Costa Rica Must Control Debt Spending Says Central Bank President

by Mike Godfrey, Tax-News.com, Washington

26 March 2003

Costa Rica's Central Bank president Fransisco de Paula Gutierrez has warned that the nation's public debt could spiral out of control if the government does not start to rein in public spending. Failure to do so will have serious consequences for the country's traditionally robust economy, the Central Bank chief revealed.

Since taking power in May last year, Costa Rican President Abel Pacheco has presided over a dramatic increase in government spending which has seen the public debt level increase to 5.4% of GDP. At the end of 2001, the fiscal deficit stood at 2.9%. Economists warn that it could reach 6% this year if nothing is done to curb spending.

One by-product of the alarming rise in the budget deficit is that it could jeopardise the government's planned $250 million bond issue next year, the Central Bank governor told the Reuters news service in an interview. He said that international players in this market start to get nervous when debt rises above 3% of GDP, fearing the government's inability to service debt payments. The Costa Rican authorities have already sold $450 million in paper debt as recently as January to tackle the $4.2 billion domestic debt.

Though the economy grew at a steady 2.8% in 2002, largely due to public spending projects, Paula Gutierrez argues that this will not sustain growth in the longer term, and indeed, is likely to lead to economic disaster. The country will be paying more and more on interest payments he said, leaving less to spend on vital infrastructure projects such as education and roads. This is unlikely to inspire foreign investors to put money into the country.

Nevertheless, the Central Bank president is optimistic that the government will attain its targets for public spending over the next couple of years. He expects debt to fall to 3% by the end of 2003, and 2% by the end of 2004.

However, such cut-backs will inevitably come at a price. This will initially be in the form of a new tax package, given the green light back in December. It includes 'sin' taxes and luxury taxes, levies on gambling, and taxation on banks maintaining an offshore presence. The total package is expected to increase government revenues by $450 million annually, or 3% of GDP. Public institutions have also been made to recognize that they will have to economise, and many public projects will probably be trimmed, privatised or postponed altogether, including a $35 million cancer research hospital.

The Costa Rican tax collection base represents only 13.5% of GDP. This stands well below the 30% average of most industrialised countries.

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