RETURNTO ~~~~~~~RESTR ICTED RE rURN TO L C ?Report 'No. WH- 18 5a REPORTS DES FILECOPY WlTHIN | ONE WEEK X This report was prepared for use within the Bank and its affiliated organizations. Public Disclosure Authorized They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELQPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized CURRENT ECONOMIC POSITION AND PROSPECTS OF COSTA RICA Public Disclosure Authorized November 8, 1968 Public Disclosure Authorized Western Hemisphere Department CURRENCY EQUIVALENTS Cbsta Rica has had a dual exchange market since January 1967. The official rate, at which about half of all exchange transact-ions- are made, is..U. S. $1 =¢6. 6Z (colones); 1 Colon = $0. 151. The free nmarket rate, which fluctuates, was quoted in June 1968 at U. S. $1 - ¢7. 80 (l(Z = $0. 128). TABLE OF CONTENTS Page No. BASIC DATA i -ii MAP SU>DIARY AND CONCLUSIONS i - iii I. LITRODUCTION 1 II. RECENT DEVELOPMENTS (1960-1967) 2 A. Economic GrowTth, Savings and Investment 2 Agriculture 3 Industry 5 B. Public Finance and Investment 6 Central Government, Finances 7 Public Investmnt 11 C. MIoney and Credit 13 D. Balance of Payments 13 III. OUTLOOK FOR 1968-1973 16 A. Economic Growqth 16 B. Public Sector Investment and Financing 17 Investment Plans 17 Financing the Program 20 Central Government, Finances 22 C. External Finance 26 D. Conclusion 2B Statistical Appendix This report is based on the findings of a mission to Costa Rica during March/April 1968 composed of M4essrs. Klaus Huber and Eugenio Lari, and discussions held subsequently with representatives of the Costa Rican Government in September, 1968. BASIC DATA* Area: 51,0C0 square kilometers Population (1967) 1.54 million Density per sq. km. 30 Rate of growth p.a. (1960-1967) 3.9 percent 1966 1967 1968 GNP, current prices (0 million) 4150.0 4465.0 4800.0 Per capita (US$) 419.0 436.0 450.0 GDP, 1962 constant prices (6 million) 3900.0 4164.0 4442.0 Real growth percent 5.4 6.8 6.7 Percent of Current GNP Gross fixed investment 20.7 21.2 21.9 Consumption 85.1 87.2 86.5 Balance of payments current account 6.0 7.9 6.0 deficit Gross savings 16.1 13.9 15.6 Central Government revenues 12.6 12.1 13.1 Central Government expenditures 16.7 17.0 16.2 GDP, current prices (9 million) 4243.0 4588.0 4964.0 Sectorial Origin (vcent): Agriculture, mining 24.2 23.7 n.a. Manufacturing 18.6 19.2 n.a. Construction 4.8 4.6 n.a. Utilities 1.6 1.5 n.a. Transport and communication 3.8 4.1 n.a. Government services 10.7 10.8 n.a. Other 36.3 36.1 n.a. Money Supply (O million) 592.9 792.3 850 Change in percent 4.4 33.6 7.3 Price Movements (change in percent) Wholesale prices 0.4 3.1 n.a. Consumer prices 0.2 1.2 n.a. GNP deflator 2.0 1.3 1.5 * 1967 data mostly preliminary; 1968 projected. - ii - 1966 '967 1968 Central Governmnent Finances (% million) Current revenues ! 023. 541el 63090 Current expenditures 525.7 576.7 609.0 Surplus on current account -2.7 -35.6 233.0 Capital expenditures 166.2 186.1 -233.0 Overall deficit -168.9 -221.7 -202.0 Public Sector Savings ( million) 74.5 49.0 114.0 Percent of GDP 1.8 loO 2.4 Balance of Payments (. million) Exports of goods and services 164.3 173.2 20353 :Lnports of goods and services -216.5 -232.0 -2.5 Transfers (net) 7.8 8r 2 8.5 Current account balance -44.4 =5o06 -33.7 Concentration of ComruditEports (percent) Coffee 38.8 37°5 33.9 Bananas 2165 21.2 26.7 Heat 4.0 6.o 6.1 External Public Debt ($ million) I4ediurx and long-term, total out- - standing as reported by IBRD 140.1 145.3 167.5 of w-;hich undisbursed 39.2 3365 43.0 Annual debt service: medium. - and long-term 28.4 21.9 22.8 short, medium and !ong-term 56.o 52.7 28.2 Debt service as percentage of exchange earnings on goods and services: mediun.i and long-term 1765 12.3 11.9 s,mrt, mediun and long-term 34.6 29.6 14.8 Fc,reirn Exchange Reserves ($ million) Dec. bec. Aujg. Total assets 21.6 28.3 32.9 Net position -14.0 11.0 19.6 L AKIF CAKODUA0 N 'I C A U A z ° / 1 ab o gs--^ 1l\ COSTAD RICA '\\\ [)t oVPAWA j\, ( 7 -;2--9 - HIGHWAY NETWORK '<' A ..... ~~~~~~~~~~~~~~~~~~~~~~~~~A* ; s ZONE 4 A ; : / Z O N E 5 ' ' 8. -} ]~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Z <~~~~~~ - 9~~~~~~~~~r- _ . ED -7.: 50K0t SEE INSET*,AFORO u ; ~~~s~sssss DETAIL 0 5 oSOSAS /'D.,sZONE N 0 ~~~~~~~~<uZ D 5 8 - LE GAR_ STO DOYANGO = SI r ~~~- -5L -00 0-UDRCD TUT'1(f>OsIOR *~~~~~~~~~~RRERONDA A COSOSO ASPHA.arsT11IlLT PAEL)'AH' ArtX 550.05.0~~~~~~~LA AG~~~~~RECI. PIEDRAS -REL -AT-. - UN4DERC2ISTRUCT1 F ~ ~ ILL-~ COLON~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~-EMEI4rMPROVEMEIJOT ) "~ - \ GANENTIA\ A; EK DARBAA FEEDE2RROADSCOIISTPUCTED WITH IDB PARrICI PAT[OA]f; - WE \\HER DIA \~~~~~~~~~SS. SNISIDRO DECO0 1) -ND- - . PLANN4EDROADS(LLING RAN4GE PLA;I)S TAAa.N = _ L OGA C STLIC 10;%STIL I RRE5 I1MOt4iROAD NEDD8as JOS_MAINT'ENIAN'CE.\ vltLa cotos Z.*NE SANULM TsS z DESA.P AAD TOS O MAINTLIAN0CE4CA SHOPSA T ALTO , 6 _ _ -) < --+eht+fs RAILWA Y = _° M0 K,.I LOMEATERSPURISCAL OR R SOI OCTOBER1968 IBRD 2377 SUIKTsAY ;ND COIICLUJSIOITS 1. Throughout the 1960's, the Costa Rican economy grew at a rapid pace. Recovering from a major decline in the late 1950's, exports pro- vided the momentum for growth. The recovery of traditional export crops was accompanied by rapidly rising m-anufacturing exports to the rest of the Central American Common IMarket (CACM), which accounted for over half of the increase in exports. However, persistently widening fiscal deficits throughout the period and permissive credit policies exerted mounting pressures on the balanzce of payments and led to rising external debt and declining exchange reserves. A dual market exchange system was introduced early in 1967, which is still in effect; the free market rate covering abGAt one titirdof all exchange transactions has depreciated considerably. 2. The fiscal problem - the overriding factor in Costa Rica's finan- cial difficulties in recent years - was mainly caused by a rapidly deteriora- ting Central Government savings performance in the face of increasing in- v_estment. The deteriorating savings performance reflected: (i) rapid in- creases in current expenditures, partly due to rapidly rising social expen- ditures as a result of a high rate of population growth; (ii) increasing erosion of the tax base due to rising duty-free regional imports and prolif- eration of industrial tax incentives; and (iii) inadeqjuate revenue effort because of the inability of the Government to persuade the majority opposition to pass tax legislation through Congress t.hen needed. Substantial tax measures uere passed, but they were always too late and, therefore, inadequate since in the meantime, expenditures continued to grow rapidly. The deteri- oration of the fiscal situation markedly accelerated in 1966 and 1967, when Central Government deficits were almost three times as high as in the irmmediately preceding years. As balance of payments problems mounted and external credits became more difficult to obtain, these deficits have since 1966 been financed mainly by the banking system, As a result, the public sector absorbed about 50 percent of total credit expansion in 1966 and 1967 agaiznst only 15 percent in the preceding five years. The continuation of such a pattern of credit allocation is not compatible with sustained economic grotAh. 3.. Tax action taken during 1967, together with a reduction in current expenditure growth, are expected to reduce the 1968 fiscal deficit below that of 1967, but not enough to avoid continued Government resort to bank credit. The early implementation of the 30 percent regional surcharge on imports from outside the CACM nowr being considered by the five CACM countries is thus urgently needed to arrest further deterioration in Costa Rica's finances. With present export prospects, this measure, together with appropriate credit policy, should keep the balance of payments situation manageable. 4h. Costa Rica has the potential for continued substantial growth over the next few years. The prospects for a large increase in banana exports, a further although somewhat slowed down expansion of industrial - ii - exports to the regional market and good opportunities of further export diversification into world markets, mainly for processed and unprocessed foocistuffs, are the main elements for continued growth. But the key to the realization of this potential is Costa Rica's ability to respond to the need for a substantial step up in domestic resource mobilization, mairly Central Government savings, to permit planned and much needed public investments to proceed without unduly diverting resources from the private sector. 5. Public investments are now planned to increase from an average annual level of 0180 mrllion in recent years to some 0290 million in 1968-73 In line with the urgent need to link Costa Rica more adequately with its major trading partners within and outside the CACM4, the bulk of this in- vestment will be concentrated on road and port investment. Substantial additional investment is also planned in power and telecommunication. In all the sectors, but particularly in transport, this will require a great effort in project preparation and execution.