Despite Early Optimism, Economy Was Mediocre

PREDICTIONS had cast 2004 as theyear of “Great Expectations” for the CostaRican economy, but with the passage ofmonths, “Waiting for Godot” became amore fitting literary metaphor, as thepromised achievements never arrived.Exports and tourism showed substantialgrowth. However, skyrocketing oilprices, budget woes, an increasing fiscaldeficit, rising inflation and a third year oflegislative gridlock for the government’sambitious tax reform dashed hopes for substantialprogress and created a lacklusterfinancial outlook for 2005.OPTIMISM was the word of the hourin January. The Central Bank predicted4.4% growth, 9% inflation and stable oilprices of approximately $28 per barrel, andmany believed the passage of thePermanent Fiscal Reform Package,designed to levy new taxes and improveexisting tax collection to increase governmentrevenues, was imminent.Strong foreign investment was alsoexpected: $556 million, 6% less than 2003but higher than the average during the pastseven years. A February survey of businessexecutives revealed high levels of confidencefor 2004 based on strong fourth-quarterperformance the previous year.BY March, however, doubt hadentered the picture. Legislators’ deadlinesfor last-minute changes to the tax plan,which had already spent 16 months underdebate in the Legislative Assembly as2004 began, were pushed back monthafter month, prompting ex-PresidentOscar Arias to invite Finance MinisterAlberto Dent and other leaders to hishouse to discuss the plan. While themeeting was designed to speed up decision-making about the proposed taxes, itultimately swamped the plan in still morecontroversy, eliciting scathing remarksfrom uninvited legislators who said theprivate negotiations undermined thedemocratic process.Meanwhile, the Central Bank, whiledownplaying concerns about inflation bysaying price increases were isolated to specificproducts and did not represent overalltrends, expressed doubt about meeting itsJanuary goals because of high oil prices,which by March hovered between $32-35.PANICKY investors withdrew nearly50% of the money in U.S. dollar investmentfunds in April and May when thethreat of rising U.S. interest rates resultedin dropping Costa Rican bond prices.According to the Superintendence ofSecurities (SUGEVAL), total losses surpassed$123 million.To help stabilize the drop in debt bondprices, the bank bought back ¢25 billion($57.9 million) of the bonds, and SUGEVALtook out a full-page advertisementin local dailies to reassure investors.The Central Bank took further stepstoward stability in July. “Given the choicebetween stability and growth, we choosestability,” said bank president Francisco dePaula Gutiérrez, announcing revised projectionsof 3.9% growth and 11% inflation,and stability measures including increasedinterest rates and colón devaluation (from¢0.16 to ¢0.17 per day).He said the growth rate was revisedlargely because of lower-than-expectedhigh-tech exports.CINDE announced it expected $450million in foreign direct investment, down$106 million from the January estimate.WITH these sobering figures in mind,the Finance Ministry caused a stir with itspreliminary 2005 budget, which includeddrastic cuts to social spending. While thecuts were scaled down in later versions,the budget remained controversial for theremaining months of the year, althoughthe assembly passed a revised version,which reassigned some of the funds originallydestined for interest payments on thenational debt to social spending, in recordtime in November.A revision will apparently be necessaryin January, since the ConstitutionalChamber of the Supreme Court (Sala IV)ruled in December that more funds must beassigned to reducing poverty.Another Finance Ministry controversyprompted angry municipal leaders to file acomplaint with the court, saying the ministrywithheld roadway funds owed to themunicipalities. The Sala IV ruled in favorof the leaders, and the ministry turned oversome of the funds in November.As for the beleaguered tax plan, whichfaces an uncertain future in the assembly in2005, its most vocal proponent, PresidentPacheco, is apparently seeking divine helpto ensure the plan’s approval.When asked Dec. 14 what he plannedto ask the Christ child for this Christmas,Pacheco responded, “Of course I will askfor the tax plan.”THE good news for 2004? Exportsincreased an estimated 2.4%, although ifhigh-tech giant Intel, which experienced adrop in exports this year, is excluded, thefigure is 10.7%, according to the CentralBank. The tourism sector experienced anoutright boom, with the number of visitorsto Costa Rica increasing by an estimated16% this year.Gutiérrez said Dec. 8 that while finaldata for 2004 will not be finalized untilearly in 2005, the Central Bank estimates“reasonable growth” of 4.2%, only 2%lower than its January projection.High oil prices decreased by year’send, down from a record peak of $45.47 inOctober for the Organization of PetroleumExporting Countries (OPEC). Estimatesplace 2005 prices at around $28-30.However, from January-November,accumulated inflation rose to 11.89%,according to the Central Bank, and Gutiérrezestimated a 2004 total inflation of 12.5-13%.LOOKING back, most analystsdescribed the year in mediocre terms andagree the problems that faced the economythis past year, especially the squeezeplaced on government spending by thenational debt, disagreement on the tax planand CAFTA, and high interest rates, seemunlikely to disappear in 2005.