San José, Costa Rica, since 1956

V.P. Liberman: Tax Reform Is On the Way

Second of two parts


Last week, The Tico Times ran the first part of an interview with Vice President Luis Liberman, President Laura Chinchilla’s point man on economic issues. In the first instalment, Liberman discussed the administration’s priorities in the economic sphere and the importance of foreign investment. This week, he addresses the national deficit, the colón/dollar exchange rate and tourism.

TT: What are your ideas for reducing the national deficit?

LL: We are looking to control expenses – specifically, public spending. That is one part of it.

The other part is what we call “P3s,” public-private partnerships.

Third, we have to do something to generate more revenue.

All of these must be packaged together to be successful.

Is tax reform on the agenda?

Remember that, in the campaign, we said we were going to create a specific tax (on casinos) to cover the citizen security plan. We hope to present it during the congressional sessions in August. Currently, we are considering the size of that tax.

As far as a tax reform: We are currently working to decide when we are going to do it, what size it will be and what will be taxed.

Any idea of a date when that will be decided?

I would hope that by the end of the year we will present it to Congress.

Changing gears, what do you think about the fluctuations in the exchange rate and how the Central Bank’s band system is handling them?

The exchange rate is fluctuating and the colón depreciated around 4 percent from December to the beginning of July. The exchange rate, as it is being managed, is a result of the Central Bank having much more control over monetary offerings. There are complaints that the volatility is very erratic, but when we compare it to the volatility of other countries in Latin America or Asia, it’s not very much.

People want to know, how does the exchange rate affect me? If you look at the growth rate of credit in colones and dollars, people are saying, “Well, maybe I shouldn’t go into debt in dollars.” The system is working as it should. The problem we have in Costa Rica is the syndrome of … instant gratification. The countries that use a similar financial system – Colombia, Chile, Israel – have taken five to eight years to develop their system. Here we want the crawling bands system to be perfected in two years.

If the Central Bank did away with the band system today, the exchange rate would stay about where it is now. The exchange rate is currently operating without band intervention.

Some people feel more comfortable with the bands because they believe they give the Central Bank the option of intervening when necessary. Currently, the Central Bank intervenes when the movements of the exchange rate threaten the economy.

I expect that the Central Bank will continue to make the right decisions. There may be small errors along the way, but I think that the Central Bank will know the right time to remove the bands.

The “dollarization” of Costa Rica is a recurring debate. Do you think that is a possibility?

(Shaking his head) No. That is not considered a cure for the country. Europe just demonstrated that it is very difficult for a central bank of one country to go in and manage the monetary policy of another country.

If we move to the dollar, what would happen? We would have a fiscal policy in which our own economic cycles would depend on the economic cycles of the North American economy. The structure of costs in our economy is completely different from the structure of costs in the U.S. This is an idea that wouldn’t be accepted here. It is something this country should not consider.

What are some of the challenges facing the Costa Rican economy?

There is not a scientific mindset in this country. We have to create a culture of innovation, a culture that continues changing. Things are changing very quickly.

What you were doing five years ago is entirely different from what you might be doing five years from now. Costa Ricans, by nature, are conservative. It is difficult for us to accept certain changes. It’s fine to say we are going to change, but nowadays the world doesn’t forgive you if you don’t change. If the agriculture sector must be more productive to compete, it has to happen immediately.

And learning how to adapt comes with research. We have to find ways to improve the way things are done here. We have to find ways to be more competitive.

To become a more knowledgeable society, we have to improve our use of technology and become more efficient in producing modern technologies. That is a very complicated challenge for Costa Rica. It is very complicated for the minimalist nature of Costa Ricans.

How do you feel about tourism? Will it continue to grow? And would that necessarily be positive for Costa Rica?

Of all the countries in Central America and the Caribbean region, Costa Rica receives the best press reviews. It seems that we will return to the growth level we had before the crisis. However, our principal market, the U.S., continues to struggle.

Many people are being financially careful, there is high unemployment and we are very expensive in comparison to the all inclusive Caribbean places. But, the Costa Rican Tourism Board (ICT) is doing more to bring more direct flights and airlines here.

There is always discussion about types of tourism. It is a valid discussion. How can we attract tourism and develop without destroying all the things that make Costa Rica special? When you look at some of the Caribbean destinations, typically, people wake up in the morning, sit on the beach all day long and get drunk at night. They do the same thing every day because there isn’t anything else to do. People come to Costa Rica to do other things. We can’t destroy those things, not only because they attract tourists, but because the country’s future depends on them.

The best description for Costa Rica was in a newspaper from Spain that termed it “A Disneyland for grownups.” The point of view was that the ecology and variety of natural adventures available here make it a unique destination. In a country so small, there is so much variety. In one week, you can see the Caribbean, the Pacific and go through Monteverde and Arenal. Those are the things we must never destroy.

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