San José, Costa Rica, since 1956

Economic Outlook Uncertain

Uncertainty over the future of much-debatedtax reforms and the Central American Free-Trade Agreement with the United States(CAFTA), high oil prices, rising interest rates,slow growth by businesses that cater to thenational market and high unemployment havecast a shadow over the Costa Rican economy’sfuture.However, the country’s two most dynamic sectors– exports and tourism – are expected to continueshowing strong growth during the remainingpart of this year and the first half of next year.Exports, particularly agricultural products and manufacturedgoods assembled in free zones, will continueto benefit from a recovering world economy, accordingto industry insiders.TOURISM, the country’s main generator of foreign currency, is expected to benefit from anabove-average high season starting inDecember, according to industry predictions.“You can see the glass as half empty orhalf full. We maintain optimism,” saidSergio Navas, executive vice-president ofthe Costa Rican Chamber of Exporters(CADEXCO).“The fiscal reform hasn’t happened andCAFTA won’t be approved before the endof the year,” he said. “However, the newappointments to the Cabinet (see separatestory) give us some hope. The new ministersmay be able to revive these projects,which are crucial for the country.”THE proposed Permanent FiscalReform Package – a tax bill that seeks tosignificantly increase government revenuesand permanently reduce the fiscaldeficit by creating new taxes and improvingcollection of existing ones – was dealta blow two weeks ago when then-FinanceMinister Alberto Dent, one of the plan’smain proponents, resigned (TT, Sept. 3).However, after more than two years ofdebate by legislators, the bill finallyreached the floor of the LegislativeAssembly on Sept. 9.On Monday, President Abel Pachecoappointed Federico Carrillo, a former managerof the National Stock Exchange, asthe new Finance Minister. Carrillo hasvowed to continue to fight for the taxplan’s approval.Navas and Carlos Denton, president ofthe Costa Rican American Chamber ofCommerce (AmCham), both stressed theneed to find a permanent solution to thecountry’s persistent budget deficits andincreasing debt.“If the right measures aren’t taken tosolve the problem, the country’s internationalreputation could worsen,” Dentonsaid. “The opportunity to solve this problemmust be taken advantage of.”CAFTA’S future also remains indoubt. Two of its main proponents – formerForeign Trade Minister Alberto Trejosand Anabel González, head CAFTA negotiatorfor Costa Rica – resigned earlier thismonth (TT, Sept. 8).In July, Pacheco conditioned CAFTAon the fiscal reform’s approval (TT, July16). The trade pact, which some legislatorshave said would take at least nine monthsto be debated, has not been submitted tothe Legislative Assembly.However, CAFTA’s future ultimatelydepends on the outcome of the U.S.Presidential elections in November, sinceDemocratic candidate Sen. John Kerry hassaid he wants to renegotiate the labor andenvironmental chapters of the trade agreement.Navas said CAFTAis entering its “politicalphase,” and he is optimistic Pacheco andnewly appointed Trade Minister ManuelGonzález have the negotiating skills necessaryto guide CAFTA through a fragmentedLegislative Assembly.Denton said he doubts the events of therecent weeks will negatively affectCAFTA’s future.“Costa Rica will be part of CAFTA,” hesaid. “I am willing to bet on it. It’s not yes orno, it’s when and how. Still, don Alberto’sdeparture could delay the process.”RISING inflation and interest rates arealso cause for concern.“The first of half of next year will bevery similar to the second half of thisyear,” said Luis Mesalles, a partner at economicconsulting firm Ecoanálisis. “Therewill be relatively low economic growth.”The economy’s performance alsodepends on what happens with the fiscalreform, Mesalles said.Another crucial factor is whether thegovernment can maintain its commitmentto control spending or if it will cave in topressure by unions and other groups, saidEdna Camacho, general director of theCosta Rican Investment Board (CINDE).Inflation is also a source of concern.Fueled by surging oil prices (see separatestory) and increases in the cost of transportation,basic utilities and agriculturalstaples, inflation has increased dramatically(TT, March 26).Inflation for the 12 months ending inAugust registered at 13.05% Originally, theCentral Bank had projected inflation for thisyear would be 9% (TT, Jan. 16), but laterrevised its projection to 11% (TT, July 30). Ifinflation meets or exceeds the new target, itwill be at its highest level in six years.INFLATION and rising internationalinterest rates have prompted the CentralBank to begin increasing local interestrates, making it more expensive to be indebt.Interest rates began the year at their lowestlevels in a decade. However, to curbinflation, the Central Bank began raisinginterest rates in June and did so again lastweek (see separate story). This trend isexpected to continue in the coming months.Higher interest rates hurt companiesthat produce for the Costa Rican marketand people with high levels of debt,Mesalles said.While the economy has been showingstrong growth – it grew 5.6% last year andis projected to grow 3.9% this year – it isnot growing in a way that creates morejobs and increases the purchasing power ofmost Costa Ricans.Between 2000-2003, for example, theunemployment rate rose from 5.2% to 6.7%.“The export sector remains dynamic,”Mesalles said. “However, this growth hasnot translated into an increase in availableincome that would increase local demand.”EXPORTS, which showed limited(1.1% overall) growth during the firstsemester, are expected to increase, fuelingthe country’s economic growth.Navas said he expects the volume ofagricultural exports, most of which are currentlybenefiting from stable internationalprices, to continue to grow. Exports fromfree-zones, particularly medical equipmentand processed food products such as fruitconcentrate and purees, will also do well,he predicted.“Services, software and call centers arealso dynamic,” he said. “Right now, thebulk of the economy’s growth depends onexports.”However, he noted that the future offree-zone export growth would depend onthe outcome of the tax plan.Free zones benefit from a series of taxbreaks, including exemption from incometaxes during their first four years in thecountry. However, these benefits willexpire in 2009 as a result of a ruling by theWorld Trade Organization (TT, March 12).Passage of the tax plan would quell theuncertainty facing free-zone business nowas far as taxes go, Navas explained.TOURISM chambers expect the 2004-2005 high season, which runs fromDecember until mid-April, to be betterthan usual.Last year, approximately 1.2 milliontourists visited the country, generating $1.2billion revenues, according to the NationalChamber of Tourism (CANATUR). Whileexact numbers for the last high season arenot available, representatives of thetourism sector have described it as the bestin many years.

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