Following an official staff visit (known as a mission) by representatives from the International Monetary Fund (IMF) to Costa Rica, the mission’s preliminary findings have been published with the consent of our country’s authorities on finance and economics. You can read the entire text of the Concluding Statement at the IMF website; The Costa Rica Star is pleased to bring you the following highlights:

The rate of the value-added tax (Spanish initials: IVA) on goods and services will climb two points over the next two years. During the administration of former President Laura Chinchilla, there was a lot of legislative debate over converting the current sales tax, which is 13 percent on a number of goods and services, to a broader IVA on just about everything.

The current administration of President Luis Guillermo Solis considered applying the IVA and enforcing it, but leaving it at 13 percent. Such is not the recommendation by the IMF:

Although significant revenue gains may be accrued by reducing tax exemptions and other special treatments, the substantial budget consolidation required will likely demand increases in tax rates in the future. Thus the mission recommends raising the VAT rate from 13 to 15 percent gradually and increasing marginal tax rates on higher brackets as part of the introduction of a global income tax, thereby addressing also distributional concerns. The government has confirmed its willingness to raise VAT rates in steps starting in 2016 consistent with the consolidation recommended by the mission.

The goal of raising the IVA to 15 percent by 2017 is to bring the current deficit to within 6 percent of Costa Rica’s gross domestic product (GDP). Such tax increases will require approval by the Legislative Assembly.

Even more somber observations by the IMF include:

• Growth decelerated in 2013, though output remains virtually at potential.
• The exchange rate depreciated markedly in 2014, broadly restoring competitiveness, which means that the IMF welcomes the depreciation of the colon against the United States dollar, even if it hurts the pockets of average working Ticos who are trying to cope with inflation that seems out of control.
• The financial system appears sound (!), though dollarization remains a source of vulnerability, which means that the Central Bank of Costa Rica is long on colones standing up to U.S. dollars. This is a result of monetary policy over the last few years.
• Inflation remained within the target range in 2013, but breached its upper limit in 2014.
• The fiscal deficit has continued to increase and public debt is climbing rapidly.
• The economic outlook is subdued amid deteriorating fundamentals.
• The government’s proposed fiscal correction for 2015 is suitable, but it is unclear whether the required measures can be implemented in time.
• The monetary policy framework still presents important weaknesses.

The mission urges the authorities to complete the transition to inflation targeting, which means that the IMF suggests eliminating the exchange rate band and allowing inflation to run its course. It remains to be seen whether this could actually work in Costa Rica, a country that can normally function through inflation -but some analysts think that current conditions of rising unemployment and income inequality will do little to assuage inflationary concerns.