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Costa Rica Grows But Fiscal Deficit Still A Worry

by Mike Godfrey, Tax-News.com, New York

29 December 2003


Growth in Costa Rica this year is expected to reach 5.6%, the best performance since 1999. Total exports grew 15% from $4.41 billion in 2002 to $5.19 billion in 2003, including exports from duty-free production zones of $3.08 billion, up 25% on last year.

Chip manufacturer Intel is a major contributor to this good export performance, with a large, state-of-the-art plant which is set to receive a further US$110m of investment after Intel decided to locate production of next-generation chipsets in the country. "This is a very positive and important decision for Intel Costa Rica that reinforces the plant's strategic importance for the company," said Bill Abraham, General Manager of Intel Costa Rica. "The plant has shown great discipline in increasing productivity, while at the same time managing to cut costs and maintaining an excellent safety record."

The authorities however worry that the country's development is lop-sided. "The economy's outcome in 2003 was interesting," said Francisco de Paula Gutiérrez, Central Bank President. "I am satisfied, but not happy. It was a year of significant growth. However, that growth did not distribute itself evenly throughout the different sectors of the economy."

Business leaders argue that the recent wave of economic growth includes only a small fraction of the country's businesses and that most companies - nearly 95% - depend on the local market, which has not showed signs of recovery. However, a survey conducted by the National Statistics and Census Institute (INEC) reported that Costa Rica's poverty rate dropped 2.1% during the last year to 18.5% - its lowest level in nearly two decades. President Abel Pacheco heralded the results, calling them proof that his campaign against poverty was succeeding. Inflation remained stable, but unemployment and the fiscal deficit continue to be major sources of concern. General unemployment grew from 6.4% last year to 6.7% this year.

The large fiscal deficit in Costa Rica is fuelling doubts over the country's ability to service its debt. However, austerity measures at public institutions and the Emergency Tax Plan approved by Congress last December helped reduce the deficit from 5.4% of the country's gross domestic product (GDP) last year to 4.3% this year. Nonetheless international credit rating agencies Moody's and Standard and Poor's lowered the country's ratings in April. The Central Bank's total foreign currency reserves grew during the year, totaling $1.74 billion in November. However, $200 million is needed in January to pay a series of Brady foreign-debt relief bonds.

The government is proposing a Permanent Fiscal Reform Package, which will be debated by Congress early next year. If approved, the plan would increase government revenues and reduce the deficit to 2.65% of GDP. Finance Minister Alberto Dent promises that additional revenue generated by the tax package would be used to reduce the country's growing foreign debt.


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