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CAFTA, Tax Reform on Businesses’ Wish List

Part one in a two-part series on the economic outlook for 2007


As Costa Rica’s businesses pinned up their 2007 calendars, leaders said they are happy with the way things are looking for the economy. Costa Rica began the year with healthy economic growth that reached nearly 7% in 2006.

Still, business leaders are crossing their fingers that the Legislative Assembly will approve a long-discussed tax system overhaul and the controversial Central American Free-Trade Agreement with the United States (CAFTA). The country is the only signatory that has not yet approved the pact.

“The economy is doing quite well, but we still need to get the tax package and CAFTA passed, because there is business uncertainty in that respect,” Lynda Solar, executive director of the Costa Rican-American Chamber of Commerce (AMCHAM), told The Tico Times.

As the administration of President Oscar Arias heads into its first full year, its priorities, including the U.S. trade agreement, the complementary agenda and massive fiscal reform, promise to give legislators a full plate as the business sector watches attentively from the sidelines.

The business community also wants the government to cut down on red tape, which some say became more stifling in Costa Rica last year.

Meanwhile, the Central Bank will continue to focus on bringing down Costa Rica’s inflation rate, which dropped from 14.07% in 2005 to 9.43% last year, while the tourism industry looks for new ways to climb out of its growth slump.

Foreign Trade Minister Marco Vinicio Ruiz has said he hopes CAFTA is approved by April of this year so the Trade Ministry can focus on negotiating an association agreement with the European Union. Talks between Europe and Central America to strike a free-trade agreement and increased political cooperation between the two regions are set to begin early this year.

Ruiz said the ministry hopes to boost Costa Rica’s $7 billion in exports to $18 billion by the end of President Arias’ term in 2010.

“We can’t do that without CAFTA approved,” he said.

He said the trade ministry will also be looking for ways to attract an additional $1 billion in foreign direct investment this year.

The ministry plans to help formulate a policy framework designed to attract foreign investment by creating new incentives. By 2010 the country’s tax-exempt “free zones” – which account for nearly half of Costa Rica’s foreign direct investment, more than half of its exports, and some 40,000 jobs – will be stripped of their tax incentives under World Trade Organization (WTO) rules.

Ruiz said the ministry also aims to finish trade agreement negotiations with Panama, will continue to seek trade agreements with Taiwan, Colombia and Ecuador, and will look for new trading partners through institutions such as the Asia-Pacific Economic Cooperation (APEC), a group of 21 Pacific Rim countries that meet in forums to improve economic and political ties.

Also at the top of businesses’ lists, Solar said, is that the government follow through with plans to cut down on red tape.

“It’s a huge problem. It’s one of the main issues for a lot of companies,” she said.

Speaking to reporters in a December press conference, Chamber of Industries president Jack Liberman said the government’s push to go digital and become more computer-friendly will help simplify bureaucratic processes, known here as trámites.

In the World Bank’s September “Doing Business 2007” report, which ranks countries based on the regulatory costs they apply to businesses, Costa Rica dropped from 99th place to 105th place, in part because of the fact that Costa Rica put up more regulatory barriers to starting business in 2006, the report said (TT, Sept. 22, 2006).

Ruiz said he is particularly interested in seeing the notoriously bureaucratic General Immigration Administration follow through with announced plans to reform the system and eliminate red tape (TT, Dec. 8, 2006).

Solar said AMCHAM would like to see the government settle the score with Alterra Partners, the airport administrator that was contracted to manage the JuanSantamaríaInternationalAirport outside of San José. A three-year-old financial dispute over the company’s agreement with the government continued in December when the government announced it had begun the process of rescinding the 20-year contract (TT, Dec. 22, 2006).

“If a project like Alterra doesn’t work, it sends a message to companies looking at coming here and getting into projects with public works,” Solar said.

She said it was good to see inflation decrease for the first time in years, and hopes the Central Bank can continue its policy of inflation reduction.

In December, Central Bank president Francisco de Paula Gutiérrez told reporters that the implementation of a new exchangerate system in which the colón was liberalized (TT, Oct. 20, 2006) was the bank’s biggest achievement of 2006.

He said the Central Bank’s biggest challenge this year will be to follow through with its plans to further reduce Costa Rica’s inflation rate.

For this to happen, the Central Bank will need to finance its $2 billion debt, which will require tax reform.

“We can’t keep financing our losses by taxing people with inflation,”Gutiérrez said.

Next: As tourism growth slows, industry leaders eye ways to increase the quality of visitors’ experiences here in 2007.



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