Country’s National Debt Reduced Sharply
by Rod Hughes
Could it be that Costa Rica’s lawmakers and government departments are learning to live within their means? Such an unlooked-for miracle may account for the unmistakeable figures showing the national debt has been reduced in the past five years, to quote the daily La Nacion’s word, in a “spectacular” manner.
The period reported includes the term of former President Abel Pacheco and the first year of the administration of President Oscar Arias. Ironically. the Pacheco Administration spent four years trying to push through the Legislative Assembly a tax reform package aimed at just such a result only, to have it overturned by the Constitutional Chamber of the Supreme Court before it went into effect.
According to national authorities, the debt passed from 60% of the gross national product in 2003 to 45% last year. The International Monetary Fund put last year;s figure at 43%. Whoever is right about the latter figure, it is the greatest debt reduction since the debt renegotiation at the beginning of the 1990s. Those re-negotiations were brought on by the economic crisis during the Carazo Administration of the early 1980s when attending to the debt ate up nearly all the gross GNP. In 1992, that figure dropped to 60%, then stagnated for a decade.
It might be well to note that the crisis had been brought on by the worldwide fall of coffee prices after the Figueres and Oduber administrations had borrowed heavily. They had been counting on the high prices of coffee to pay the debt and President Rodrigo Carazo came into office just in time to be handed the bill. He then refused to listen to financial advisors and made a series of blunders such as trying to buoy up the national currency by using the country’s gold reserves. It should be noted that, since then, Costa Rica has diversified its exports to a point that only a world economic crisis could put the nation on the edge of bankruptcy again.
The IMF estimates that this year, the figure could fall to 40% of the GNP. What accounts for these happy figures? La Nacion economics writer Patricia Leiton suggest three important factors: 1. Increased national production, including exports. 2. Lower interest rates. 3. Governmental savings. Gross internal product, (the monetary value of goods and services produced by the country in a year) is up “significantly,” to used the reporter’s word. In the past three years it rose to 6.3% in 2005, to 8.8% in 2006 and to 6.9% last year.
So the government had larger income from taxes and less need to borrow. Couple this with a lowering of interest rates from 15% in 2005 to the current 5% and you have a drop in the cost of the debt. The capping achievement was a surprising curb in government spending, especially under President Pacheco’s austerity plan. Far from having to borrow to pay interest on the national debt as had been done in years past, the government actually created as surplus, something the World Bank had advocated Costa Rica accomplish.
Actually, the nation finds itself with a slight embarrassment of riches. Foreign investment has been so great that the Central Bank has trouble controlling the number of dollar floating around. The danger is overheating of the economy, resulting in runaway inflation. It is a dilemma economic officials would rather confront than that which faced the Carazo Administration.