San José, Costa Rica, since 1956

Stimulus Plan meets Skepticism

As Costa Rica’s economy slows to a crawl, President Oscar Arias announced measures to slow job losses and put cash in the pockets of poor people.

But his plan to invest heavily in infrastructure and expand social programs has drawn criticism from some economists, lawmakers and business leaders who say it is not ambitious enough.

“This is a step in the right direction,” said Juan Maria González, president of the Chamber of Industries. “But this crisis is so grave that we are going to need a second package of measures.”

Rocked by a global recession, Costa Rica’s economy will likely grind to a halt this year, if not shrink, while unemployment could reach 8 percent, up from around 5 percent today, said Eric Vargas, strategy director at the financial advising firm Aldesa.

“The plan … will help soften the blow for the most vulnerable sectors, but it won’t solve the problem of unemployment,” Vargas said.

Arias’ plan, presented late last month, would reduce interest rates on loans by stateowned banks and expand programs that give food and cash to poor people. The president is also lobbying lawmakers to make labor laws more flexible and pass nearly $2 billion in loans.

To the dismay of some bankers and economists, Costa Rica’s Central Bank president Francisco de Paula Gutiérrez has shunned an expansive monetary policy, saying he is more worried about a gaping trade deficit and record inflation, which reached 13.9 percent last year.

“The coming months will be difficult,” Arias said. “We will have to make sacrifices … but we will pull through.”

Arias’ administration has pledged to make sacrifices, too. Finance Minister Guillermo Zúñiga said he requested each ministry to cut about 15 percent of spending on travel, food and publicity and other discretionary items. Savings could total $7.3 million this year.

The announcement came after news leaked that Ennio Rodriguez, head of the National Housing Mortgage Bank (BAHNVI), spent $1,140 in public money on a fancy lunch for 13 government officials and private-sector partners.

Arias directed much of his plan toward families and young people. He pledged to expand his signature Avancemos program, which pays families to keep kids in school, to include 150,000 students, up from 132,000 today. For three months, the Mixed Institute for Social Aid (IMAS) will give a weekly package of food to more than 16,000 children who live in the poorest areas of the country.

Recognizing that job loses are inevitable, Arias said laid off workers will continue to receive health care from the state for six more months, up from three months today. He also promised to increase to about $120 from $105 a monthly cash transfer for lowincome senior citizens, invalids, widows, sick

people and orphans.

As local firms take a beating, Arias proposed measures to ease their finances. Firms that sell products to the state will now receive payment within a month, down from about 45 days. And businesses will soon be able to defer more of their income taxes by reporting a quicker depreciation of their assets.

Arias is also seeking to reform the Labor Code that would allow firms to reduce workers’ hours rather than fire them. The Union of Private-Sector Chambers and Associations, which represents 42 private business chambers, is drafting the bill and will present it to the Legislative Assembly this month.

“If you have 10 employees and you want to fire two of them, you could instead reduce everyone’s hours by 20 percent. It’s the same cost,” said lawmaker Francisco Molina from the opposition Citizen Action Party (PAC), who supports the proposal.

Arias is also a backing a second proposal, stuck in the Legislative Assembly since 2005, that would allow firms to hire workers for up to 12 hours a day, instead of the current 8-hour limit. The schedule aims to reduce overtime pay, encourage productivity and reduce costs associated with starting and shutting down machinery.

After years of too-easy credit, banks are seeing more clients default on their debt. To slow that trend, Arias requested that the three state-owned banks and a fourth public-private bank reduce by 2 percentage points interest rates on loans for small- and medium-sized business, as well home loans of 50 million colones ($91,000) or less.

Banco Nacional, Banco Agrícola de Cartago, and Banco de Costa Rica agreed this week to lower rates, while Banco Popular was still studying the proposal at print time.

“We want to offer…credit that is accessible and competitive enough for businesses and the general public to continue their activities,” said Mario Rivera, Banco de Costa Rica’s general manager.

Arias is also lobbying lawmakers to approve loans that would dramatically increase public spending. The World Bank has awarded Costa Rica $72.5 million to develop the Caribbean port city of Limón.

The Inter-American Development Bank has agreed to lend Costa Rica $850 million for roads and bridges, $500 million for electricity generation projects and $500 million to the Central Bank to inject dollars into the banking system as investment, tourism and exports stagnate.

Some schools could see a makeover, too. The state-owned Banco Nacional has agreed to start a trust that will issue mortgagebacked securities and invest more than $182 million in new classrooms, gyms, cafeterias and school office buildings. These projects are partly an effort to stanch job loss in the construction sector. (see story, business, P. 14)

 “In the next few months our priority will be, as it was in my electoral campaign, jobs,

jobs, and jobs,” Arias said.

Still, some business leaders were skeptical. By the time lawmakers approve the loans, and the government designs the projects, six or seven months could pass, said González of the Chamber of Industries.

“In six or seven months, hundreds of firms could no longer exist,” he said. “We need a short-term fix.”

He suggested moving the payment date for sales taxes, or shifting more of the health insurance burden from employees to the government.

Banks are required to keep 15 percent of their deposits with the Central Bank, and some economists think that number should be lowered to ease tight credit markets and lower interest rates.

“In addition to increasing public spending, (Arias) could have done more to encourage private sector investment,” said Luis Mesalles, general manager of La Yema Dorada, a food manufacturer. “But he’s moving in the right direction. There’s nothing in the plan that makes you stop and say, ‘Uy, that’s silly.’”


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