San José, Costa Rica, since 1956

Economic Leaders Report Gains

THE top managers of Costa Rica s national pocketbook last week announced important gains for the economy, despite tough odds. In separate, year-end press conferences, both Finance Minister David Fuentes and Central Bank President Francisco de Paula Gutiérrez applauded the government s efforts to contain spending and highlighted achievements such as a drastic reduction in the deficit and equally drastic improvements in tax collection. However, they both coincided in saying current measures are not sustainable, and called for the approval of President Abel Pacheco s Permanent Fiscal Reform Package.

According to the Finance Ministry, the national deficit as of November was 41.2% lower than the same period in 2004, having dropped from 2.5% of the gross domestic product (GDP) last year to 1.3% of the GDP this year.

We have to say that the country s fiscal situation has improved, I would say notably, Fuentes said at the press conference.

The Finance Minister credited the deficit reduction to a more efficient and aggressive tax collection effort by his ministry, and its much-criticized austerity measures.

As his evidence of a better-than-they say year, Gutiérrez pointed to an expected growth of 4.1% for Costa Rica s economy in 2005, the creation of 123,000 new jobs and the manageable deficit.

IN terms of tax collection, Fuentes touted a historic 20.5% increase in tax income this year when compared to last, reaching a total of ¢1.14 trillion ($2.25 billion).

I would dare to say that, without any tax reform, this country has never had, at least in its records, more than a 20% increase in its tax collection, Fuentes said.

The Finance Ministry integrated and strengthened the efforts of the various tax collection entities this year; in addition, the launch of a new customs system called the Information Technology for Customs Control (TICA) allowed for a better netting of taxes through customs, Fuentes said. At the customs station at the Pacific port of Caldera, where TICA was first implemented, tax collection increased 57% over the previous year, according to ministry figures.

Government spending rose only 5.9% this year, not including interest payments on the government s debt. With the debt payments, spending rose 9.3%, Fuentes reported. He said the effort to contain government spending has been successful, but an imbalance in national finances continues to threaten the long-term stability of the country.

The solution, he said, is the approval of the tax reform bill.

AT the Central Bank press conference, Gutiérrez also called for the approval of the tax plan, designed to provide increased funds for the central government. He said the principal cause for the rise in inflation this year was the country s increasing debt as it pays down the fiscal deficit.

Gutiérrez also blamed this year s inflation which is expected to close at 14%, well above the Central Bank s initial goal of 10% on external blows to the economy, principally oil prices that surged beyond expectations. While in January the Central Bank expected a price of about $50 a barrel, at the end of the year, prices are approximately $62 a barrel, and in October they were as high as $72.

This rising cost has had multiple impacts on the economy. Most directly, the government has spent more than $1 billion in oil imports, which is $200,000 more than the previous year and equals 5% of the country s gross domestic product (GDP). Gutiérrez warned that the current rise in oil prices should not be seen as a temporary effect, but a permanent condition caused by a steady growth in demand, to which Costa Rica must adapt.

HOWEVER, in comparison with international oil crises in past decades, Gutiérrez said Costa Rica has handled this one much better.

In the oil crisis of 1974, for example, the nation had a foreign debt equal to 23.6% of the GDP, and a deficit equal to 3.3% of the GDP, Gutiérrez said. In 1980, the debt reached 40.1% of the GDP and the deficit was at 9%. This year, external debt is estimated to be only 19% of the GDP at year s end, and the deficit is, as Fuentes said, expected to be at only 1.3% of the GDP.

The bank president said the government has managed the crisis well, with adjustments that included continuing both a restrictive monetary policy in the Central Bank, and restrictive spending by the central government. With these efforts and the help of $650 million in foreign direct investment, the government was able to maintain the deficit at manageable levels, Gutiérrez said.

The Central Bank attempted to limit the amount of currency circulating in the Costa Rican economy by limiting inflation.

The bank accomplished this by multiple means, such as selling monetary stabilization bonds, which allowed the bank to absorb ¢665 billion ($1.34 billion).

HOWEVER, because of the steady ¢0.15-per-day mini-devaluation of the colon, Costa Rica is an attractive market for the short-term investment of dollars, which works against the restrictive policies, Gutiérrez explained. As more dollars enter the Costa Rican economy a flow over which the Central Bank does not have control the bank must then release more colones into circulation, putting an upward pressure on the inflation rate.

Gutiérrez said that it is time to rethink the bank s mini-devaluation policy, and said that the bank has been studying the cases of several other countries with similar economic situations that have left such a system behind. While declining to advance any details on alternatives before the bank announces its 2006 monetary policy in January, he said that he would like to see more flexibility with the colon s exchange rate.

(See the Year in Review for more on CostaRica s economy in 2005.)


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