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Thursday, May 23, 2024

Borrowing Worries Some as Debt Nears $2.5 Bil.

As Costa Rica prepares to take on nearly $2.5 billion in debt to jump-start a faltering economy, critics from both ends of the political spectrum are questioning whether the country will ultimately benefit, or struggle to even be able to pay it off.

The World Bank recently offered Costa Rica a $500 million loan, the latest in a series of loans from international banks to build public works projects and strengthen the country’s financial system.

For President Oscar Arias, these loans are imperative to create jobs and bolster the economy. Some lawmakers and economists are backing his argument, but others remain skeptical of the loans and the lenders.

“We’re swiping a credit card we can’t afford to pay,” said legislator Luis Barrantes, Libertarian Movement Party head.

Terms and Conditions

The vice president of the World Bank for the Latin American and Caribbean region, Pamela Cox, in an interview with The Tico Times, seemed confident that Costa Rica can handle the repayment of the loans, and she was adamant that World Bank loans do not include hidden or unwanted conditions imposed on the borrower.

The $500 million to help deal with the financial crisis is a Development Policy Loan, which according to Cox is different than the structural adjustment loans the World Bank has offered in the past.

“The Development Policy Loan is where the government has a program in certain areas, it has its policies and we sit with the government to evaluate those policies,” said Cox. “On the basis of that we make the loan.”

Cox emphasized that the World Bank does not add conditions on the loans, other than the obvious promise from the country to repay them and not misuse the money. The bank will look at the package proposed by the borrower government, then evaluate it to see whether it’s appropriate to finance before presenting it to the bank’s board for approval.

The World Bank wants to make sure that the proposed policies are sensible and that the government will be able to meet the goals it sets.

“We like to see that the government has begun to implement the policies that it’s talking about with us,” said Cox. “It’s not just, ‘this is our idea and please lend us some money and maybe in the future we’ll implement.’ No, these are policies they already have in place that they’re implementing.” “We don’t put conditions in that sense,” reiterated Cox.

Lawmaker José Merino of the leftist Broad Front Party has no trust in international financial institutions such as the International Monetary Fund or the World Bank, nor in their ‘‘no conditions’’ guarantee.

“They oblige countries to dismantle their businesses and then privatize them,” said Merino. “They are not to be trusted because of the reforms they want to perform in the countries they lend to.”

Merino said that all World Bank loans come with conditions, and he’ll believe Cox’s declaration of having no conditions when he sees it “in hard copy on the deed.” He said that accepting all kinds of loans from outside sources is not the way to solve the problem.

“I’m nervous the government is using the excuse of the crisis to allow Costa Rica to accumulate debt, with the blessings of some economists,” said Merino.

Leiner Vargas, an economist and vice dean of development at National University (UNA), both agree that Costa Rica is in need of the loans and will have no trouble reimbursing the World Bank.

“Costa Rica is different than most other countries for whom the World Bank has provided loans,” said Vargas, “and in terms of repayment, I think we’re better off. We’re better qualified by having political stability and [more favorable] macroeconomic conditions.” Castro mentions that the loan may be even more beneficial if the U.S. dollar loses some of its value permanently.

“Though the U.S. dollar will most likely bounce back again, I don’t think it will be worth quite as much,” said Castro. “And the potential of having to repay the loan in dollars may turn out favorably for the Costa Rican economy.”

Finance Minister Guillermo Zúñiga pointed out that Costa Rica has decreased its public debt dramatically in the last three years, giving the state freedom to take on more loans. In 2008, the public debt was estimated at 38.4 percent of GDP, down from 56.3 percent in 2005, Zúñiga said.

How Much Is Too Much?

With $65 million already on the table, another $72.5 million from the World Bank pending to revitalize the port city of Limón and the $500 million offered last week for the crisis, Costa Rica could be in debt to the World Bank for decades to come, caution some.

Isaac Castro, chief economist for financial firm Interbolsa, said Costa Rica may not even need the all of $500 million loan, since the current global economic crisis will affect the liquidity of the U.S. dollar internationally, and the simple deceleration in the rhythm of imports will work as a shock absorber. He said the need for imports will decrease and the availability of goods for exports will adjust proportionately.

In contrast, Vargas thinks the loans aren’t sufficient to address the severity of the crisis, which has yet to fully hit Costa Rica.

“I actually don’t even think that together the World Bank loans will be enough,” said Vargas. “It may provide short-term help, but overall I think we’ll need to ask for more money from elsewhere.”

The Inter-American Development Bank has already stepped up to the plate. The regional bank has offered $850 million for infrastructure, $500 million for the Central Bank and $500 million for ICE (TT, Feb. 6).

Libertarian head Barrantes feels Costa Rica’s government is letting the loans get out of hand.

“We’re putting all of Costa Rica at risk,” said Barrantes. “Between all these loans, there’s almost $3 billion. Costa Rica is in a recession, we’re dealing with a crisis and I think we’re handling this very irresponsibly.”

Vargas said the main aspect of the crisis keeping everyone on their toes is the amount of uncertainty.

“With the crisis coming from abroad instead of from within Costa Rica,” said Vargas, “It’s not as simple a situation to predict.”

In 1982, Costa Rican entered into the worst economic crisis in its history when it defaulted on a series of international obligations. At that time the country owed $4 billion, which was the highest per capita debt in the world (TT, Dec. 22, 1982). The crisis caused the colon to collapse and inflation and unemployment to soar.



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