Costa Rica’s ‘explosive’ debt crisis: All you need to know

Costa Rica’s latest effort to address a nearly $40bn debt crisis threatens to rekindle anti-austerity protests across the Central American nation, experts say, as the government began talks on Monday with the International Monetary Fund (IMF).

The government had been preparing an agreement with the IMF last year, but the terms for that deal were quickly rescinded after thousands of people demonstrated for weeks, marching and blocking roads to protest proposed tax reforms and spending cuts.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 focused instead on social spending and strengthening democratic institutions, is considered an oasis of political stability and development in Central America.

The country’s social indicators are excellent, but the COVID-19 pandemic and ensuing recession have exacerbated income inequality and eroded government legitimacy – and brought a longstanding fiscal crisis to a breaking point.

What exactly is the problem?

Costa Rica’s debt crisis has been mounting for decades. Spending far outstrips the country’s income and little has been done to address the issue prior to President Carlos Alvarado Quesada’s current administration.

“Costa Rica has had, unlike most other Central American countries, social spending that pursues rights, such as social protections, education, and health,” said Lourdes Molina, a senior economist at the Central American Institute for Fiscal Studies.In 2021, about 42 percent of the country’s $19bn national budget will go to debt and interest payments, the minister of finance told legislators 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 bring in only 13 percent of the country’s gross domestic product (GDP), largely due to tax evasion and exemptions. Of the seven countries in Central America, only Guatemala and Panama bring in fewer relative taxes, said Molina.

What is the government’s approach?

Alvarado Quesada, the country’s centre-left president, took office in 2018. He quickly followed through on a campaign promise to respect a court ruling legalising marriage equality and focused heavily on carbon neutrality.

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

“It is a unique moment in history,” municipal worker Guillermo Piedra told Al Jazeera in San Jose on Day 30 of the 2018 strike, raising his voice to be heard over the din of the crowd at a three-hour union march.

The bill was centred on a series of austerity measures that would have primarily affected the middle and working classes, slashing worker benefits and introducing a new tax on services.

The strike actions altered but did not ultimately halt fiscal reforms, but they did result in unprecedented pan-union unity and strengthened the labour movement. Meanwhile, the reforms themselves were not substantial or systemic enough to resolve the fiscal crisis.

What happened last year?

Costa Rica received early international praise for keeping the spread of the novel coronavirus under control, but that did not last.

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

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

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

 

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