San José, Costa Rica, since 1956

Short on Cash, Gov’t Considers Outside Loans

Costa Rica may seek a loan from the International Monetary Fund for the first time in 16 years as a worldwide financial downturn slows the influx of dollars.

In a visit to San José last week, IMF Director Dominique Strauss-Kahn said the fund is willing to grant Costa Rica as much credit as the country needs.

The government has also negotiated $500 million credit lines from the World Bank and the Inter-American Development Bank and has approached two other lending organizations.

While the Oscar Arias administration argues that a dramatic reduction in public debt over the last 30 months allows the country to seek credit now, some economists are advising caution.

“The risk, if we borrow dollars, is that we may not be able to generate dollars in the future,” said Isaac Castro, chief economist at the financial firm Interbolsa. “That will make it harder to pay off our debts. We remember well the lesson of 1982.”

Over a 12-month period ending in September that year, Costa Rica defaulted on a series of international obligations as the country entered its worst economic crisis in history. The colón collapsed, inflation soared, and the country owed $4 billion, the highest per capita debt in the world at the time (TT, Dec. 22, 1982).

Today’s situation is much different, said Eduardo Lizano, who was president of the Central Bank from 1984 to 1990. The bank has $3.9 billion in reserves, the central government has a $250 million surplus, and the public debt is 40 percent of GDP, down from 55 percent four years ago.

But while Costa Rica’s finances are relatively sound, the country will still suffer as the world economy worsens next year, Strauss-Kahn said.

“You may be the best driver in the country, but if other drivers on the road are not good, you may have an accident,” he said. “And that’s why you need insurance. For the insurer – and I am the insurer – it’s much better to insure good drivers than bad drivers.”

As a recession consumes the United States, Costa Rica’s principal trading partner and source of tourists and investment, fewer dollars are entering the Tico economy, said Eric Vargas, strategy director at the financial advising firm Aldesa.

The Central Bank has dumped dollars on the market in recent months to keep the exchange rate within the boundaries it set in 2006. The bank’s reserves, while still healthy, have shrunk 5.7 percent in the past 12 months.

The loan from the Inter-American Development Bank will be used to increase the Central Bank’s reserves, Finance Minister Guillermo Zúñiga said. A possible IMF loan would also go to the Central Bank, Strauss- Kahn said.

“You ask about the amount of the insurance,” he told reporters late last week. “When you ask Rolls Royce about the power of their engine, they say, ‘It’s enough.’ So my answer is the same. What we have discussed with the government and the Central Bank is that if they need something, they will have


In the 1980s and 1990s, the IMF loaned Costa Rica a total of $142 million in today’s dollars to help the country climb out of bankruptcy, according to IMF spokesman Andreas Adriano. In a less popular move, the fund demanded drastic cuts in government deficit spending.

Strauss-Kahn said the fund now has a “new face” and will no longer impose strict conditions or try to change local policy.

“The fund tells us, ‘Yes, you should invest in infrastructure. …You should take care of the most vulnerable sectors,’” Zúñiga said. “This is not the same IMF that we are accustomed to.”

Other possible sources of funding include the Latin American Reserve Fund and the Andean Development Corporation, Zúñiga said.

The Finance Ministry will draw on the World Bank loan, if needed, to pay back a more expensive, short-term debt.

“What will happen in two months, four months six months? We don’t know,” Zúñiga said. “It’s better to be prepared.”

But borrowing money should not be the country’s only strategy, Vargas said. Costa Rica should also tackle a root problem behind the shortage of dollars: a growing trade imbalance.

As imports became pricier and export growth slowed, Costa Rica’s trade deficit in the first six months of 2008 ballooned to three times its deficit over the same period last year.

To reduce the deficit, Vargas said banks should increase interest rates to encourage savings and reduce spending on imports.

He added that the Central Bank should also allow the colón to float more freely, leading to a devaluation that would make exports cheaper and imports more expensive.

“If I can seek a loan at any time, I will never have to adjust variables like the interest rate or the exchange rate … and the deficit will continue to grow,” Vargas said. “Going into debt … creates a moral hazard.”


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