Costa Rica will strengthen its fiscal sustainability with IDB support

A $350 million loan will contribute to controlling expenditure and modernizing the country's tax system

Costa Rica will strengthen its fiscal sustainability by controlling expenditure and modernizing the tax system with a $350 million loan approved by the Inter-American Development Bank (IDB). This is the first of two operations under the programmatic policy-based loan modality.

The objective of the project is to approve legal instruments of fiscal policy and management that reinforce sustainability and efficiency, both on the expenditure side and on the revenue side. This will include the approval of a fiscal rule (Law on Strengthening of Public Finances) to control spending and a proposal for the design of an Independent Fiscal Council.

The resources will be used to support the country in the implementation of its tax reform program aimed at improving efficiency in public expenditure management (employment and administrative reform), the effectiveness of the macrofiscal institutional framework and increase the country’s tax system management.

Regarding the modernization of the design and management of the tax system, it is related to the tax reform approved, which involves the creation of a Value Added Tax (VAT) that includes services and greater progressivity in the income tax and the start-up of the electronic invoice for large taxpayers. In the area of ​​public expenditure management, a draft Public Employment Law, spending control measures and the designation of the Ministry of National Planning and Economic Policy as the governing and coordinating body for administrative reform will be submitted to the Legislative Assembly.

The project is expected to have a medium-term impact of an estimated yield of 3.8 percent of GDP for the year 2023, integrated by 1.7 percent for higher tax revenues, and savings by streamlining the current expenditure of 2.1 percent, contributing to the improvement of the Central Government's primary balance on GDP that is estimated to go from -2.3 percent of GDP in 2018 to +0.6 percent in 2023.

The IDB loan, for $350 million, has a repayment period of 20 years, a five-and-a-half-year grace period and an interest rate based on LIBOR.

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Alberto Barreix
IDB Project Team Leader