San José, Costa Rica, since 1956

IMF Director Says Reforms Must Move Forward

THE Costa Rican economy is in goodshape and has the potential to continuegrowing, but major reforms are necessaryfor that to happen, said Agustín Carstens,deputy managing director of the InternationalMonetary Fund (IMF) during aroutine visit to the country this week.During his visit, Carstens met withPresident Abel Pacheco and members ofthe government’s economic team.Carstens called Costa Rica a “pillar” ofdemocratic tradition and a “role model” forother countries in the region.“Costa Rica has maintained solid economicgrowth despite the recent downturnin the regional and global economy – asymptom of its resistance and great growthpotential,” Carstens said during a pressconference Monday afternoon.“DURING the past decade, the countryhas been successful at diversifying itsexport base and attracting foreign investment.Solid institutions, high educationlevels and a strategy based on exportgrowth constitute important elements inthis effort,” he saidAmong Latin American countries,Carstens said, Costa Rica is the one closestto meeting the United Nation’s MillenniumDevelopment Goals – eradicating extremepoverty and hunger, achieving universal primaryeducation, promoting gender equality,reducing the infant mortality, improving andexpanding basic health care and ensuringenvironmental sustainability.HOWEVER, several crucial reforms,such as the approval of the much-delayedtax reform package being debated by theLegislative Assembly (TT, July 9), theCentral American Free-Trade Agreement(CAFTA) with the United States andreforms aimed at strengthening and furtherliberalizing its financial sector, need to beimplemented, he said.To help the country make the recommendedreforms, the IMF has offered toprovide the country with technical assistanceon tax policy, financial reform andother matters.“Looking ahead, Costa Rica’s perspectivesare favorable. However, there are importantchallenges to face,” Carstensexplained. “Adopting an integral reformagenda is a fundamental step in takingadvantage of Costa Rica’s considerablegrowth potential and making it possible tocontinue with its impressive record ofsocial progress.”The tax reforms would help reduce thecountry’s spiraling fiscal deficit, graduallyreducing the percentage of the government’sbudget used to pay interest on foreigndebt and increasing the amount ofmoney available for the country’s socialwelfare needs. Ultimately, the tax reformwould help reduce inflation and strengthenthe country’s economy, he said.Lower inflation, he added, would benefitto the country’s financial sector. Carstenssaid low inflation would make investors lesslikely to choose dollars over colones wheninvesting. The spontaneous and unregulated“dollarization” of Costa Rica’s economy is asource of concern for both the IMF and theCentral Bank (see separate story).To improve the efficiency of the country’sfinancial system, measures must betaken to “level the playing field” betweenpublic and private banks, he recommended.CARSTENS called CAFTA “a vehicleto attract foreign investment, increaseexports and obtain economic growth” andrecommended the country approve it,despite the negative political climate itfaces in the United States (TT, June 4).In his opinion, if Costa Rica approvesCAFTA soon, it would send a positivemessage to potential investors that it iscommitted to building a better investmentclimate.He cited the example of what happenedin Mexico shortly before the NorthAmerican Free-Trade Agreement (NAFTA).Despite what appeared to be a lack ofsupport for NAFTA in the United States,Mexico moved forward with the trade pact.This prompted several U.S. firms set up shopin Mexico before NAFTA became a reality,and this created thousands of jobs, he said.Carstens, 46, is a Mexican citizen. Heholds a PhD in Economics from theUniversity of Chicago.From 1999-2000, Carstens served asan executive director at the IMF (representingCosta Rica, El Salvador, Guatemala,Honduras, Mexico, Nicaragua,Spain and Venezuela).In August 2003, he was named deputymanaging director, the second-highestpost at the IMF.

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