San José, Costa Rica, since 1956

Country Counted Colones During Lean Year

Costa Ricans had to work harder and pay more to maintain their quality of life in 2005. Inflation rose, gas prices skyrocketed, and the cost of living in general increased more than expected. According to government officials looking back at year’s end, however, the people and the country got by thanks to a little cinching of the belt and sacrificing.


At the forefront of the struggle to keep the country’s economy stable were Central Bank President Francisco de Paula Gutiérrez and successive Finance Ministers Federico Carrillo and David Fuentes; as in past years, they called for the passage of President Abel Pacheco’s tax reform package in order to increase the government’s tax revenue, and insisted on strict limits on government spending. This month, they claimed a partial victory against difficult odds, with a significant drop in the fiscal deficit, improved tax collection and other achievements.


Throughout the year, legislators and social sector representatives said Carrillo underestimated the amount of money available for social spending and overestimated the amount that needed to be spent on interest payments on the national debt.


Last year’s disputes over whether the Finance Ministry is obligated to turn over gas-tax revenues for road improvements – which Carrillo maintained the country could not afford – dragged on this year as the country’s courts continued to rule against the ministry.


An ugly manifestation of this conflict between social-spending advocates and those touting austerity measures took place Sept. 1, when Carrillo presented his 2006 budget to the Legislative Assembly and received a raucous reception by assembly employees, furious that the minister had not prioritized the construction of new buildings for them to work in. The budget encompassed ¢2.76 trillion ($5.71 billion) in spending, with tax income only covering 53%, while the rest of the budget was paid for with further debt. It was criticized for being too stingy with social spending.


On Sept. 29, Carrillo celebrated his 41st birthday by resigning from his position, becoming the third Finance Minister to do so since Pacheco took office.


Denying that the resignation had anything to do with conflicts over his policies, Carrillo said he would be taking a job as the Executive Vice-President of the Central American Bank for Economic Integration (CABEI). In his wake, his successor, Fuentes – previously the Vice-Minister – announced positive results in the ministry’s year-end report in December (see separate story in News).


Carrillo’s 2006 budget, with some changes by legislators including more funds for social spending taken from debt payments, was passed in second debate Dec. 1 after a broken quorum triggered an assembly regulation passing it in first debate automatically and without a vote.


The Central Bank mirrored the Finance Ministry in its policies, as it continued to implement a restrictive monetary policy using government bonds and other means to limit the amount of money in circulation in Costa Rica. Despite its efforts, inflation rose well beyond the 10% goal that the Central Bank announced in January: it surpassed the revised goal of 12.7% by November, and was expected to close at 14% at the end of the year.


Gutiérrez attributes much of the blame to oil prices, which also brought up the cost of living and the prices on many imported goods. He estimated that at the close of the year, the government would have spent more than $1 billion on oil imports, $300 million more than in 2004. However, in his year-end report, Gutiérrez concluded that despite some poor indicators, the country would have been much worse off if the government had not controlled spending as it has.


The approval of the Permanent Fiscal Reform Package seems increasingly unlikely. In March, legislators approved a new regulation that would allow a fast track status for certain bills, which was applied to the plan. But at year’s end, some leaders were saying the plan’s approval is not likely before legislators’ terms end in May.


Inflation and gas prices took their toll this year, and the cost of living rose dramatically.


A poll in March found that the cost of living had surpassed corruption as the biggest concern for Costa Ricans. Consumer goods in the basic food basket had risen by 20.78% from the year before.


The annual State of the Nation report, released in October, found that real incomes (adjusted for inflation) had fallen and the minimum wage was equal, in real terms, to the minimum wage of the mid-1980s. The annual Household Survey conducted by the National Statistics and Census Institute (INEC) concluded that while the poverty rate had fallen from 21.7% to 21.5% over the last year, individual incomes had also fallen and the prices of goods had risen. Researchers explained these seemingly incongruent figures by saying that, despite the drop in income, more people in each household were working, so total household incomes went up and families managed to stay afloat.


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