President Luis Guillermo Solis said in a nationwide address that Costa Rica "faces liquidity problems in paying its obligations and guaranteeing the provision of services."
"Despite all the public calls and efforts we have made since the start of my administration to contain spending and increase revenues, there is still a gap that we must close with fresh resources," the president said.
Economic decisions made by the government have allowed the people to "not perceive the danger," but the liquidity crisis is occurring in spite of growth, manageable inflation and interest rate stability, Solis said.
The Treasury will give priority to covering the public debt, salaries and pensions, the president said.
A bill has been submitted to Congress to change the sales tax into a value-added tax (VAT) and to reform the income tax system, Solis said.
"My government is willing to implement unprecedented taxes, to limit the growth of spending even more and to prioritize the payment of its obligations in a prompt manner," Solis, whose term ends in 2018, said.
A report released on Tuesday by the Organization for Economic Cooperation and Development (OECD) concluded that Costa Rica needed significant tax reforms to achieve sustainable economic growth.
Costa Rica finished 2016 with a budget deficit equivalent to 5.2 percent of the gross domestic product (GDP), the lowest level in the past four years, the Finance Ministry said.
On Monday, the Central Bank said it was revising its 2017 budget deficit projection upward from 5.9 percent to 6.1 percent of GDP, while the economic growth forecast was being revised downward from 4.1 percent to 3.8 percent.