure support goes to those who need it. Stabilizing public finances allows us to focus again on prosperity, social progress, and unleashing our citizens’ huge potential and talent.

Another plank of the program is ensuring favorable liquidity provision and credit conditions for the recovery, while safeguarding monetary and financial stability. The Central Bank and financial authorities have carefully calibrated their policies to strike this balance.

How do you plan to boost productivity, while tackling informality and inequality?

Boosting productivity requires setting the right conditions for domestic companies to thrive, improving the regulatory framework, and reinforcing our commitment to trade and foreign direct investment, to help companies integrate in global value chains. These efforts were aligned with the comprehensive agenda for accession to the Organisation for Economic Cooperation and Development, which culminated last May with the invitation to join the organization.

We have made important advances digitalizing the issuance of licenses and permits in all major cities; adopted a new insolvency law; strengthened our competition framework; and improved the governance of state-owned enterprises.

Competitiveness will also be boosted by stimulating innovation, including among small and medium-sized enterprises, and by reducing infrastructure bottlenecks. We will rely on public-private partnerships to rapidly increase the quality of our road network, and we will also strengthen our digital infrastructure.

Another challenge is a labor market supply and demand mismatch. There is an increasing demand for professionals in services, science, and technology that our academic institutions are not managing to fulfill. We recently approved legislation to strengthen and modernize the National Institute of Learning, so as to better prepare for the 4^th industrial revolution.

Our strategy to reduce informality includes reviewing business regulations, social security taxes, and training services. Providing more public child and elderly care facilities will increase women’s participation in the labor market.

Costa Rica was named “UN Champion of the Earth” in 2019. Tell us more about your plans to achieve a net-zero emissions economy.

Expanding decarbonization into all areas of public policy has been a first and critical step to achieve zero net emissions by 2050. For example, at the beginning of the pandemic, we did not lower fossil fuel taxes and prices. This provided resources for emergency response and decarbonization. We are greening and electrifying the transportation sector, the largest contributor to greenhouse gas emissions.

We have encouraged the adoption of low-carbon technologies in the agricultural and forestry sectors. Rural producers can implement sustainable and climate-resilient production techniques, proving that it is possible to pursue social protection schemes with a green employment vision. Costa Rica has received international grants for reducing forests’ greenhouse gas emissions, and international validation of our efforts.

We cannot fight climate change alone. Strong global cooperation and solidarity are needed. Since protecting nature is our life insurance against climate change, we are leading with France and the United Kingdom the High Ambition Coalition for Nature and People, aiming to protect 30 percent of our world's land and marine ecosystems by 2030.

You brought together different stakeholders for a national dialogue on the government’s economic reform agenda. What lessons have you learned?

The national dialogue was a unique opportunity to hear the concerns and proposals of different stakeholders. Sitting around the table allowed us to find common ground, dispel misconceptions and foster trust. It helped the whole country to understand that the fiscal problem is real and requires quick action to avoid hurting our country now and in the future.

In a democracy, dialogue is a powerful tool to build agreements and move things forward while strengthening social cohesion. The national dialogue allowed us to develop a program with stronger ownership. Looking ahead, our newly established Economic and Social Council will ensure ongoing consultations with different stakeholders of the Costa Rican society and build consensus on public policies and reforms.

What role do you see for the IMF in supporting the country’s policy and reform efforts?

The IMF plays a key role in three areas: technical support to the program’s design, implementation and follow up; the credibility it brings to the process and to the macroeconomic policy program at the national and international level; and access to cheaper financing by mobilizing resources from other official creditors and supporting market confidence.

The COVID-19 shock was of such magnitude, not just on lives and livelihoods but also on the public finances, that fiscal consolidation is unfortunately inevitable. Having the IMF’s support helps us to smoothen this process and strengthen our public finances in a way that ultimately benefits all Costa Ricans.

The medium-term nature of the three-year program, will also help ensure policy continuity throughout and beyond the 2022 elections, thereby boosting consumer and investor confidence and supporting economic growth and job creation.