SAN JOSE, March 1 Costa Rica should let its
currency move more freely, set an inflation target and take more
steps to rein in its public finances, the International Monetary
Fund said on Friday.
After a regular health-check of Costa Rica's economy, the
IMF said further fiscal reforms were needed to reduce the
country's debt and deficit, which is almost 5 percent of gross
domestic product, although it was moving in the right direction.
Benchmark interest rates of 7.35 percent are attracting
record foreign investment into the small Central American
nation, leading authorities to slap on taxes and impose other
measures in a bid to slow inflows.
The central bank spent $1.5 billion in six months to keep
the country's currency, the colon, from strengthening
beyond 500 per dollar, but the IMF said such measures were not a
"Directors noted the authorities' concern about
exchange-rate flexibility, but generally recommended increasing
exchange-rate flexibility as it would allow greater use of
exchange rate as a shock absorber," the IMF report said.
"Directors also saw merit in establishing an inflation
target as the anchor of monetary policy to protect macroeconomic
Exporters have warned that letting the colon trade outside
its current strict band would lead to excessive appreciation and
Unlike most other central banks, the Banco Central de Costa
Rica does not set the benchmark interest rate, which instead is
an average of rates offered by major financial institutions.
The government plans fiscal reform that seeks to scrap the
country's sales tax and replace it with a higher-rate
value-added tax, in an attempt to trim the country's fiscal
deficit to a 2 percent target by 2018.