San José, Costa Rica, since 1956

Chinchilla signs tax laws, announces loan

From the print edition

Tuesday was a good day for President Laura Chinchilla and her National Liberation Party government. 

After a brief speech by Finance Minister Edgar Ayales, Chinchilla signed three tax and finance bills into law. The first two, the Fiscal Transparency Law and the Law for Strengthening Tax Administration, are aimed at providing better government access to taxpayers’ financial information, closing tax loopholes, putting in place stronger sanctions to force better cooperation with tax authorities, and getting Costa Rica off the Organization for Economic Cooperation and Development’s (OECD) “gray list” of countries not up to First World standards in international sharing of tax information. 

The last of the three new laws is the Eurobonds Law, which will allow the Costa Rican government to issue up to $4 billion in dollar-denominated 10-year bonds, to obtain financing from the Eurodollar market.

Once published in the government newspaper La Gaceta, these three laws will become the government’s “Plan B” on tax and fiscal reform. They were meant as complements to a tax package that failed in April of this year, in the wake of a personal tax scandal involving then-Finance Minister Fernando Herrero, which cost him his job. Ayales, his replacement, quickly reorganized the government’s fiscal strategy and got the three laws back on track.

At a press conference on Tuesday, Ayales was generous in praising his staff, who had nearly completed the three bills before he became finance minister. Ayales regretted the failure of the main tax bill, which would have increased government revenues to reduce the fiscal deficit. 

Costa Rica’s 2013 government budget is now under discussion in the Legislative Assembly, with a deficit of about 5 percent of gross domestic product for the third year in a row. But the finance minister considers the Eurobonds Law, which will allow Costa Rica to refinance its maturing dollar-denominated debt at record-low international interests rates, an extremely useful tool. Substituting low-interest dollar financing for the government should help lower colón interest rates, which have increased due to competition of government bonds with private-sector issuers in the local financial markets, analysts said.

Chinchilla expressed satisfaction that the Fiscal Transparency Law and the Law for Strengthening Tax Administration will open the door for Costa Rican incorporation into the OECD, an invitation-only global development organization founded in 1960 by the United States, Canada and 18 European countries. 

Through the years, the OECD has evolved into a prestigious club of governments that emphasize public-sector transparency and accountability. Mexico, Chile and Turkey have been admitted from the developing world. Invitations to join the OECD are low-key and never formal until membership is approved. The two tax laws enacted this week will remove a gray market flavor to this country’s tax administration, which should strengthen Costa Rica’s OECD bid, officials said.

A boost to infrastructure

Also on Tuesday, Vice President Luis Liberman, back from a trip to the People’s Republic of China, had good infrastructure news for Costa Rica. The Chinese government has agreed to finance a widening of a 106-kilometer stretch of Route 32, the highway linking San José and the Atlantic port of Limón. 

The two-lane stretch of highway between Rio Frío and Limón for years has been inadequate for the heavy container truck traffic generated by 80 percent of Costa Rica’s exports and imports channeled through Limón port. 

The government, constrained in infrastructure spending by its fiscal deficit problem, negotiated the project as the best way to address what has become both a commercial and public-safety problem. Many highway accidents have resulted from frustrated drivers trying to pass heavy container trucks on this stretch of highway. That problem should be much reduced by its widening to four lanes.

The project is budgeted at $400 million, to be financed over 20 years at a favorable 3.5 percent interest rate. China will not only finance the highway improvement, but also will build it on a turnkey basis with Chinese construction companies. Engineers from the Public Works and Transport Ministry and the National Highway Council have committed to completion of the technical specifications and an environmental-impact analysis by Oct. 8. 

Lawmakers must now approve the Chinese loan for the project to move forward. The government’s plan is to present it to the assembly during extraordinary sessions in December, when the executive branch sets the legislative agenda. Liberman said that Limón’s lawmakers have already been briefed on the project, and that they are committed to its approval.

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