October 30, 2018 / 8:08 PM / 20 days ago

UPDATE 1-Costa Rica's central bank says tax reform should be approved soon

(Adds central bank president’s comments, background)

By Alvaro Murillo

SAN JOSE, Oct 30 (Reuters) - Costa Rica could face difficulty servicing its public debt obligations if President Carlos Alvarado’s proposed fiscal reform is not approved soon, Central Bank President Rodrigo Cubero told Reuters in an interview.

Costa Rica’s external and domestic government debt is equivalent to 53 percent of gross domestic product, exposing its economy to the whims of rising interest rates and foreign exchange fluctuations, Cubero said late on Monday.

“If the (fiscal reform) isn’t approved soon, we risk not giving the market the signs of confidence it’s asking for and that would increase government financing costs,” said Cubero, a former International Monetary Fund official.

“That makes paying debt more difficult,” he added.

The central bank agreed in September to lend Costa Rica’s Finance Ministry $862 million to help shore up the government’s finances, amid a wave of protests over the proposed fiscal reform.

“We have a pretty solid external position, but a weak fiscal situation. Without the fiscal reform, debt would be unsustainable and in 10 years debt would reach 100 percent of GDP,” said Cubero.

Thousands of unionized public employees have protested the tax proposal, arguing it would disproportionately affect the middle and lower classes.

The measure would convert Costa Rica’s 13 percent sales tax to a value added tax, affecting more products and services. Additionally, it would include adjustments to income tax, reduce public spending and cut wage benefits for some public-sector workers.

Congress voted in favor of the fiscal measure earlier this month, but before heading back to lawmakers for a second and final vote, the country’s constitutional court must approve it.

The court rejected prior fiscal reform measures in 2006 and 2012 and there is some concern that something similar could happen this time.

“If there is a default, access to financing could dry up, the government would be forced to make big cuts,” said Cubero.

“If there is no solution, we would fall into a vicious cycle.” (Reporting by Alvaro Murillo; Writing by Anthony Esposito; Editing by Peter Cooney)

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