Costa Rica WT/TPR/S/1
Page 1
I. THE ECONOMIC ENVIRONMENT
(1) Main Features oftheEconomy1
1. TheRepublic ofCosta Rica, withanareaof50,900 square kilometres andapopulation of
3.3million, islocated intheCentral American isthmus, bounded byNicaragua inthenorth, Panama
inthesouth-east, theCaribbean inthenorth-east andthePacific Ocean inthesouth-west. Thecoastal
climate istropical, withatemperate central plateau andcooler mountainous areas. Thecapital, SanJosé,
withapopulation ofsome 900,000, islocated intheplateau; themain port, Puerto Limón, witha
population of34,000, liesontheCaribbean. Thepopulation grewatanannual rateofsome 2.8percent
intheperiod 1970-90, while theurban population, currently justbelow 50percentofthetotal, has
grown atbelow 1percentannually overthesame period -incontrast totheurban driftobserved in
many developing countries.
2. GNP percapita wasestimated atUS$2,482 incurrent prices in1994. Realpercapita income
hasgrown byanaverage ofsome 2percentannually since thedebtcrisis of1982 (Chart I.1). The
fertility ratedeclined from fivebirths perwoman in1970 to3.6in1980, falling further toaround
3inthe1990s; lifeexpectancy increased from 67to73years in1970-1980 andto76by1992
(Table I.1).Allchildren receive primary education, while 43percentareenrolled insecondary school,
upfrom 28percentin1970. According totheWorld Bank, Costa Rica'sextensive social programmes
haveplaced thecountry 'ssocial indicators among thebestinLatin America, although theprogrammes
havebeenadversely affected byausterity measures adopted during the1980s.
3. Inthesecond halfofthe1970s, withanovervalued realexchange rate,expansionary domestic
policies anddeclining terms oftrade, Costa Ricasuffered falling economic growth, culminating in
asubstantial decline inrealincome intheyears 1981and1982. Since thecrisis, successive Governments
haveimplemented stabilization andadjustment policies, supported bytheInternational Monetary Fund
andtheWorld Bank, which have reduced macroeconomic imbalances andrestored growth.
Macroeconomicstabilizationwascomplementedbytradereforms,begunin1986,whichreversedearlier
import substitution anddomestic support policies (Chapter IV).Intheinitial phase (1986-90) emphasis
wasplaced onexport promotion andsubsidization; however, there were alsomajor tariff reforms.
Since 1990, thefocus hasshifted towards reducing anti-export biasbygreater import liberalization,
andexport subsidies arebeing phased out.
4. Some measure ofthesuccess oftheprogramme maybejudged fromthefactthat,according
totheauthorities, realGDP hasgrown atanannual average rateof4.4percentinthelastdecade,
driven largely byprivate consumption andinvestment. Inflation hasremained aproblem, withthe
annual change intheconsumer priceindex rising to28percentin1991; although itfellto9.8percent
in1993, inflation re-surged in1994aspublic spending increased ahead ofnational elections (Table I.2).
Thecurrent account remains indeficit, withsuccessive merchandise tradedeficits onlypartly covered
bygrowing tourism receipts andother inflows; reserves havegrown mainly through exceptional
financing, although therehasalsobeenanincrease indirect investment. Thevalue oftheforeign debt
isatacomparable level to1982, butthedebt/GNP ratiohasbeensubstantially reduced because of
thegrowth oftheeconomy.
1Theprincipal datareferred tointhisChapter correspond tothetables andcharts which arebased mainly
onWorld Bank, IMFandUNSTAT data, collected initially inCosta Ricaandprocessed according tothestandard
definitionsoftheseinternationalinstitutions.Otherdata,particularlymorerecentinformation,havebeenprovided
directly bytheGovernment ofCosta Rica.WT/TPR/S/1
Page 2Trade Policy Review Mechanism
5. Asaresult ofthestructural reforms, theshare oftradeingoods andservices inGDP(atconstant
prices) grew fromaround 60percentinthemid-1980s to93percentin1993 (Chart I.2).2Thiswas
achieved through almost equal growth intheexports/GDP andimports/GDP ratios, anindication that
thereforms hadarelatively neutral orientation overtheperiod.
6. Thedomestic economy isdominated bytheservices sector, which accounted for56percent
ofGDPin1993(Chart I.3)andisreported bytheCentral Bank tohaverisento58.5percentin1994.
Theoverall sectoral distribution ofGDP hasbeenrelatively stable overthelastdecade; however,
therehasbeenaslight shiftfromagriculture toindustry. Thechange inemployment ismore marked:
between 1980 and1993 employment inservices grew from 56to59percentofthetotal, while
manufacturing employment hasincreased from 16to18percent; theshare ofagriculture fellfrom
27to23percentinthesame period. Thesituation isdifferent intrade. Merchandise exports are
heavily dominated byagricultural products, mainly bananas andcoffee (Chapter V)although exports
ofbeef, textiles andclothing and,more recently, non-traditional products suchasvegetables, fruit,
flowers andindoor plants havegrown inimportance. Income from factor services (mainly tourism)
hasgrown toequal themain commodities asaforeign exchange earner (Table I.3).
2WorldBankestimates.TheCostaRicanauthoritiesestimatetheshareinGDPoftradeingoodsandnon-factor
services at84percentin1993.Costa Rica WT/TPR/S/1
Page 3
Table I.1
Basic economic andsocial indicators
1970 1980 1990 1991 1992 1993
1.Population
Population (millions) 1.7 2.3 3.0 3.1 3.2 3.3
Labor force (thousands) 530.7 777.5 1,023.3 1,049.3 1,075.2 1,101.1
Urban population (percentoftotal) 39.7 43.1 47.1 47.6 48.1 48.7
Total fertility rate(births perwoman) 4.9 3.6 3.2 3.0 3.1 ...
Lifeexpectancy atbirth(years) 67.1 73.0 76.0 76.0 76.3 ...
2.GDP
GDP (US$m., 1987 prices)
Percentage share:2,338.0 4,035.0 5,135.0 5,250.0 5,656.0 6,003.0
Agriculture (percent) 22.9 18.2 16.3 17.0 16.4 15.8
Industry (percent) 22.8 30.1 23.7 23.4 23.6 23.7
Manufacturing (percent) ... 22.2 18.2 18.1 18.6 18.6
Services, etc.(percent) 54.3 57.6 48.9 48.6 49.0 49.6
3.Employment
Total employment (thousand) ... 725.0 1,017.0 1,007.0 1,043.0 1,096.0
Agriculture (percent) ... 27.4 25.9 25.5 24.1 22.6
Industry (percent) ... 16.3 18.1 18.9 19.0 18.1
Manufacturing (percent) ... ... ... ... ... ...
Services (percent) ... 56.0 55.2 54.7 54.0 59.3
4.Education
Primary school enrollment ratio (percent) 110.0 105.0 101.0 103.0 ... ...
Secondary school enrollment ratio(percent) 28.0 48.0 42.0 43.0 ... ...
... Notavailable.
Note: Primary school enrollment ratios exceed 100percentwhere student outside primary school ageareentrolled inprimary schools.
Source: World Bank, World Tables, 1993/94 andGovernment ofCosta Rica.WT/TPR/S/1
Page 4Trade Policy Review Mechanism
Table I.2
Economic performance
1986 1987 1988 1989 1990 1991 1992 1993
Average annual realgrowth rates (percent)
1.GNP anddomestic absorpbtion
Gross National Product 5.4 5.2 2.9 5.5 6.7 3.6 7.9 6.3
GDP atmarket prices 5.5 4.8 3.4 5.7 3.6 2.2 7.7 6.1
Domestic absorption 9.5 4.4 0.8 6.6 4.4 -2.6 12.2 8.0
Private consumption, etc. 3.7 5.5 3.5 6.0 4.7 1.7 7.6 6.7
General gov't.consumption 2.4 2.2 3.0 3.5 2.0 -0.9 2.9 4.5
Gross domestic investment 30.8 3.2 -6.7 10.2 4.9 -14.1 31.2 12.7
Fixed investment 11.8 9.9 -3.2 15.5 14.5 -12.8 21.8 17.2
2.Resource balance
Exports ofgoods &NFServ. 3.6 20.9 7.2 15.9 9.1 8.0 14.3 11.6
Imports ofgoods &NFServ. 17.6 17.6 -0.9 18.1 10.8 -4.6 26.0 15.6
3.Competitiveness indicators
GDP deflator 18.1 10.2 18.9 15.2 18.5 29.1 21.6 12.3
Consumer price index 11.8 16.8 20.8 16.5 19.0 28.7 21.8 9.8
Manufacturing realoutput perempl. 105.5 100.0 100.7 92.9 93.3 ... ... ...
4.Money (growth inlocal currency) andinterest rates (percent)
Money supply, broadly defined 21.0 16.9 39.8 16.0 27.7 33.7 24.5 15.1
Money asmeans ofpayment 31.0 0.3 53.2 -2.0 3.9 20.0 37.2 7.0
Discount rate(endofperiod) 27.5 31.4 31.5 31.6 37.8 42.5 29.0 35.0
Deposit rate 16.7 14.1 15.2 15.6 21.2 27.3 15.8 16.9
Lending rate 21.8 23.8 28.7 29.2 32.6 38.9 28.5 30.0
Share ofGNP (percent)
5.Government finances
Government deficit (-)orsurplus -4.8 -3.1 0.0 -2.3 -3.3 -1.4 ... ...
Government current revenue 23.6 26.4 27.1 26.3 24.1 24.7 ... ...
Government current expenditure 23.2 25.3 22.9 23.6 23.7 23.5 ... ...
Government current budget balance 0.4 1.0 4.2 2.7 0.3 1.2 ... ...
Government capital receipts 0.0 0.0 0.0 0.1 0.1 0.0 ... ...
Government capital payments 5.1 4.2 4.2 5.2 3.7 2.6 ... ...
6.Memorandum items
Gross domestic investment 25.2 27.1 24.5 26.5 27.2 25.0 28.9 30.4
Gross domestic savings 26.1 23.0 22.7 22.7 20.4 24.1 23.6 24.5
... Notavailable.
Source: World Bank, World Tables 1993/94; except interest ratesfrom IMF, International Financial Statistics.Costa Rica WT/TPR/S/1
Page 5
WT/TPR/S/1
Page 6Trade Policy Review Mechanism
Table I.3
Balance ofpayments
(US$ million)
1990 1991 1992 1993 1994a
Current account
Excluding BOPtransfers -424.0 -75.1 -380.4 -619.4 -462.6
Including alltransfers -354.0 -51.1 -370.4 -619.4 -462.6
Trade balance -642.2 -388.1 -716.0 -1,018.8 -995.6
Exports f.o.b. 1,354.2 1,498.2 1,739.0 1,866.8 2,102.8
Imports c.i.f. -1,996.4 -1,886.2 -2,455.0 -2,885.6 -3,098.4
Services 96.4 195.4 172.2 256.3 390.4
Factor payments -244.7 -187.2 -216.8 -241.6 -224.5
Official interest due -269.6 -186.4 -196.6 -191.9 -174.7
Other 24.9 -0.8 -20.2 -49.7 -49.8
Non-factor services 341.1 382.6 389.0 497.9 614.9
Ofwhich: Tourism 285.1 340.4 440.0 587.6 700.5
Transfers 191.8 141.6 173.4 143.1 142.6
Balance ofpayments 70.0 24.0 10.0 0.0 0.0
Other 121.8 117.6 163.4 143.1 142.6
Capital account -273.9 384.0 277.8 359.8 13.2
Official capital -328.6 71.2 7.5 15.8 -173.4
Disbursements 237.0 310.5 330.1 401.5 255.6
BOPsupport 35.0 81.4 48.4 15.0 0.0
Other 202.0 229.1 281.7 386.5 255.6
Amoritizationb-565.6 -239.3 -322.6 -385.7 -429.0
Private capital 54.7 312.8 270.3 344.0 186.6
Errors andomissions -27.4 84.6 201.8 284.0 267.7
Overall balance (predebtrelief) -655.3 417.5 109.2 24.4 -181.7
Rescheduling 1,023.4 205.8 11.4 117.2 0.0
Arrears (+increase) -883.1 -107.1 24.3 -62.9 -51.8
Capital gainfrom buyback 0.0 0.0 0.0 24.9 0.0
Overall balance (post debtrelief) -515.0 516.2 144.9 103.8 -233.5
Netinternational reserves 515.0 -516.2 144.9 103.6 -233.5
Non-refinanciable arrears (+increase) 209.5 -210.4 15.4 -37.7 50.3
Other BOPfinancingc0.0 0.0 0.0 0.0 0.0
Netofficial reserves (-increase) 305.5 -305.8 -160.3 -65.9 183.2
Netuseoffundcredit -24.2 70.0 -13.5 0.0 -16.0
Other netofficial reserves 329.7 -375.8 -146.8 -65.9 199.2
Memorandum items
Trade balance/GDP 11.2 6.9 10.6 13.5 11.9
Tourism/GDP 5.0 6.0 6.5 7.8 8.4
Current account/GDP
Excluding BOPtransfers 7.4 1.3 5.6 8.3 5.5
Including BOPtransfers 6.2 0.9 5.5 8.3 5.5
Netinternational reserves -307.4 208.8 353.7 457.3 223.8
Inweeks ofimports -8.0 5.8 7.5 8.2 3.8
a Preliminary.
b Includes buy-back atparvalue.
c Overdue payments tomultilateral institutions within grace period. These adjustments arenotreflected inthedataonnetinternational
reserves inthemonetary accounts.
Source: IMF, International Financial Statistics; Terms ofTrade Index andcomponents from World Tables 1993/94.Costa Rica WT/TPR/S/1
Page 7
(2) Recent Economic Developments
(i) Introduction
7. Under thestabilization andstructural reform programme, Costa Ricahasexperienced moderate
butuneven growth since 1983 (Table I.2andChart I.4),partly influenced byapattern ofstop-go
policies, coinciding withthefour-year election cycle. Thecentral government deficit (about halfof
thetotal) fellfrom4.8percentin1985 (Table I.2)tozeroin1988, butbegan toriseagain, reaching
3.3percentin1990, when inflation alsorosesubstantially andinternational reserves fellsharply
(Table I.3). Inthatyear, thenewGovernment tooksteps toreduce growing fiscal imbalances and
deepen Costa Rica'sintegration intheworld economy; accession toGATT wasseenasanimportant
step. While realGDP grew atonly2.2percentin1991, itrecovered strongly in1992 and1993,
andinflation felltobelow 10percentin1993(Table I.2).3Efforts weremade toimprove fiscal balances
bytaxandfinancial system reforms, scaling down public sector activities andfurther trade andprice
liberalization.
8. ThenewGovernment, which tookoffice inMay1994, stated thatitwould givepriority to
reducing thedomestic imbalances. However, measures taken inMarch/April 1995 focused ontax
andtariffincreases rather thanpublic sector reforms. Atthetimeofwriting (April 1995) theSecretariat
hadreceived nodetails ofthese newmeasures.
9. In1994, anelection year, thepublic sector deficit widened to8percentandinflation rose
steeply to19.9percent. RealGDP growth was4.5percent. While theeconomic slowdown was
expected toreduce thedemand forimports, preliminary dataindicate thatprivate capital inflows were
alsodown fromtheprevious yearandinternational reserves again fell.Itisahighpriority ofthenew
Government, which tookoffice inMay1994, toaddress these problems.
(ii) Supply anddemand
10. Theservices sector hasledeconomic growth inCosta Ricainthelast20years, usually followed
byindustry (Chart I.4).Inthelastfewyears, investment andgrowth inservices havebeenconcentrated
intourism andrelated construction. Onthedemand side,private consumption andinvestment have
grown strongly. Thecontribution ofnetexports todemand hasbeennegative. Inadequate infrastructure
remains amajor constraint fortourism andexports: ports androads, inparticular, needupgrading.4
(iii) Savings andinvestment
11. Investment hasgrown strongly inrecent years, although withdownturns in1988 and1991
(Chart I.4). Thisisreflected inrising GDI/GDP ratios, reaching 30percentin1993 (Table I.2).5
While thesavings ratioisalsohigh, ithasnotgrown asstrongly asinvestment; thegapbetween domestic
savings andinvestment in1992/1993 hasbeenmade upbyforeign direct investment and,tosome extent,
byexceptional financing (Table I.3).
3Estimates bytheCosta Rican authorities show realGDP growth of7.7percentin1992 and6.3percent
in1993.
4UNDP-World Bank (1992).
5TheCosta Rican authorities estimate gross fixed capital formation at27percentofGDP in1993.WT/TPR/S/1
Page 8Trade Policy Review Mechanism
Costa Rica WT/TPR/S/1
Page 9
(iv) Prices
12. Following thedebtcrisis in1982, when consumer priceinflation peaked at90percent, prices
havetended tofluctuate within arange of12-30 percentalong withstop-go cycles. Following the
1990election, priceincreases (measured bytheconsumer priceindex) fellsharply tounder 10percent
in1993 (Table I.2). However, prices roseagain in1994, withinflation reaching 19.9percentfor
theyear. Thisincrease waslinked toanincrease inthepublic sector deficit, asspending onwages,
inparticular, roseahead ofthe1994 elections. Other factors included increases inpensions, interest
oninternal debtandpublic sector transfers.
13. InMay1994, thenewGovernment modernized thecanasta basica ,asystem ofmonitoring
abasket ofbasic commodities, equivalent toabout 55percentoftheCPIbasket, toensure thatprices
reflected market conditions butthesystem wasestablished inDecember 1994except where amonopoly
oroligopoly situation exists.
(v) Public finance
14. Government spending hasbeenoneofthemain sources ofinflation inCosta Ricaandakey
factor inthecyclical nature ofeconomic policies. Forthisreason, public sector reform hasbeena
particularly important element inthemacroeconomic stabilization programmes followed sincethedebt
crisis (BoxI.1).Forexample, expansionary economic policies drove upthecentral government deficit
toalmost 8percentofGDPin1980, andtheconsolidated public sector deficit (which includes operating
losses oftheCentral Bank aswellasnon-financial public enterprises) reached almost 14percent.
Under thereforms, thecentral government deficit declined tozeroby1988(according toWorld Bank
data)6,butspending increased again through to1990, afterwhich anewreform package wasintroduced
(Table I.2). Therecurring problems stemessentially fromthedifficulties various governments have
hadinreducingthesizeofthepublicsector,whetherthroughprivatizationorstreamliningofgovernment
structures andfunctions.
15. Fiscal reforms begun in1990 included increases intheprices ofpublic services, anewtax
package (including reform oftheCustoms Administration, Chapter IV),anincrease inthenumber
ofmini-devaluations andother temporary fiscal measures. Central Bank operating losses were also
reduced. However, while these actions prevented afurther deterioration inthefiscal (and
balance-of-payments) situation, therewaslittleimprovement. Toremedy thesituation, theGovernment
increased thesales taxfrom 10percentto13percent(reducing itbyonepercentage point ayear
toreach 10percentagain in1994), the"temporary" import surcharge from2.5percentto10percent
(eliminated in1992), andtheprior import deposit (introduced inMay1990atarateof1percentand
eliminated inFebruary 1992. (SeealsoChapter IV).Italsoaccelerated thepaceofdevaluation under
thethencrawling pegexchange raterégime.
16. Thereforms continued through thefirsthalfof1993, andthenbegan toslipaswage increases
were granted; becoming evident in1994 data. Theincrease inthepublic sector deficit wasmainly
related totransfers totheprivate sector andsubstantial wage increases (some 29percenthigher in
the12months ending June1994). However, interest payments alsogrewasaresult ofthebondissues
tofinance thedeficit andhigher interest rates. According tomore recent datafrom theMinistry of
Finance, thecentral government deficit rosefrom1.9percentofGNPin1993to7.1percentin1994.
6According totheauthorities, thecentral government deficit declined to2.52 percentofGDP in1988.WT/TPR/S/1
Page 10Trade Policy Review Mechanism
BoxI.1: Public sector reform
Inaneconomy with a(managed) floating exchange rateandanopen capital account, such asexist in
Costa Rica since thereform oftheexchange régime in1992, fiscal andmonetary policies arethekey
instruments toensure domestic andexternal stability. InCosta Rica'scase, theCentral Bank'sability to
manage monetary policy, which influence exchange rates aswell asdomestic demand, hasbeen
compromised byitsoperational losses. These resulted largely from itsobligation tolendtonon-financial
State-owned enterprises atthetime ofthedebt crisis in1982 atfixed interest rates, while obliged to
borrow atmarket rates (seetext). Thus, responsible fiscal policy iscritical totheachievement ofsound
economic management.
Public sector reform maybeseenashaving three benefits: first, itiscritical tomacroeconomic stability;
second, privatization receipts canbeused toreduce thedebtburden; andthird, aleaner public sector
improves theallocation ofscarce domestic resources, including finance, infavour ofmore economic
industries.
According totheWorld Bank, suchreforms need tofocus onfairandefficient revenue collection aswell
asimproving theefficiency ofexpenditure.
Ontherevenue side, thetaxburden needs tobemore evenly spread sothatitdoes notfalluniquely on
legitimate businesses, while thesubstantial informal economy getsafreeride. This implies improved
efficiency inthecollection oftaxes aswellasmore efficient taxes, andconsiderable progress hasalready
been made inongoing efforts inthisarea, including incustoms administration. Itisalsoimportant to
ensure fullcostrecovery fortheprovision ofpublic services.
Ontheexpenditure side, measures maybetaken toimprove efficiency, improve targeting andreduce the
large share claimed bythepublic sector payroll. Budget reforms aimtoshift from aninput-oriented
system toonebased onoutcomes andresults.
Thesavings, together withfuller costrecovery onservices, canbeused toimprove thequality ofpublic
services, including thearea ofinfrastructure which iscurrently imposing constraints onexport
performance andfullachievement ofthetourist potential.
Thepublic sector mayalsoberedefined bythetransfer ofactivities totheprivate sector, ensuring an
appropriate regulatory framework andacting asthewatchdog toguarantee thefreeplayofmarket forces.
Theimplementation ofsuch reforms candirectly reduce public (and international) debt, aswell as
contributing tooverall welfare byenhancing productivity andinternational competitiveness.
17. Thefinancial sector inCosta Ricaisdominated bypublic enterprises; thetopfourState-owned
commercial banks account formore thanhalftheassets ofthefinancial system (seealsoChapter V).
Private banks aresubject torestrictions thatlimittheirability tocompete withtheStatebanks; anumber
oftaxes alsodistort thefinancial system, contributing, interalia,toawidespread ofinterest rates.
Forexample, theState-owned banks haveamonopoly oncurrent andsavings account deposits, aswell
asonaccess totherediscount window oftheCentral Bank. Private banks haveresponded bycreating
substitutes, including offshore U.S.dollar accounts, andthegrowth ofthese banks suggests thatthey
havemetwithsomesuccess inchallenging thepower oftheState-owned banks, although theiroperations
posesome problems forfinancial regulation.Costa Rica WT/TPR/S/1
Page 11
18. Mainly because ofpoorportfolio management andother losses, Costs Rica'sthird largest
State-owned bank, theBanco Anglo Costaricense ,accumulated losses equivalent tosome 1.7percent
ofGDP byJune1994. Theauthorities were obliged tointervene andthebank wasclosed under
Law7471of27December 1994. Thecrisis strengthened pressure toimprove thesupervision ofthe
banking system (Box I.2).
BoxI.2: Financial sector reform
In1992 aspecial committee oftheNational Assembly wasestablished todiscuss changes inthe
regulatory framework, andhasproposed reforms thatwould strengthen theindependence oftheCentral
Bank, including bylimiting thecredit which itisrequired tomake available totheGovernment. There
arealsoplans foranimproved regulatory andsupervisory framework under theSuperintendency of
Financial Institutions which would become more independent from theCentral Bank andwould acquire
greater enforcement powers. Thescope ofthesupervisory rôlewould beextended toallfinancial
intermediaries, other than offshore subsidiaries. Changes arealsoplanned intheinsurance market
(Chapter V).
Therecommendations ofthespecial committee include making Central Bank rediscount facilities
available toallfinancial institutions subject toCentral Bank regulations andunder thesupervision ofthe
Superintendency ofFinancial Entities (Superintendencia General deEntitades Financieras ,SGEP);
making emergency loans available toallsuch entities; fixing legal reserve requirements ofamaximum
25percent; increasing thediscretion oftheCentral Bank toconduct open market operations; andthe
establishment ofthemargin offinancial intermediation under theauthority oftheCentral Bank forall
institutions supervised bytheSGEF. Thefinal draft proposal alsocovers, inter alia,emergency powers
andother functions oftheCentral Bank.
Concern about theoperating losses oftheCentral Bank relates tothegeneral question offiscal
responsibility aswellastheconstraints thattheyimpose ontheconduct ofmonetary policy. Inthepast,
annual changes inthenetdomestic assets oftheCentral Bank andthebanking system have depended
largely ontheextent towhich external payments arrears were accumulated orreduced. Forexample, in
theearly 1980s themost important component ofCentral Bank losses wastheinterest paidonforeign
debt contracted bytheCentral Bank tosupport State-owned commercial banks andthenon-financial
public sector. These received softloans, while theCentral Bank itself hassince been paying mainly
market interest rates. However, since 1991 theCentral Bank hastaken anumber ofmeasures toreduce
itsoperating losses. There isalsodiscussion ofarecapitalization oftheBank with government bonds,
transferring theBank'slosses tothecentral Government. However, thelosses continue toconstrain the
effectiveness ofmonetary policies.
(vi) Monetary policy
19. Growth ofcredit tothenon-financial public sector declined sharply intheyears following the
debtcrisis, butexpanded again sharply in1986. Inboth1988and1991therateofexpansion inbroad
money (M2) accelerated, fuelling increases ininflation (Table I.2). Attheendof1991, there was
asharp tightening ofmonetary policy, forcing upinterest rates; thisprovoked anincrease inprivate
capital inflows in1992andtheCentral Bank again lowered interest ratesthrough salesofstabilization
bonds.WT/TPR/S/1
Page 12Trade Policy Review Mechanism
20. Tohelpcorrect thefiscal deficit, which hadbeendeteriorating since thesecond halfof1993,
theCentral Bank tightened monetary policy byintensified openmarket operations. Interest rateswere
again increased onthree-month stabilization bonds (IMF) andtheincrease wasalsoreflected inthe
discount rate,aswellasborrowing andlending rates(Table I.3). Withanelection approaching, interest
rateswereeased inthefirsthalfof1994, despite theincrease ininflation andinforeign interest rates.
However, interest rateswere raised again inthesecond halfoftheyear.
21. During thedebtcrisis, monetary policy hadrelied largely ontheissue ofstabilization bonds
tooffset theimpact ofCentral Bankexchange losses. However, asnoted earlier, theconsequent increase
ininterest costsadded tothelosses oftheCentral Bank, andsubsequently theBank switched tolegal
reserve requirements astheprimary means tocontrol liquidity andencourage savings. During the
1990s, theauthorities havemade efforts tointroduce indirect instruments, buttheuseofstabilization
bonds, soldinopenmarket operations, hasbecome more difficult inthefaceoflarge capital inflows,
andlegalreserve requirements stillplayanimportant rôleinmonetary policy.
22. Intheyears following thedebtcrisis, lower levels ofcredit tothenon-financial public sector
increased theavailability offunds fortheprivate sector. Today, however, private sector interests
complain about thecostofcredit forbusiness expansion inCosta Rica, withinterest ratesonloans
ataround 30percent7;thereappears tobegeneral agreement thatinefficiencies inthefinancial sector,
noted above, areresponsible. Thatfinancial sector reforms havenotyetledtoanyreductions ininterest
ratesmaybeattributable totheneedforfiscal restraint toprevent theresurgence ofinflation. However,
itisalsobelieved thatacertain lackofco-ordination between theCentral Bank andtheTreasury has
ledtocompetition inbond sales. Thismayhaveimproved withtheparticipation oftheTreasury in
thework oftheOpen Market Committee (Comité deOperaciones deMercado Abierto )oftheCentral
Bank toco-ordinate thetiming andvolume ofbond sales, interest ratesandcommissions.
(vii) Balance ofpayments
23. Thecurrent account hasrunapersistent deficit formany years (Table I.3).Exports andtourism
receipts havegrown substantially inrecent years, inresponse toamoderate downward movement in
therealeffective exchange rate(Chart I.5). Nevertheless, thishasbeennotbeensufficient tooffset
thestrong import growth resulting fromincreased demand under expansionary fiscal policies aswell
asthereduction intariff rates.
24. In1993tourism became themajor foreign exchange earner, ahead ofbananas forthefirsttime.
Coffee, forwhich therewasanimportant recovery ofprices in1994isthethirdlargest foreign exchange
earner afterbananas andtourism.8Theeconomic slowdown in1994mayhavereduced import demand,
while exports were expected tocontinue togrow strongly; these trends should leadtoanimproved
current account balance in1995.
25. Asnoted earlier, aspartofaseries ofmeasures toreduce thefiscal deficit andaddress the
deteriorating balance ofpayments, theGovernment increased theprior import deposit andtherateof
thetemporary import surcharge in1990, butthese were subsequently eliminated.
7Thiswasraised byprivate sector representatives indiscussions withtheWTO Secretariat inSanJosé. It
isalsomentioned inUNDP-World Bank (1992) andRodriguez (1991).
8Coffee prices increased from US$64.49 toUS$104.63 per46kg.bag,between 1993 and1994, generating
exports ofUS$300 million in1994.Costa Rica WT/TPR/S/1
Page 13
26. Therealeffective exchange ratehasdeclined moderately since 1985, although itappreciated
in1989 and1992 (Chart I.5). Upto1992, when theforeign exchange system wasderegulated
(Annex I.1),exchange ratepolicy wasimplemented through increasing thenumber ofmini-devaluations
attimes ofpressure onthebalance ofpayments. Since then, theexchange ratehaslargely beenset
bymarket forces.
27. Theterms oftrade havemoved against Costa Ricainrecent years. While import prices have
risenby19percentsince 1987, export prices in1992werealmost thesame asin1987(although they
hadrisensubstantiallyin1988).9MorerecentdatafromtheCentralBankshowthatthesituationchanged
littlein1993, while therecent increase incoffee prices caused aslight improvement intheterms of
trade in1994.
28. Onthecapital account, Costa Ricamanaged tomaintain netcapital inflows intheyears following
thedebtcrisis, mainly because itwasamajor beneficiary ofaidfunds, particularly from USAID.
Between 1983and1989, Costa Rica, ahighly indebted country which haddefaulted onitsinternational
debtin1981 (oneyearbefore Mexico), wasengaged inalmost constant debtnegotiations because of
payments defaults, andpolitical support fromtheUnited States assisted inthisprocess. Nevertheless,
ithasbeenargued thattheaidwasarequisite forthegrowth achieved inthe1980s.10
9World Bank, World Tables, 1993/94.
10Rodriguez (1991).WT/TPR/S/1
Page 14Trade Policy Review Mechanism
29. Costa Ricawasabeneficiary oftheBrady Planfortherescheduling ofcommercial bankdebt,
completing itsbuy-back in1990.11Nevertheless, ithashadcontinuing difficulty inmeeting itsexternal
debtcommitments andthere havebeenseveral reschedulings. Total external debtreached almost
US$4 billion in1993, equivalent tosome 62percentofGNP andalmost 150percentofexports of
goods andservices (Table I.4). However, thevalue ofitsexternal debthasmostly beendeclining
since 1987 andthedebt/GNP ratioisaround onethirdthatoftheearly 1980s. Thedebtismainly
divided between theCentral Bank andtheCentral Government, butnon-financial public enterprises
alsoowejustunder US$0.5 billion. Despite debtrescheduling toParis Clubcreditors inJune1993,
external payments arrears stood atabout US$40 million attheendof1993.
Table I.4
External debt
(US$ million)
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992
External debt, total
(EDT)2,744 3,305 3,645 4,181 3,991 4,401 4,577 4,721 4,544 4,603 3,772 4,050 3,963
Long-term external
debt(bydebtor)2,169 2,685 2,870 3,686 3,656 4,024 4,104 4,142 3,949 3,898 3,392 3,710 3,622
Central Bank
external debt,
incl.IMFcredit666 1,085 1,148 1,253 1,243 1,249 1,126 1,091 992 1,002 1,348 1,580 1,508
Central
Government
external debt513 556 666 1,529 1,569 1,949 2,116 2,122 2,044 2,092 1,311 1,394 1,301
RestofGeneral
Government
external debt3 2 2 2 1 18 14 14 24 20 19 15 14
Non-financial
pub.enterprises
external debt533 637 629 531 508 497 536 611 569 480 409 417 465
Priv. sector
external debt,
incl.
non-guarant.453 405 424 370 335 312 312 305 319 305 305 304 334
Short-term external
debt575 620 776 495 335 377 472 579 596 705 380 340 341
Memorandum items
EDT/EGS (per
cent)225 276 319 357 304 346 318 316 274 236 180 176 149
EDT/GNP (per
cent)59 93 139 176 139 131 115 102 92 91 69 71 62
Source: World Bank, World Tables, 1993/94.
11Rodriguez(1991)notesthatthestructureofCostaRica'sdebtisunusualforasmallnation,withasurprisingly
large share ofcommercial bank debt. Heattributes thistotheattractiveness ofitshighgrowth ratesinthe1970s
inthecontext oftheliquidity thatprevailed attheendofthatdecade.Costa Rica WT/TPR/S/1
Page 15
30. Inrecent years, foreign direct investment hasgrown atover20percentannually, while portfolio
investment hasbeennegative (seealsoChapter III). Itisunderstood thatprivate capital inflows were
much lower inearly 1994, when localinterest rateswere falling asinternational rateswere rising.
Higher domestic interest ratesmaybeexpected toattract further private capital, although Costa Rica
maysuffer fromaweakening ofconfidence insome Latin American markets following theMexican
financial crisis. Costa Ricaiscurrently discussing astand-by arrangement withtheIMF, following
failure toagree ontheterms ofathirdStructural Adjustment loanfrom theWorld Bank.
31. Netexternal reserves, excluding gold,havefluctuated between -8and8.2weeks ofmerchandise
imports since 1990. Attheendof1994, theywereestimated atsome US$224 million, equivalent to
3.8weeks ofmerchandise imports.
(3) Composition andDirection ofMerchandise Trade
(i) Composition oftrade
32. Chart I.6andTables AI.1andAI.2show thechanges thathavetaken place inthecomposition
ofCosta Rica'smerchandise trade since 1970. Theshare ofmanufactures inimports declined from
82to68percentbetween 1970 and1980, standing at69.5 percentin1992. Food products
(e.g., bananas, coffee, and,lessimportant, beef) remain themostimportant category ofexports, but
th0eir share inthetotaldeclined fromalmost 80percentto64percentbetween 1970and1980, falling
further by1990 andrecovering slightly thereafter (Table AI.2). Items which havebeengrowing in
absolute terms andasapercentage oftotalexports include agricultural rawmaterials, clothing, chemicals
andother semi-manufactures.
(ii) Direction oftrade
33. TheUnited States isCosta Rica'smostimportant trade partner (Charts I.7andI.8). Itsshare
ofimports isestimated tohaveincreased significantly inthelast20years, from 35percentin1970
to50percentin1992. Thatofexports, afteramarked fallbetween 1970 and1980, increased from
35to48percentbetween 1980and1992(Tables AI.3andAI.4).12TheEuropean Union isthesecond
largest export market, witharound 25percent; however, itsimportance asasource ofimports is
considerably less,having fallen markedly between 1970 and1980.
34. Costa Rica'strade withother countries intheCentral American Common Market (CACM)
hasdeclined overthesame period (seealsoChapter II).CACM countries provided lessthan8per
centofCosta Rica'simports in1992, about onethirdoftheirshare in1970, andtooksome 17percent
ofitsexports, significantly lessthanin1970 or1980.
35. Imports from other Latin American countries havegrown inimportance; thegrowth inthe
shares ofVenezuela andMexico ismainly related tofuel,while Brazil hasalsobecome animportant
supplier (Table AI.3). Other significant suppliers include Japan, with6.1percentofthemarket (having
previously increased from9to11percentbetween 1970 and1980). While trade isstillverysmall,
theRepublic ofKorea, Chinese Taipei andHong Kong aretheonlyimport sources other thanthe
United States showing substantial growth intheirshares overthelast20years.
12UNSTAT data. Figures provided bytheauthorities show theU.S. share ofimports andexports rising
from 33to45percentbetween 1980 and1992.WT/TPR/S/1
Page 16Trade Policy Review Mechanism
Costa Rica WT/TPR/S/1
Page 17
WT/TPR/S/1
Page 18Trade Policy Review Mechanism
Costa Rica WT/TPR/S/1
Page 19
(4) Outlook
36. While progress hasbeenachieved ineconomic restructuring andprospects seem favourable
forsustained growth, theoverall prognosis fortheCosta Rican economy depends bothoninternal and
external factors.
37. Internally, there isacontinuing needtoproceed withpublic andfinancial sector reforms to
bring thefiscal deficit andinflation backunder control andtoreapthefullbenefits ofthetradereforms
thathavebeenunderway since 1986 (Chapter IV).Taxchanges intended toaddress thefiscal deficit
include: theintroduction ofa15percenttaxonearnings from coffee production (theearlier coffee
export taxhadbeenabolished bytheConstitutional Court -Chapter V);anincrease inthesalestax
from10to15percent; ataxof1percentonbusiness assets; introduction ofalimitonthededuction
ofinterest onthepayment ofprofits tax(Impuesto alaRenta );modifying income taxforphysical
persons; andelimination of23minor taxes withhighadministrative cost. Itwillalsobenecessary
toobserve restraint ingrowth ofthepublic sector wage billandtocontain current expenditures. Within
thenewadministration, itisaccepted thatthere isaneedtoimprove accountability andtorestructure
andstreamline theoperations ofthepublic sector, butthedegree andpace ofreform remain
controversial.13Itisalsoimportant forfiscal reasons andformonetary policy thatfinancial sector
reforms beimplemented, toincrease competition, strengthen prudential supervision andenhance the
independence oftheCentral Bank.
38. Certain external conditions, suchasprices forcoffee andbananas, arelargely outside thecontrol
ofCosta Rica. Intheareaofnon-traditional products, thephase-out oftheMultifibre Arrangement
could leadtoincreased competition fromlow-cost Asian suppliers inparticular. While itisamember
oftheCentral American Common Market, which isundergoing some revitalization, Costa Ricaplaces
considerableemphasisonitstradewithNorthAmericaandhasrecentlyconcludedafree-tradeagreement
withMexico (implemented asof1January 1995, seeChapter II).Italsohassome aspirations toaccede
toNAFTAwhichiscurrentlyseenlargelyasachallengeforCostaRica,asMexico'srelativecompetitive
position intheU.S.market improves. Although aCBIbeneficiary andarecipient ofGSPtreatment
intheEuropean Union, Costa Ricaisaffected byquantitative limitations onexports suchasmeat, sugar
andtextiles intheU.S.market, while thecompetitiveness ofbananas intheEU,which wasadversely
affected bytheEUtariff quota, islikely, according totheauthorities, tobestabilized under the
Framework Agreement (Chapters VandVI). Inthelonger term, Costa Ricamight beexpected to
benefit from theproposed FreeTrade Area fortheAmericas (FTAA) which should reinforce its
autonomous reforms toagreater extent thanthemore limited CACM market.
39. Thepost-Uruguay Round eraaswellastheFTAA proposal willbring about some important
changes intheexternal conditions facing Costa Rica, implying aneedforgreater adaptability inits
domestic economy. Thiscanbeachieved bycontinuing thetradeliberalization process andenhancing
itthrough implementation ofthepublic sector andfinancial sector reforms underway. Theconsequential
improvementsintheallocationofdomesticresourcesarecriticaltomaintainingthecountry'sinternational
competitiveness inthefaceoftheexternal challenges.
13ThethirdStructural Adjustment Plan(PAE III),which hasbeenshelved, involved aUS$350 million World
Bank-IDB loanforamajor public sector reform, including privatization, andfurther deregulation oftheeconomy.WT/TPR/S/1
Page 20Trade Policy Review Mechanism
Annex I.1
Exchange régime14
TheCosta Rican currency isthecolón.Costa Ricaaccepted Article VII,paragraphs 2,3and4of
theIMFArticles ofAgreement on1February 1965, committing itself nottoimpose restrictions on
current payments andtransfers without Fund approval.
Until February 1992, Costa Ricamaintained acrawling pegrégime, under which thecurrency was
adjusted periodically taking account oftherelative ratesofinflation domestically andinitsmainmarkets.
Inessence, thisledtoaseries ofmini-devaluations aimed atmaintaining acompetitive realexchange
rate.
On1March 1992, amanaged floatofthecolón wasintroduced. Under thisarrangement, commercial
banks andotherfinancial intermediaries areallowed tobuyandsellforeign exchange atfreely negotiated
ratesforcurrenttransactions,debtservicingand,since1June1992,othercapitaltransactions.However,
90percentofexport receipts havetobesoldtoauthorized entities atmarket ratesand25percent
ofallforeign exchange purchased bythose entities hastobesoldtotheCentral Bank. TheCentral
Bank meets thebalance ofitsrequirements directly fromthemarket andmayintervene inthemarket
todampen major fluctuations intheexchange rate. Proceeds from invisibles arefreefrom controls
orrestrictions, butsuchreceipts maybeexchanged intocolones onlybytheCentral Bank orother
authorized institutions.
ExchangeregulationsareissuedbytheCentralBank.Institutionsauthorizedtoconductforeignexchange
transactions aretheCentral Bank itself, State-owned commercial banks, private banks andspecified
non-bank financial institutions.
Since 1March 1992therehavebeennorestrictions oncapital transfers. Private sector capital inflows
exceeding US$5,000 must beregistered attheCentral Bank, buttheforeign exchange neednotbe
soldtotheCentral Bank. Ontheother hand, theCentral Bankhasnoobligation tosellforeign exchange
tomeettheservicing ofanydebtonsuchtransfers.
TheNational Budget Authority, composed oftheMinisters ofFinance andPlanning andthePresident
oftheCentral Bank, isresponsible forauthorizing thenegotiation ofanynewexternal credits forthe
CentralGovernment,decentralizedagenciesandStateenterprises.Foreignanddomesticcapitaltransfers
from abroad maybeheldintimedeposits inU.S.dollars withagent banks intheform ofspecified
foreign currencies. Alternatively, theymaybeinvested incertificates ofdeposit denominated incolones ;
when suchcertificates mature, theyarerepaid inthecurrency inwhich thedeposits were originally
made.
There arerelatively fewrestrictions ontheholding, purchase orsaleofdomestically produced gold
athome orabroad, provided thereisnoinfraction ofinternational agreements. Asinthecaseofother
exports (Chapter IV),aCentral Bank licence isrequired forexports ofgold.
14This annex isbased onIMF (1994).