Country’s financial options are bad and even worse

Costa Ricans like to think of themselves as living in a peaceful country where respect for institutions reigns.

That self image is likely to be put to the test as economic realities force unwanted changes.

The national government is prone to making short-term decisions to preserve what officials call the social peace.

Meanwhile,  Moody’s Investors Service notes that the national debt has mushroomed from 25 percent to 40 percent of the  gross domestic product in just seven years.

The  current administration seems unable to make hard decisions. For example, President Luis Guillermo Solís promised in his campaign to eliminate the road agency, the Consejo Nacional de Vialidad. Yet, employees there were told officially last week that the agency would at least outlast the current administration.

Even while the road agency exists, Costa Rican officials say they will outsource public road and bridges projects to a United Nations agency, which will receive a 4 per cent cut. The idea is to sidestep the country’s bidding and contract rules.

This decision most likely will be challenged in court, as well as the executive branch’s announcement that it will cut pensions 20 percent.

When Costa Rican officials decided to join the Central American Free Trade Agreement, there was plenty of social unrest. Opponents, mostly young university students, marched and held protests in front of the legislative complex. Some set afire barricades on major highways.

That is just a small taste of what might happen if some government chooses to enact austerity measures.

Thousands of demonstrators marched Sunday in European cities in a show of anti-austerity solidarity on the eve of an emergency summit aimed at keeping the debt-ridden Greek government from defaulting on its European loan payments, according to A.M. Costa Rica wire services.

In Costa Rica there have been protests to preserve social welfare programs like that Caja Costarricense de Seguro Social and a decision to charge a toll for a new highway.

The Asociación Nacional de Empleados Públicos y Privados is a coalition of unions that strongly promotes what it calls street democracy, meaning massive marches, work stoppages and general strikes.

Taxi drivers also showed the national tendency to protest by orchestrating running blockades earlier this month over a small cut in the official fare rate.

Government officials must certainly be wondering what will happen if they make any move to stem the growing deficit. The central government, facing the political realities of an anti-tax legislature, have delayed plans for a 15 percent value-added tax to replace the current 13 percent sales tax and a second proposal to increase the corporate tax rate.

Instead, the executive branch is promoting flip062215an anti-tax fraud proposal and an anti-smuggling bill more or less as away to save face.

Of course, the  Asociación Nacional de Empleados Públicos strongly favors higher corporation taxes even as foreign direct investment has fallen and international firms look elsewhere for a cheaper environment.

So does the Organisation for Economic Co-operation and Development, which the Solís administration is trying very hard to join. This Paris-based organization favors much higher taxes of the European style.

The result of higher taxes most certainly will be fewer jobs and higher unemployment.

The manipulation by the Banco Central of the dollar-colon exchange rate has succeeded in the short term. Still, the colon is overvalued, and this affects tourism and hurts exporters who receive payment in dollars and have to pay bills in colons.

An abrupt revaluing of the dollar to reflect reality will have a strong impact on retail sales and the ability of Costa Ricans to maintain their current lifestyles, not to mention making interest payments on the deficit.

Then there are unexpected financial woes. A reader Friday said that the country could be hit with a $300 million demand though international arbitration over the Las Crucitas open pit gold mine that the government shut down.

Much of the financial woe comes from many years of the country’s social democracy that seeks to be all things to all citizens. Many of the government’s social welfare investments end up benefiting bureaucrats instead of the poor. And this long-term policy is one reason for the unbalanced budget.

In the wings are far left politicians who are seeking to take power out of the confusion of financial collapse. They find support from Latin America’s authoritarian regimes.

Consequently the central government faces two unwelcome decisions: Cut spending and risk a popular prottest or let the deficit grow and be someone else’s problem.

Solís seems to have picked the second option.

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