REF: Joint Emb/USAID Message. SUBJECT: FINANCE: Costa Rica’s Fiscal
Difficulties and Request for U.S. Assistance.
From above indications plus published Central Bank reports there is
strong evidence that the government is in a very difficult financial
position. Orlich and his
representatives indicate that they are determined to take the necessary
drastic measures to correct the basic causes of the problem, including
such unpopular measures as enforcing tax collections and strengthening
the entire tax system. One of the prime causes of the unbalanced budgets
in recent years and calendar 1962 has been the not infrequent
irresponsible conduct of the Congress in fiscal matters. We hope that
the new Congress, with a majority of one [Typeset Page 188] from Orlich’s party, will cooperate and approve the
well-intentioned plans of the president-elect. It will be months before
the new administration can prove its capacity and effectiveness to
improve the situation through self-help measures. However, it should be
realized that Costa Rica, like other countries in the region, has
drifted into this situation through continuing to increase its level of
government expenditures at the same time that the prices of its
principal export crops were declining. Costa Rican officials stress the
urgency of the situation and claim that the alternatives are printing
money or external aid before corrective measures can be effective. [Facsimile Page 2] Certainly the
situation is acute and worse than usual but a similar situation has
existed in previous years on a somewhat lesser scale without
disaster.
It is our opinion that the advisable method to assess the situation is to
have an expert or a team of experts come here as quickly as possible to
study and analyze the fiscal situation, and further, to study and advise
the government on the adequacy of the present tax laws and enforcement
of the same, and assist in reviewing the budget in order to determine
the realism of the budget. All of this would be done in an attempt to
prevent the recurrence of the same apparent present fiscal situation
next year. We are contacting the government to try to get their
concurrence in this and to agree to such a study. If it materializes as
a request to AID then we will hope for
speedy assistance. If they prefer IMF, IBRD or other agency analysis we
should be prepared to support and hurry the selected agency.
It is recognized that this suggested study will be limited in scope. It
cannot resolve any long term problem which will require time and the
establishment of an effective planning body but it should provide us a
technical basis for immediate decisions as to the real size of the
problem and as to whether or not external assistance is required.
Enclosures:
1. Letter from Central Bank to Orlich, with attached tables, in Spanish (7
copies)
2. Translation of above letter (without tables)
Enclosure
San José, February 22, 1962
TRANSLATION
Mr. Francisco J. Orlich,
President-Elect of Costa Rica, San José.
My dear sir:
The Bank is pleased to reply to the questionnaire contained in your
interpellation published by the press February 16, relating to
certain aspects of the difficult fiscal situation. The answers given
in this letter to your interesting questions have had to be prepared
very rapidly as we wished to be able to deliver them to you before
your departure from the country, announced for tomorrow; therefore,
they are very brief and just include the data expressly provided by
the offices responsible for the conduct of the respective
matters.
We are in a position to supply you this information with the desired
timeliness because of the rapidity with which these government
departments have attended to our request. To provide you a more
complete report on the points answered below, we have considered it
necessary to include the tables received from the different
responsible public offices.
Question No. 1: What is the exact amount of the floating debt derived
from government obligations pending as of December 31, 1961?
Answer: According to Table No. 1 supplied by the Treasury, the
Treasury deficit as of December 31 last year reached the amount of
46.2 million colones.
Question No. 2: What Treasury deficit will there be as of the last
day of April 1962?
Answer: The National Treasurer estimates that the possible Treasury
deficit as of next April 30 will amount to 71.7 million colones, in
accordance with the analysis which appears in Table No. 2.
Question No. 3: What are the due dates of the obligations incurred by
the Government through loans for fiscal purposes supplied by the
Central Bank, commercial banks and other institutions?
Answer: Complete details on these due dates are given in Table No. 4.
The origin of the obligations included in this table, in
chronological order, is as follows:
A. Commercial Banks (El Coco Highway): In April 1961 the Board of
Directors of the Central Bank authorized the Commercial Banks a
specific [Facsimile Page 4]
ceiling up to the amount of $1.5 million, with an expiration date of
December 31, 1962, in order that the Banks might buy public debt
bonds from the Government, to permit the Treasury to pay for the
right-of-way involved in the construction of the San José-El Coco
Highway.
[Typeset Page 190]
B. Treasury Drafts: As of November 20, 1961 the Central Bank had in
its possession Treasury drafts for an amount of $12.5 million. These
certificates were thereafter cancelled November 23 with the proceeds
of the bond operation indicated below. On December 18 the Board of
Directors of the Central Bank authorized the purchase of new
Treasury Drafts up to the amount of $10 million. On that occasion it
was directed that if at the end of the year there remained a balance
pending to be redeemed, this could be cancelled through the issuance
of new Drafts. On January 2, 1961, new certificates for the same
amount of 10 million were acquired, cancelling the previous ones.
The new issue of drafts has an expiration date of February 28,
1962.
C. Purchase of Bonds by the Commercial Banks: In November 1961 the
Board of Directors of the Central Bank granted the Banco Nacional
and the Banco de Costa Rica a specific temporary ceiling of $20
million to enable them to acquire Government bonds and hold them as
a temporary investment. The expiration date of this ceiling was set
for April 30, 1962. The proceeds thus obtained by the Treasury ought
to be used primarily in cancelling the Treasury drafts in the
possession of the Central Bank, and the rest for attending to urgent
disbursing needs, especially the payment of the thirteenth month
salary of government employees.
D. Banco de Costa Rica: On February 1, 1962 the Board of Directors of
the Central Bank agreed to authorize the Banco De Costa Rica a
specific temporary ceiling, thus to permit it to buy public debt
bonds up to the amount of $2 million. The expiration date for the
ceiling was set as March 6, 1962. The operation was carried out for
a net of $1.3 million.
Question No. 4: In what amount is it calculated that the revenues for
the rest of 1962 were over-estimated?
Answer: In a letter to the Central Bank the National Treasurer
calculates that in five of the principal revenue categories of the
budget there will be a $44.3 million shortfall in revenues.
Question No. 5: Are there expenditures anticipated for 1962 that were
not included in the national Budget? If so, how much do they amount
to?
Answer: The Budget Office estimates at $21.9 million the obligations
to be met in 1962 that are not included in the budget
calculations.
Question No. 6: To sum up: What does the total National Treasury and
budget deficit amount to, taking into consideration the data
relating to the questions in the preceding paragraphs?
[Facsimile Page 5]
Answer: As indicated in Question No. 1, the Treasury deficit
according to the Report of the Situation on December 31, 1961 (Table
No. 1) reached $46.2 million. With regard to the budget for the
current [Typeset Page 191]
year, the Bank considers that the estimate of the deficit, even
taking into account the deficiencies noted under the preceding
questions, is a very uncertain matter, since such a result is based
essentially on the policy that the Executive Power may follow in
regard to public expenditures. Therefore, any calculation in this
regard must take into consideration as a fundamental element the
government policy decisions in the matter, which are unknown at this
time.
In the form set forth above the Bank believes that it has
satisfactorily attended to the objectives and anxieties of your
public interpellation, especially if there is taken into
consideration the limited time available and the objective of
delivering this letter before your departure. Nevertheless, we are
pleased to offer to amplify the above information or clarify any
point which in your judgment might be necessary for a better
evaluation of the fiscal situation in the current budget
exercise.
Leaving to your better judgment the use which you may be kind enough
to make of the information contained in this letter, we take the
opportunity to repeat, Mr. President-Elect, that we are your very
attentive and trusty servants,
Central Bank of Costa Rica,
Alvaro Castro J.,
Manager
