- Category: The Nation
- Published on Monday, December 26 2011 01:23
- Written by Rod Hughes
- Hits: 900
Analysis: President Laura Chinchilla and her economic team depicted a rather grim new year for the 2012 national economy -- but before one finds a high place to jump off of, one must take into account politics.
The President is rather disappointed about delays in passing tax reform despite her having given away the farm to leftist sentiments of Citizen Action Party (PAC) leader Otton Solis in order to obtain a majority in the generally hostile Legislative Assembly.
Still, one has to give the Chief Executive credit for not painting a rosy picture far from the reality. She warned that citizens would begin to feel a pinch and, if the European situation gets worse, could feel it even more.
The President blamed much of probable problems on insufficient tax revenue that has caused the government to spend more than it takes in. Moreover, even tightening collections has not had the desired effect -- the country still has the highest domestic debt in Latin America. (See previous article.)
She may be bracing her constituents for a cutting back on social programs, exactly what the Legislative Assembly's majority opposition coalition tried to do this year. The opposition, a fragile construct of left and right, failed to hold the line on the 2012 budget.
The President's men are economic specialist First Vice President (there are two veeps) Luis Liberman, Finance Minister and his deputy, Fernando Herrero and Randall Garcia, Central Bank President Rodrigo Bolanos and Communications Minister Roberto Gallardo -- the last probably chosen to tread the fine line in Chinchilla's message between doom and gloom and fantasy.
This group warned that interest rates would go up this week and probably continue to rise next year. Interest rates have been quite low for this country in 2011 but Finance cannot hold the line much longer.
Rising interest rates will have a dampening effect on the economy. Liberman estimated that the government would "swap" 30% of it. Every point the rate rises will cost debtors 50 billion colones, he added.
Higher interest rates will, in turn, affect export production costs, meaning wither exporters retain their prices and swallow a lower return or raise prices on their products. But Bolanos said the Central Bank would do its best to keep inflation low.
So worried are authorities, reported the country's leading newspaper La Nacion, that the team has been consulting foreign financial experts, especially to find out what would probably happen in Europe and what the country should do.
The responses have not been encouraging, reported the paper. The International Monetary Fund told Liberman that discussions are still proceeding in Europe and that it was impossible to tell the outcome.
The country is a real player in the export markets and what happens in Europe will certainly have an impact on the national economy. Thanks in great part to Europe, Costa Rica has become the world's leader in pineapple sales, for example. Some European customers may put off upgrading computers as well, impacting the export leader, Intel.
One must not forget the number one trading partner, the United States. Although it remains the world's largest economy, there is just so far it can go on sheer momentum.
With its manufacturing base long gone, it is fading and, despite almost desperate buying during the Christmas season, it may slide back into recession. If it does, this country will not be the only victim.
The political impasse in the United States is not the only one. President Chinchilla thought she had the silver bullet to pass the tax package when she joined forces with PAC, but Social Christian Unity floor leader Luis Fishman remanded the bill to the Constitutional Chamber (Sala IV) for study.
Fishman, chairman of the Assembly Finance Committee, attempted to slash the 2012 budget -- which Chinchilla admitted she might try to convince her government to do next year -- and is unhappy with the Chinchilla-Solis bill.
But he can do very little more to block the tax bill. It contains one odious clause, taxing the foreign companies in the erstwhile tax free zones. The government cannot touch the companies already there--they are "grandfather in"-- but would tax future companies.
These free zones have been a huge factor in keeping unemployment low among skilled workers and bringing in foreign exchange. But even the hint that taxes might increase has cooled down foreign business enthusiasm.
If one looks back at the blog stories under "foreign investment" earlier this year, one can find articles on companies coming in with factories or expanding existing facilities nearly every week. We have not reported such a move since the Chinchilla-Solis compromise on the tax bill.
Although advised by wise men, the President is no economist. She admits she has no Plan B to confront the unstable world economic situation. The tax reform appears to be the only arrow in her armament.
Her solution--more tax revenues--is beginning to sound like a broken record. "Right now," she says, "the question is how we treat the financial crisis so it won't end up converting into an economic one."
On the other hand, La Nacion reports that businessmen in the country have their own broken record -- tighten up revenue collection and cut government spending.
"The fiscal problem," said Chamber of Food Industries president Mario Montero, "is not just one of revenues but of spending, and that is the government's responsibility. Businessmen have been pushed aside because reform just talks about tax increases."
Despite making a lot of noise in the voluntary reduction os spending, economist Jorge Guardia thinks, the government has put little real effort toward austerity. But cutting spending drastically isn't politically popular.
Former President Abel Pacheco, the last Social Christian Unity chief of state, announced an austerity government in his 2002-06 term and helped lower the foreign debt enough to make the IMF applaud him.
Yet, he was considered a "do-nothing" president and the fragmented Legislative Assembly cobbled together its own version of a tax reform. That bill was killed by the Sala IV before becoming law.