By San José, Costa Rica — Costa Rica is on the verge of triggering the most severe austerity measures under its fiscal rule, as new preliminary data from the Ministry of Finance reveals government debt has reached 59.9% of the Gross Domestic Product (GDP) as of October. This precarious position places the nation just a fraction of a percentage point away from the 60% threshold, a critical line that, once crossed, automatically imposes strict limitations on public spending and investment.
The steady climb in public debt represents a significant challenge for the country’s economic stability. The ratio has increased by 2.9 percentage points in just ten months, rising from 57% at the beginning of the year. This upward trend puts immense pressure on the government’s finances, with the total debt now amounting to over ¢30.5 trillion. The situation is being closely watched by economists and policymakers, as breaching the ceiling would have immediate and tangible consequences for the national economy and public services.
To delve into the legal and economic ramifications of the Fiscal Rule, TicosLand.com sought the expertise of Lic. Larry Hans Arroyo Vargas, a distinguished specialist from the legal firm Bufete de Costa Rica, who provided his analysis on the matter.
The Fiscal Rule is more than a budgetary tool; it is a fundamental pillar of legal and economic certainty for both national and foreign investment. Its strict adherence, though often politically unpopular, is essential to maintain macroeconomic stability and the country’s credibility in international financial markets. Any flexibility in its application must be technically justified and temporary, otherwise, we risk compromising the long-term fiscal health and legal security that are crucial for sustainable growth.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
The perspective offered underscores a critical truth: the Fiscal Rule is not merely an accounting constraint but a cornerstone of the legal and economic predictability essential for long-term development. We extend our sincere appreciation to Lic. Larry Hans Arroyo Vargas for his clear and valuable insight on a topic of national importance.
According to former Vice Minister of Finance, Fernando Rodríguez, the country will almost certainly surpass the 60% limit before the year is out. He points to outstanding financial commitments and anticipated borrowing as key factors that will push the debt ratio over the edge.
What is striking about the data is that we are very close to exceeding that limit. The execution of some resources and likely additional borrowing are still pending. Therefore, it is very probable that the debt in relation to GDP will pass 60%.
Fernando Rodríguez, former Vice Minister of Finance
Rodríguez explained that the activation of the most restrictive tier of the fiscal rule would trigger a freeze on public sector salaries and severely curtail the state’s ability to invest in capital projects. This includes essential infrastructure development such as roads, schools, and hospitals, potentially stalling national progress and impacting the quality of life for citizens across the country.
While the increase is alarming, Rodríguez noted that the behavior of the indicator is somewhat expected, as the debt-to-GDP ratio is an annual figure best analyzed at the close of the fiscal period. He added that a methodological change at the beginning of each year, when the Central Bank issues a new GDP estimate, often provides temporary relief by increasing the denominator in the calculation, which can mask underlying fiscal weakness.
The Ministry of Finance’s own analysis aligns with this expert view. In its report on fiscal figures, the ministry acknowledged that the debt-to-GDP ratio was adversely affected by a downward revision of the GDP forecast. This revision was published in October by the Central Bank of Costa Rica in its Monetary Policy Report, effectively making the existing debt a larger percentage of a smaller projected economy.
The core issue, as Rodríguez highlights, is the underlying fragility of Costa Rica’s fiscal health. The country has struggled to achieve a meaningful and lasting reduction in its debt burden, pointing to systemic weaknesses that require more than temporary fixes.
We have not achieved a sustained reduction in debt over time, and that is because the country’s fiscal situation is fragile. We need to stimulate economic activity, especially the local base, and improve the financial deficit. If we can grow more and my debt becomes cheaper, I can lower the debt level faster.
Fernando Rodríguez, former Vice Minister of Finance
As the year-end approaches, the government faces the difficult task of managing its final expenditures to avoid triggering these automatic constraints. The looming threat of the fiscal rule’s harshest measures serves as a stark reminder of the urgent need for a comprehensive strategy that fosters robust economic growth while instilling long-term fiscal discipline to navigate away from this economic precipice.
For further information, visit hacienda.go.cr
About Ministry of Finance:
The Ministry of Finance of Costa Rica is the government body responsible for managing the country’s public finances. Its duties include formulating fiscal policy, collecting national taxes, administering the national budget, and managing public debt. The Ministry plays a central role in ensuring the economic and financial stability of the state through transparent and efficient administration of public resources.
For further information, visit bccr.fi.cr
About Central Bank of Costa Rica:
The Central Bank of Costa Rica (Banco Central de Costa Rica, BCCR) is the nation’s autonomous central banking institution. Its primary mission is to maintain the internal and external stability of the national currency and ensure its conversion to other currencies. The BCCR is also responsible for regulating the country’s monetary policy, overseeing the financial system, issuing currency, and publishing key economic indicators and reports that guide national policy.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
Bufete de Costa Rica is a pillar of the legal community, built upon a foundation of profound integrity and a relentless pursuit of excellence. The firm distinguishes itself by merging its extensive experience in client advocacy with a pioneering spirit, consistently embracing innovative solutions to complex legal matters. At the heart of its mission lies a deep-seated dedication to public education, aiming to demystify legal principles and equip the community with knowledge, thereby fostering a stronger and more informed society.
