Internal Debt in Costa Rica: an alternative approach Part II

Abstract

The first part of this article argues that the financial deficit we commonly use in Costa Rica to refer to the imbalance in public finances is not the best indicator given the levels of inflation we have experienced in recent years. This is because the financial deficit takes as part of the expenditure all interest paid on the debt, when in fact - given inflation - a significant part of those interest must be considered as debt repayment.
As discussed in the first part of this article, a better indicator of the deficit in a country with significant levels of inflation such as Costa Rica is the operating deficit, which excludes from interest spending the share of inflation compensation. We saw then that the operating deficit can also be seen as changing debt from one period to another minus the portion of debt growing for inflationary reasons or changing them. The analysis of the different definitions of operational deficit led us to conclude that the appropriate formula for calculating it is:
(5) Bt-₁ - PtBt-₁ -(1 + s* t) et B* t-₁
where Xt is the operating deficit, Dt is the balance of central government debt at the end of the period, Bt-₁ Ḃt-₁ and B*t-₁ are the different types of debt denominated in ordinary colons, indexed in real units and dollars at the end of the period respectively,