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

Costa Rica desperately needs to enact fiscal reform, experts say, but government efforts may reignite mass anti-austerity protests.

A resident wearing a face mask walks after taking a test for COVID-19 in San Jose, Costa Rica on June 26, 2020 [File: Juan Carlos Ulate/Reuters]

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The government had been preparing an agreement with the IMF last year, but the terms for that deal were quickly rescinded after thousands of people demonstrated for weeks, marching and blocking roads to protest proposed tax reforms and spending cuts.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

“That is a good thing because the state ensures people’s rights, but Costa Rica has gone around two decades without any fiscal reform,” she told Al Jazeera.

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

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.

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 spurred by the virus [File: Juan Carlos Ulate/Reuters]

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

Measures would have included tax reform, a public sector wage freeze and the sale of some state assets. Costa Rica had expelled an IMF mission in the 1980s and social movements have long fought against austerity measures and privatisation – often successfully.

The IMF deal prompted months of protests and blockades by diverse actors, from small business owners opposing taxation altogether, to unions calling for progressive tax reform and the elimination of corporate exemptions instead of social spending cuts.

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

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

Did the government address protesters’ concerns?

First, the government deployed police to crack down on protests. Then, it invited a limited number of groups to hold a dialogue.

While this initial effort failed, a process eventually got under way with representatives across diverse sectors of Costa Rican society, including labour and business groups, churches and women’s organisations.

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

That consensus system took some important issues off the table, but after weeks of discussion, the process resulted in more than 50 initial agreements as a step towards addressing the fiscal crisis.

“It was a roundtable that allowed us to return to dialogue after so much polarisation,” Coronado, who participated in and lauded the efforts, told Al Jazeera. “But you cannot resolve a 30-year crisis in three weeks.”

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

What happened to all the deals? Were they enacted?

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

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

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

A deal with the IMF may also face opposition from other politicians. Alvarado Quesada’s party holds only nine of 57 seats in the legislative assembly, so he will need support from other parties to pass any deal with the global body.

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

Costa Rica’s 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 happens now?

The negotiations that began on Monday for a three-year $1.75bn IMF loan package are expected to last a few weeks, prior to the legislative approval process. The goal is to stabilise public debt and facilitate another multilateral financing in the coming years, according to the Costa Rican government.

The government notes underlying principles of negotiations include maintaining social investment and protecting the most vulnerable people, but concrete proposed measures include a contentious Public Employment Framework Law.

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

The IMF issue was simply 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 labour conditions. The public employment bill, in particular, is expected to be the focus of labour movement protests.

“It is the fundamental element that the government is incorporating into the negotiation,” said Coronado. “It is what links the struggle against the IMF and the defence of working conditions and salary conditions.”

Meanwhile, amid rising polarisation, a narrative that dismisses and demonises public sector spending has been increasingly emerging, Coronado and Molina said.

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

Source: Al Jazeera

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