U.S. Crisis Will Affect
Growth, Exports, Tourism
in Costa Rica, Banco
Central President Says
Interview with Francisco
de Paula, president of
the Banco Central
SAN JOSÉ (IPS) -
The possibility of a
recession in the United
States is already
causing repercussions in
Costa Rica, where
exports and the value of
real estate in tourist
areas are expected to
contract, according to
the president of the
country’s Banco Central
de Costa Rica (Central
Bank), Francisco de
Paula.
Like several other Latin
American countries,
Costa Rica has signed a
Free Trade Agreement
with the United States,
its main trading
partner, but the
treaty’s entry into
force depends on the
Costa Rican parliament’s
approval of certain
complementary laws.
Costa Rican officials
will have to take
measures to weather the
turbulence of
international financial
markets, triggered by
the bursting of the U.S.
housing market bubble.
However, Costa Rica may
not be as severely
buffeted as other
Central American
countries, because of
the "diversification" of
its economy, de Paula
said in an interview
with IPS correspondent
Daniel Zuera.
U.S. Treasury Secretary
Henry Paulson admitted
last week that the U.S.
economy is going through
a phase of "sharp
decline," although he
avoided the word
"recession", which has
already been used by a
number of private sector
analysts.
The U.S. Federal Reserve
lowered its interbank
lending interest rate
from an annual three
percent to 2.25 percent
in an attempt to
reinvigorate the
economy. The markets,
according to experts,
were hoping for an even
larger rate cut.
IPS: How does this
affect the Costa Rican
economy?
FRANCISCO DE PAULA: The
crisis does affect us.
There are already some
signs, shall we say, of
slowdown. It will be
very difficult to avoid
its effects, from the
point of view of
external demand.
Fortunately we are in a
position to face it, as
we have ample reserves.
It would be unrealistic
to think that we could
escape the effects of
such a complex
situation. Demand for
our export products will
fall, and we shall have
to see what the impact
is on the tourism
industry.
There is a potential
element of compensation,
in that U.S. tourists
are finding it very
difficult to travel to
Europe or Asia because
of the depreciation of
the dollar. There could
be a change in direction
of tourist traffic, and
Costa Rica is
well-positioned to
attract visitors.
But another concern is
that, if the recession
bites deep, many people
in the U.S. may decide
to postpone their
vacations. One question
is how much that might
affect real estate
markets, and especially
construction, in coastal
areas in Costa Rica.
IPS: Will Costa Rica
have to follow the
Federal Reserve policy
of cutting interest
rates?
FDP: We are within the
U.S. economic sphere of
influence, although we
have different rhythms,
levels and priorities.
The United States is
more concerned with
growth than with
inflation. For us, it’s
the reverse.
But our interest rates
policy cannot be
divorced from that of
the United States. The
Federal Reserve’s
decisions directly
affect us.
IPS: How would you
describe the performance
of the Costa Rican
economy?
FDP: In the past few
years it has performed
very encouragingly, with
strong growth. In 2007
the economy grew by 6.8
percent, and by 8.8
percent in 2006, with a
dynamic export sector
and a high proportion of
foreign direct
investment, which have
financed the country’s
needs for foreign
currency reserves. The
fiscal situation has
improved. We predict
economic growth of about
3.8 percent in 2008.
In 2007 the open
unemployment rate was
4.6 percent, the lowest
in recent years. Poverty
fell by three percentage
points and now affects
16.7 percent of the
population. I see a
dynamic economy, with
growth in several
sectors, and which is
not powered by a strong
price increase in a
single commodity, as in
the case of other
countries in the region.
IPS: What is the main
concern?
FDP: Inflation, which is
still high. The forecast
for 2007 was an eight
percent rate, but by
year-end, inflation
stood at 10.8 percent.
We have the
vulnerabilities of any
Central American
economy: dependence on
imported oil and on
certain commodities
which have risen in
price and hit us hard.
We import 100 percent of
our wheat, and bread is
a staple food.
The impact of commodity
prices prevented us from
meeting the Central
Bank’s inflation
targets. Last year we
were on target for eight
percent annual inflation
until August, but in the
last four months heavy
external shocks knocked
us off course.
IPS: Your predecessor,
Eduardo Lizano, used to
say that the Costa Rican
economy "does the
doggy-paddle," because
it doesn’t drown, but it
barely keeps its head
above water. Has it
branched out into a more
elegant swimming style?
FDP: The "doggy" has
been doing a lot of
practising. We can take
some important
decisions. The exchange
rate system’s transition
process is difficult. In
October 2006 it changed
from a system of
mini-devaluations to one
of exchange rate bands,
with the goal that our
currency, the colón,
will eventually float
freely with respect to
other currencies.
There were some
temporary hitches, but
the transition will
allow the economy to
make much more progress.
The improvement in
public finances,
especially in tax
collection, will help a
great deal. But there is
still much to do, for
example in tax reform.
IPS: How well have the
exchange rate bands
succeeded, and when will
the colón be freely
floated?
FDP: It has been quite a
change for us, because
previously we had 22
years of the
mini-devaluation system.
The transition was
smooth. Floating the
colón is part of a
project to control
inflation, a different
way of setting monetary
policy.
One of the requirements
is that the exchange
rate be flexible.
Flexible exchange rates
are not an aim in and of
themselves, but are one
of the instruments we
need in order to change
the way we implement
monetary policy, and to
achieve better success
in lowering inflation,
which is our main
concern.
IPS: Is the present boom
due to the inflow of
speculative capital? How
might that affect the
country?
FDP: It’s very difficult
to measure. Our estimate
is that 1.88 billion
dollars entered the
country in 2007 as
foreign direct
investment. That more
than covered the deficit
in the current account
of our balance of
payments. Of course,
there is always concern
about the volume of
capital of a more
speculative nature,
which generates
"bubbles" of demand,
especially consumer
demand.
One of the issues that
concerns me is the
growth of credit in the
private sector,
especially over the past
year. We must be
careful, because that
could lead to situations
like the one we are
seeing in the United
States, with a crisis
resulting from a strong
expansion of sub-prime
mortgage lending, and
consumer spending
financed by credit
cards. |
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