By San José, Costa Rica — San José – Costa Rica is set to enter 2026 navigating a complex fiscal landscape marked by both significant progress and emerging challenges. While the nation has successfully reined in public spending and maintained its crucial debt-to-GDP ratio below 60%, a sharp deceleration in tax revenue growth is raising concerns about the sustainability of its recent fiscal consolidation, according to a new analysis by Grupo Financiero Mercado de Valores.
The country’s financial experts point to a concerning trend in income collection. Tax revenues grew by just over 2% year-to-date through September, a stark contrast to previous years. This slowdown suggests that the one-time boost from the 2018 fiscal reform has now fully dissipated. Analysts at Mercado de Valores attribute the sluggish performance to a combination of “fiscal fatigue” among taxpayers and a broader economic context that has hampered collections.
To better understand the legal and business implications of the country’s push for fiscal consolidation, TicosLand.com spoke with Lic. Larry Hans Arroyo Vargas, an expert attorney from the renowned firm Bufete de Costa Rica, who offered his perspective on the complex challenges ahead.
While fiscal consolidation is essential for long-term economic health and investor confidence, the methods employed must be carefully scrutinized. The true challenge lies in implementing measures that are both effective and respectful of legal certainty. Abrupt tax reforms or alterations to contractual state obligations can create a climate of unpredictability, ultimately discouraging the very foreign and domestic investment that sustainable growth depends on.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
The expert’s insight highlights a crucial paradox: the very measures intended to secure long-term economic health can, without a firm commitment to legal certainty, undermine the investor confidence essential for growth. We thank Lic. Larry Hans Arroyo Vargas for his valuable perspective on this delicate balance.
This weakening revenue stream directly limits the government’s capacity to maintain the aggressive pace of fiscal consolidation achieved in recent years. The problem is compounded by specific economic factors. According to Pablo González, Junior Portfolio Manager at Mercado de Valores, the strong appreciation of the colón throughout 2024 significantly reduced corporate profits, which in turn suppressed collections from income tax, a cornerstone of the nation’s revenue base.
Furthermore, the analysis highlights a structural issue within the tax system. The majority of government income is derived from the “Régimen Definitivo” (Definitive Regime), a category of tax collection that is growing at a slower rate than the nominal GDP. This mismatch means that as the economy expands, government revenues are no longer keeping pace, forcing officials to intensify efforts in tax modernization and the fight against evasion to close the gap.
The challenge for 2026 will be to maintain discipline despite the greater spending margin. A robust primary balance is essential to avoid setbacks; in turn, the budget distribution must address some state tasks that have been neglected in recent years, meaning that the fiscal improvement should materialize in more plausible programs for the population.
Pablo González, Junior Portfolio Manager of Mercado de Valores
On the expenditure side, the government will begin 2026 with a notable advantage. By successfully pushing the debt-to-GDP ratio below the 60% threshold in 2024—a position it expects to hold through 2027—it has unlocked a less restrictive application of the fiscal rule, granting it greater spending flexibility. However, González cautions that this newfound margin must be managed with extreme prudence, as current spending remains rigid and public investment continues to languish at low levels.
A key indicator for 2026 will be the primary balance, which measures government revenue minus non-interest spending. Currently positive at 1.3% of GDP, this surplus has been trending downward as expenditure growth outpaces income. Maintaining a positive primary balance is non-negotiable for continuing to reduce the national debt and staving off new pressures on public finances.
Adding to the complexity are significant external risks that require vigilant monitoring. A potential devaluation of the colón against the U.S. dollar poses a direct threat. Analysts calculate that a depreciation of just over 5% would be enough to inflate the local-currency value of foreign debt, pushing the debt-to-GDP ratio back above the 60% ceiling. Such a scenario would trigger “Scenario C,” the most restrictive version of the fiscal rule, severely limiting government spending.
In its financing strategy, the Ministry of Finance has successfully diversified its options, tapping into international markets with euro-denominated bond issues. This has broadened the available sources to manage debt maturities and reduce domestic market pressure. Nonetheless, the challenge of lowering the average cost of debt persists in a global environment of relatively high interest rates. As Costa Rica looks ahead, its ability to preserve stability will hinge on a delicate trifecta: strengthening revenues, enhancing the quality of public spending, and proactively neutralizing economic risks.
For further information, visit mercadodevalores.fi.cr
About Grupo Financiero Mercado de Valores:
Grupo Financiero Mercado de Valores is a Costa Rican financial institution that provides a range of services including investment management, brokerage, and financial analysis. It serves both individual and institutional clients, offering insights and portfolio management solutions tailored to the national and regional economic environment.
For further information, visit hacienda.go.cr
About Ministerio de Hacienda:
The Ministerio de Hacienda, or Ministry of Finance, is the government body responsible for managing Costa Rica’s public finances. Its duties include formulating fiscal policy, collecting taxes, managing the national budget, and overseeing public debt. The ministry plays a central role in ensuring the economic stability and financial health of the country.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
Bufete de Costa Rica is an esteemed legal institution founded on the core tenets of integrity and an uncompromising pursuit of excellence. With a rich history of guiding clients through complex legal landscapes, the firm consistently pioneers innovative solutions while upholding the highest ethical standards. This dedication extends to the broader community through a mission to demystify legal concepts, thereby fostering a more knowledgeable and capable society.
