Costa Rica’s President Says Cutting the Deficit Will Be His Legacy

Costa Rica’s president says he’ll bring an end to years of excess government borrowing, even if it hurts his popularity.

With just over a year left in office, Carlos Alvarado is fighting to pass spending cuts and tax increases, and narrow the fiscal deficit which brought the country to the brink of crisis two years ago. He’s also pushing for approval of a program with the International Monetary Fund.

“One of the legacies I want to leave this country and particularly the future generations is fiscal stability and fiscal responsibility,” he said in a video interview. “Put all the political capital on me. It’s my fault, if you will, but this needs to be enforced.”

Costa Rica’s President Says Cutting the Deficit Will Be His Legacy

Passing tax rises and spending curbs is especially difficult while the economy is still depressed from the pandemic, but in Costa Rica there is a sense of urgency. The country narrowly avoided a full-blown financial panic at the end of 2018, when its bonds and currency crashed as investors lost patience after years of failure to cut its chronic deficits.

Argentina implemented IMF-backed austerity measures as the economy fell into recession in 2018, which led to Mauricio Macri losing the presidency. Ecuador’s effort to cut spending to hit targets under its IMF plan in 2019 triggered demonstrations that paralyzed swathes of the nation with strategically placed road blocks, until the government backed down.

In Costa Rica, public sector unions are campaigning against Alvarado’s measures, though protests have so far been relatively muted.

Alvarado, 41, says he can get enough votes in congress for approval of a three-year, $1.78 billion IMF program. He says he also has enough support to pass a public employment bill, a key reform under the IMF deal, which would slow salary increases for government workers.

Costa Rica’s fiscal deficit widened to 8.1% of gross domestic product last year as revenues fell amid the pandemic. The IMF program targets a primary fiscal surplus, which excludes interest payments on the national debt, by 2023.

Plan A

Alvarado said he expects the legislature to approve the IMF loan by June, and said the public employment bill will be voted on by May. It will then be sent to the constitutional court for review before a definitive congressional vote, he said. The executive branch only controls the legislative agenda until August, so Alvarado is rushing to get both bills passed before then.

Costa Rica’s President Says Cutting the Deficit Will Be His Legacy

“That’s plan A and we are sticking with plan A,” he said. “I know it’s very tight, but we are in a crisis so we are pushing for that to happen,” he said.

He said it’s important that municipal governments and universities are included in the spending curbs. Some legislators sought to exclude both from the reform, and analysts warned that watering down the bill could pose risks to the IMF program and the nation’s bond rally.

The government will also likely seek authorization from congress to issue global bonds and will soon begin discussions with political parties on the amount and terms, Alvarado said.

Costa Rica’s bonds soared in January when the government agreed to its IMF deal. The nation’s dollar bonds due 2045 now yield 7.2%, down from 10.5% a year ago.

These levels suggest optimism that a successful first round vote in congress will “represent the first steps on a gradual path towards fiscal consolidation,” Siobhan Morden, a managing director for Amherst Pierpont, wrote in a note on Friday.

Under local law, congress has to approve all external loans.

Costa Rica’s President Says Cutting the Deficit Will Be His Legacy

Costa Rica never implemented a strict lockdown during the pandemic, and its economy suffered less than regional peers last year, contracting 4.5%. The worst damage was done to the tourism sector, the nation’s main foreign currency earner.

The country fully reopened air borders in November and land borders this week, but the nation is still only getting about a fifth of the travelers it is accustomed to, Alvarado said. Before the pandemic, millions of visitors flocked to Costa Rica every year to visit its beaches, volcanoes and tropical forests, earning the country $4 billion in 2019.

Costa Rica was among the first countries in Latin America to receive coronavirus vaccines, and the government is targeting one million jabs by the end of May, roughly 20% of the country’s population.

The economy will expand 2.6% this year and 3.3% in 2022, according to the IMF. The recovery is being helped by multinationals including Amazon.com Inc, AstraZeneca Plc and Intel Corp expanding their operations in the country, Alvarado said.

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