Abstract
This paper discusses the request from Costa Rica for a Stand-By Arrangement (SBA). The program seeks to enable an orderly adjustment of the Costa Rican economy to an adverse external environment, while mitigating its adverse effects on growth and household incomes. To strengthen the external position, the authorities have tightened monetary conditions and increased exchange rate flexibility. Fiscal policy will be geared toward mitigating the impact of the adjustment on domestic activity and the most vulnerable population. IMF financial support is intended to bolster investor confidence in the authorities’ policy framework.
1. This statement summarizes information that has become available since the issuance of the staff report. The new information does not alter the thrust of the staff appraisal.
2. The latest data suggest that downside risks to the growth outlook are materializing. The monthly indicator of economic activity declined by 5.5 percent (y/y) in January 2009, showing a sharp slowdown in retail and hotel services and a continued slump in manufacturing. External trade data suggests that activity remained weak in February, as imports and exports declined (33.5 percent (y/y) and 15.9 percent (y/y), respectively). The decline was particularly abrupt for non-oil consumer good imports.
3. Inflation continues to fall. Consumer price inflation fell to 12.3 percent in March, down from 13.9 percent at end-2008. Also in March, producer price inflation reached its lowest level (10.3 percent) in more than 6 years, driven by lower commodity prices. Inflation expectations continued to converge slowly to the official inflation target (9 percent +/- 1 percent by end-2009), and have fallen by about 2 percentage points since December 2008.
4. Financial conditions have remained broadly stable. The colón traded slightly below the upper limit of the currency band during most of March and early April, while depreciation expectations seem to be anchored below 9 percent (the announced 12-month rate of crawl of the ceiling of the band). Purchases by the Central Bank of Costa Rica (BCCR) in the wholesale foreign exchange market contributed to raise net international reserves (NIR) to US$4.2 billion by end March (US$3.8 billion by end-2008). Bank lending rates rose 50bps during March, but other domestic interest rates remained broadly stable. Annual growth rates of monetary aggregates continued to decelerate; by end-February, base and broad money were growing at 6.5 percent and 16.6 percent respectively, down from 11.9 percent and 18.3 percent, in December 2008.
5. Budget implementation in the first two months of 2009 was broadly in line with program projections, according to preliminary data. Central government revenues through February were at about the same level (in nominal terms) as in the corresponding period of 2008, with customs collections showing particular weakness. The central government overall balance through February showed a deficit of about 0.5 percent of annual GDP—just over one-half of the program projection for the first quarter.
6. The estimate of short-term external debt as of end-December 2008 has been revised upwards. The revised estimate is US$3.9 billion, about US$500 million higher than reported in the staff report. Repatriation of offshore operations by banks explain the bulk of the revision. With the new estimate, NIR coverage of short-term debt obligations is expected to reach 82 percent in 2009, compared to a previous estimate of 92 percent.
Preliminary Safeguard Assessment
7. A safeguards assessment mission visited San José during March 30–April 7. The main preliminary findings of the mission are related to the need for establishing independent external audits of the BCCR’s annual financial statements, in line with the requirements of the Fund’s Safeguards Policy. Enhancements in the areas of financial reporting and internal audit review of program data are also necessary. The authorities agreed in principle with the mission’s recommendations, and intend to commission annual external audits of the BCCR financial statements starting with the 2008 financial year. The final safeguards assessment report will be completed in time for the first program review in September.