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Costa Rica’s ‘Explosive’ Debt Crisis: Everything You Need to Know | Business and economic news

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Costa Rica’s latest push to deal with a nearly $ 40 billion debt crisis threatens to reignite anti-austerity protests across the Central American country, experts say as the government began on Monday talks with the International Monetary Fund (IMF).

The government had prepared a deal with the IMF last year, but the terms of that deal were quickly revoked after thousands of people demonstrated for weeks, marching and blocking roads to protest proposed tax reforms and spending cuts.

Costa Rica, which abolished its military in 1948 and instead focused on social spending and strengthening democratic institutions, is seen as an oasis of political stability and development in Central America.

The country’s social indicators are excellent, but the COVID-19 pandemic and subsequent recession exacerbated income inequality and eroded the legitimacy of government – and brought a long-standing budget crisis to a breaking point.

What is the problem exactly?

Costa Rica’s debt crisis has been escalating for decades. The spending far exceeds the country’s income and little was done to address the problem before the current administration of President Carlos Alvarado Quesada.

“Costa Rica has had, unlike most other Central American countries, social spending that targets rights, such as social protection, education and health,” said Lourdes Molina, senior economist at the Central American Institute for Fiscal Studies.

“It’s a good thing because the state guarantees people’s rights, but Costa Rica has spent about two decades without any tax reform,” she told Al Jazeera.

Thousands of civil servants march in a strike against the government’s economic measures in San Jose, Costa Rica, in April 2016 [File: Juan Carlos Ulate/Reuters]

In 2021, about 42% of the country’s $ 19 billion national budget will be spent on paying debt and interest, the finance minister told lawmakers last year. Unlike most countries in the region, much of Costa Rica’s debt is internal, with its own banking sector, which ends up costing more than foreign or multilateral bonds.

Taxes only earn 13% of the country’s gross domestic product (GDP), largely due to tax evasion and exemptions. Of the seven Central American countries, only Guatemala and Panama impose lower relative taxes, Molina said.

What is the government’s approach?

Alvarado Quesada, the country’s center-left president, took office in 2018. He quickly delivered on his election promise to honor a court ruling legalizing marriage equality and focused heavily on carbon neutrality.

Within months of his inauguration, however, he faced a backlash against an attempt to resolve the debt crisis. Public sector unions crippled the country with a massive nationwide strike against a tax reform bill.

“This is a unique moment in history,” municipal worker Guillermo Piedra told Al Jazeera in San José on the 30th day of the 2018 strike, raising his voice to be heard in the face of the din of the crowd during the ‘a three-hour trade union march.

The bill centered on a series of austerity measures that would have mainly affected the middle and working classes, reducing workers’ social benefits and introducing a new tax on services.

Strike actions changed but did not stop the tax reforms, but resulted in unprecedented pan-union unity and strengthened the labor movement. Meanwhile, the reforms themselves were not substantial or systemic enough to resolve the fiscal crisis.

What happened last year?

Costa Rica quickly received praise from the international community for bringing the spread of the novel coronavirus under control, but it did not last.

The country of about five million people now has more than 180,000 confirmed cases of COVID-19 – the second in Central America after Panama, which has one of the highest per capita testing rates in the Americas.

The public health system is strong and the death rate from COVID-19 remains low, but Costa Rica was less well equipped to deal with the economic crisis caused by the virus. As elsewhere in Latin America, the recession caused by the pandemic has exacerbated inequalities, poverty and unemployment in Costa Rica.

“Its finances were already in crisis long before the pandemic and with the pandemic these problems have intensified,” Molina said.

Cosa Rica’s public health system is strong and the COVID-19 death rate remains low, but the country was less well-equipped to deal with the economic crisis caused by the virus [File: Juan Carlos Ulate/Reuters]

In September 2020, the government announced the terms of negotiations with the IMF for a $ 1.75 billion loan program to offset the economic impact of the pandemic.

The measures have reportedly included tax reform, a public sector wage freeze and the sale of some state assets. Costa Rica kicked out an IMF mission in the 1980s and social movements have long struggled against austerity measures and privatization – often successfully.

The deal with the IMF sparked months of protests and blockades from various actors, from small business owners opposing the tax to unions calling for progressive tax reform and the elimination of corporate exemptions instead. cuts in social spending.

The protests continued even after the Costa Rican government withdrew its plans for IMF-related austerity measures in early October.

“The IMF issue was just like a valve on an exploded pressure cooker,” said Jorge Coronado, longtime Costa Rican activist and member of the Latin American Network on Debt, Development and Rights.

Has the government responded to the concerns of the protesters?

First, the government deployed police to quell protests. Then he invited a limited number of groups to hold a dialogue.

Although this initial effort failed, a process eventually began with representatives from various sectors of Costa Rican society, including labor and business groups, churches and women’s organizations.

The government sat down and allowed the participants to design their own ground rules for the dialogue, and they decided to seek agreements that all parties would agree to.

This consensus system removed some important issues from the table, but after weeks of discussion, the process resulted in more than 50 initial agreements as a step towards resolving the fiscal crisis.

“It was a roundtable that allowed us to resume the dialogue after so much polarization,” Coronado, who participated and praised the efforts, told Al Jazeera. “But you can’t solve a 30-year crisis in three weeks.”

The headquarters of the National Bank of Costa Rica is pictured in San Jose, February 12, 2020 [File: Juan Carlos Ulate/Reuters]

What happened to all the offers? Have they been adopted?

A precarious calm followed the results of the initial dialogue. The Presidency has supported the agreements, but some require legislative approval and a number of actions could threaten to derail the progress that has been made.

“We have a very explosive situation,” Coronado said. “The government has lost its political legitimacy.”

To make matters even more volatile, the Costa Rican government on Monday began talks with an IMF mission, encouraging unions and other groups that staged protests last year to announce plans to hold more protests in the coming weeks.

A deal with the IMF may also face opposition from other politicians. Alvarado Quesada’s party only holds nine of the 57 seats in the legislature, so it will need the support of other parties to strike a deal with the world body.

Costa Rica’s presidential and legislative elections will be held in February 2022, and while the official election season is still a long way off, unofficially it has already started – and it may not be in the interests of other parties to resolve or even alleviate the current crisis.

Costa Rican President Carlos Alvarado Quesada speaks to the press about new preventive measures against COVID-19 on March 9, 2020 [File: Juan Carlos Ulate/Reuters]

What is happening now?

Negotiations that began on Monday for a three-year loan of $ 1.75 billion from the IMF are expected to last a few weeks, before the legislative approval process. The aim is to stabilize public debt and facilitate further multilateral financing in the coming years, according to the Costa Rican government.

The government notes that the underlying principles of the negotiations include maintaining social investment and protecting the most vulnerable, but the concrete measures proposed include a framework law on contentious public employment.

“The government’s proposal is essentially an aggressive strategy of neoliberal fiscal austerity,” Coronado said.

The IMF question was just like a valve on a pressure cooker that exploded

Jorge Coronado, Latin American Network on Debt, Development and Rights

As talks continued this week, public sector unions joined forces to announce their unified opposition to measures affecting working conditions. The bill on public employment, in particular, should be the subject of protests from the labor movement.

“This is the fundamental element that the government is incorporating into the negotiation,” Coronado said. “This is what links the fight against the IMF and the defense of working conditions and wages.”

Meanwhile, amid growing polarization, a discourse that rejects and demonizes public sector spending is increasingly emerging, Coronado and Molina said.

While tax reform is desperately needed, there is more than one way to go about it, and Molina said Costa Rica needs to take a long look in the mirror – and the rest of Central America.



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