Costa Rica: Bank Debt Repayment Would Bring Interest Rates Down

Mike Godfrey, Tax-news.com, New York

19 September 2000

Last week the Costa Rican President Miguel Angel Rodriguez announced that his government will pay off by early next year the Central Bank's decades-old debt of some US$801m. Taken together with improvements in the tax collection system and tighter control on spending, such a move could result in a lower cost of living for Costa Ricans and residents.

Bank debt is a veritable albatross around the neck of the Costa Rican government. However, President Rodriguesz proposes to pay it back using money from a US$250 million international bond sale earlier this year, in conjunction with new financing from Venezuela. The government hopes the measure will enable the Central Bank to concentrate on maintaining the value of the colón against the US dollar, make credit cheaper by reducing the mandatory deposits required of state and private commercial banks, and keep inflation down by eliminating the need for the Central Bank to sell bonds to cover its own fiscal deficit. Earlier this month Mr Rodriguez said: 'We’re heading in such a direction that the government will have to assume fiscal responsibilities for accumulated past debts.'

The Finance Ministry has already made the first US$256m payment, just days ago, and has pledged to pay off the balance in several months, once financing is secured from Venezuela. The debt stems from the monetary crisis of the late 1970's and early 1980's when the Central Bank sold "money stabilization bonds" to the domestic market in an unsuccessful attempt to bolster the rapidly devaluing colon. The bond debt was compounded when the country’s fiscal circumstances obliged the bank to loan money to various government institutions that later failed to repay. The accumulated debts have been accruing interest ever since. Finance Minister Leonel Baruch is to send a bill to the country's Congress that will authorise the government to gradually buy the US$641m of the Central Bank's money stabilisation bonds. The government requires the approval of Congress to pay off the rest of the debt.

What is also going to ease the predicament of the government is the Venezuelan financing, which has come about following negotiations at this month's Millennium Summit between the President Rodriguez and his Venezuelan counterpart Hugo Chaves, in response to President Rodriguez' call for relief from escalating oil prices. Chaves has agreed to partially finance Costa Rica's total oil purchase from Venezuela, which will spell an additional US$75m in credit annually at 2 per cent interest over 15 years.

Finance Minister Baruch believes the balance of the Central Bank's debt will be paid by early 2001 at the latest. He said: 'And when I say "pay," I mean pay with real money, not with paper.' President Rodriguez said: 'This decision is a very important part of how the current government is responsibly making decisions and taking positions to defend the economic stability of Costa Rica’s finances and currency.' Nonetheless, both are aware that the measure on its own will not achieve their goals of cheaper credit and a lower cost of living, which can only be realised with an accompanying increase in tax revenues and strict controls on spending.

President Rodriguez insists that the strategy to "swap" expensive "internal debt" – created when the government sells bonds to its state institutions to cover its budget deficit – for less expensive "external debt" through the sale of bonds on the international market, will reduce the government’s overall interest payments, freeing up money for spending on projects that improve the quality of life, such as roads, health and education. Baruch estimates that a tight fiscal policy and the Central Bank’s debt purchase could result in interest rates up to a point or more lower. Economists have hailed the government's announcement but have warned repaying the debt will not do much good without the tighter spending controls. One commented: 'It all depends on whether the government can maintain fiscal stability. If it doesn’t, the debt will become so large that nothing will have been achieved by paying off the Central Bank debt.'

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