San José, Costa Rica, since 1956

Economic Forecast Lackluster

Though a year has passed, the refrain on thelips of economic and business leaders has notchanged since the early days of 2004: theapproval of the Central American Free-TradeAgreement with the United States (CAFTA),ambitious tax reforms and laws to modernizethe country’s insurance and telecommunicationssystems are the keys to Costa Rica’s economicfuture.Central Bank president Francisco de PaulaGutiérrez, who presented the bank’s monetary policyand projections for 2005, said it will be anotherunspectacular year for the Costa Rican economy ifdecisive legislative action on these issues does nottake place.He placed special emphasis on the importance of thePermanent Fiscal Reform Package, which seeks toincrease government revenues by levying new taxes.He said the assembly is postponing the inevitable by failing to vote on the plan, which in oneform or another has been under debate for28 months.Additional revenues would help thegovernment reduce the national debt, so“we wouldn’t have to see inflation rates of10% and be happy about it,” he said lastweek. “We could see rates of 3, 4, 5%.”THE Central Bank expects 2005 to be ayear of moderate growth, lower inflation(10%, down from a projected 13.3% for2004), lower external debt and higherinterest rates. The bank will continue topursue a restrictive monetary policy toachieve “relative stability,” Gutiérrez said.“I emphasize the word ‘relative’,” headded. “Really, 10% inflation is not stability.”Dynamism in exports (which rose 10%in 2004) and tourism (up 16%) will continueto be crucial for the economy in 2005,he said, despite a drop in the exports ofhigh-tech giant Intel.The largest jump in exports in 2004came from free zones (12%). TimothyScott, executive director of the Costa RicanAssociation of Free Zones (AZOFRAS),told The Tico Times in an e-mail that theassociation expects similar growth fromfree zones in 2005. Companies in free zonesrepresent more than 50% of Costa Rica’stotal exports and 40% of its total foreigndirect investment (FDI).FOREIGN Trade Minister ManuelGonzález spoke optimistically of the country’sexport future last week.He said major government priorities fornext year include making reality the proposedCentral American Customs Union tostreamline regional trade and travel, alongwith passage of legislation to modernize theCosta Rican Electricity Institute (ICE) andNational Insurance Institute (INS), which“unfortunately has not advanced in a significantmanner” in the Legislative Assembly.GUTIÉRREZ said the achievementsof 2004, including “reasonable growth” of4.2% and lower rates of unemployment,are especially noteworthy when consideredin light of soaring petroleum prices, whichcaused a $197 million increase in CostaRica’s oil expenditures this year, broughtpetroleum spending to 4% of the grossdomestic product (GDP) and drove upinflation.According to economist RodrigoBolaños, the hike in oil prices will causelower growth rates in the global economyand trade in 2005. He added the decelerationof China’s production and high U.S.interest rates are other external risk factorsfor Costa Rica in the coming year.The dropping value of the U.S. dollaragainst the euro will be another factor towatch, according to Gutiérrez, since itcould allow the Central Bank to slowdevaluation of the colón, helping reduceinflation here. The colón’s devaluation iscurrently set at ¢0.17 per day.INTERNALLY, control of governmentexpenditures will be a major factor economicstability, according to economists.During a presentation of the CostaRican Chamber of Commerce’s projectionsfor 2005, economist Jorge Corralessaid he hopes “God will help” FinanceMinister Federico Carrillo maintain hisrestrictive approach toward governmentspending to limit the growth of the nationaldebt next year.Gutiérrez praised the relatively newfinance minister’s efforts.“The Finance Ministry will have tokeep doing what it’s doing,” he said.Pacheco’s third finance minister – histwo predecessors both resigned because ofbudgetary arguments – is much less popularwith other groups.Since Carrillo took office in September,he has faced conflicts with the assembly,threats from angry municipal leaders andeven lawsuits over his insistence on limitinggovernment spending (TT, Nov. 19).LIKE Carrillo, Pacheco has maintaineda firm line regarding fiscal matters,unflinching in his refusal to send CAFTAto the assembly for ratification until the taxplan is passed.For private-sector leaders, this stancecould endanger the future of businessesacross the country.“These things make no sense. Why linka tax package to a free-trade agreement?”the chamber’s Corrales said.He said doubt surrounding the future ofthe agreement in Costa Rica could have acrippling effect on foreign investment.“Who is going to invest in a countrywhere we don’t know if the market will beopened?” There will not be foreign investmentwhile we don’t know (CAFTA’sfuture),” he said.Trade Minister González blames theassembly for the potential delay, citing itsfailure to bring the tax plan to a vote.“May the assembly assume the responsibilitythe people have given it,” he said.THE Central Bank president maintainsa skeptical attitude toward the possibilitythe assembly will pass the tax plan andCAFTA in 2005, saying this year’s corruptioncases will most likely increase legislators’cautiousness.“It will be a year of opportunities, but Idon’t think we’ll see growth much higher,or interest rates much lower, than whatwe’re experiencing now,” he concluded.

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