75. Memorandum from Woodward to Moscoso, March 71
SUBJECT
- Costa Rican Financial Difficulties
On February 15 Ambassador Telles received a memorandum from President-elect Orlich of Costa Rica reviewing the fiscal situation of the GOCR, which, in the latter’s words, adds up to “a picture of absolute insolvency”, with the Government requiring a total of 134 million colones, or approximately $20 million, to balance its books in calendar 1962. The memorandum requested assistance from the U.S. to cover the deficit in the form of a long-term, low interest loan to be extended prior to June 30, 1962.
Orlich’s memorandum was delivered to the Ambassador by Raúl Hess, who has been designated as the future Costa Rican Minister of Economy in the new administration which takes office on May 8, and by Jaime Solera, who is slated to be a director of the Central Bank. The latter, acting as spokesman for Orlich, made it clear that he had no authority to speak for the outgoing Echandi Government but expressed the hope that a loan could be obtained from the U.S. to cover the budgetary deficit. The Embassy does not consider the Orlich memorandum as a formal request for a loan, which could only be made by the present Echandi Government.
The Solera-Hess visit followed a previous approach to the Embassy on February 8 by Finance Minister Borbon Castro, in which he estimated the GOCR needs from external sources to meet the budgetary gap at $5 million and promised to give the Embassy a detailed analysis of the situation, which would presumably serve to justify a loan request. This analysis has not yet been received by the Embassy nor does it have a firm indication that the Echandi Government plans to request a U.S. loan during the remaining two months of its term of office.
[Facsimile Page 2]Nature of the Deficit
The Orlich memorandum, which is said to be based on Central Bank figures, breaks down the deficit into four categories, as follows:
[Typeset Page 195]| Million Colones | ||
| 1. | Payments on internal bank loans due before April 30 | 30 |
| 2. | Payments on 1961 obligations falling due in 1962 (Floating Debt) | 43 |
| 3. | Decrease expected in 1962 revenues | 40 |
| 4. | Expenditures not included in 1962 budget | 21 |
| TOTAL | 134 |
Item 1 represents payments falling due on loans contracted by the GOCR with the commercial banks and the Central Bank. Obligations to the Central Bank consist of short term public bond issues and Treasury notes. The floating debt (Item 2) represents payments due to individuals in 1962 on obligations contracted in 1961. Item 3 represents an anticipated shortfall in 1962 revenues to meet expenditures programmed in the 1962 budget while item 4 consists of expenditures (unexplained) which were not included in the budget. Only items 1 and 2, totaling 73 million colones, appear to represent obligations for which the GOCR has already contracted.
The memorandum points out that the budgetary situation has led to the suspension of service on a number of Costa Rica’s external obligations. The country is in arrears to the extent of $600,000 on interest payments due on an Eximbank loan for the Inter-American Highway and has also failed to pay interest of £70,000 due on sterling bonds and on bonds held in France. The Foreign Bondholders Protective Council has expressed concern over the possibility of a default on service of dollar bonds due April 15. It is anticipated that all U.S. and international lending institutions will suspend action on current loan applications of the GOCR because of the serious question that these defaults have raised respecting its credit-worthiness.
From the material already submitted by the Embassy, particularly the Central Bank memorandum on Costa Rica’s fiscal situation, it appears that the present budgetary crisis is the culmination of several years’ mismanagement of GOCR finances and that rectification of the situation will require a thorough overhaul of GOCR budget and fiscal practices as well as a reform of the tax structure to create new sources of public [Facsimile Page 3] revenue. In this connection, an official of the IBRD has indicated that it would be prepared to respond to a GOCR request for the assignment of a fiscal expert to provide advice on reform measures.
The loss of confidence in the national finances is already having adverse effects on the national economy, creating uncertainty for private enterprise and threatening a halt in economic and social development programs undertaken by the GOCR. USAID reports that the Government has failed to make contributions to certain projects included in the aid program because of its shortage of funds.
[Typeset Page 196]Proposed Fact-Finding Mission by AID Fiscal Expert
In response to a request from the Director of AID/Costa Rica for the temporary detail of an economist versed in fiscal matters to assist the mission in assessing the Costa Rican financial situation, AID/W is considering the sending of Mr. Frederic R. Fisher to San José.
ARA believes that the timing of sending an AID official to Costa Rica for the above purpose has political implications which merit serious study. In any event he should not proceed until the new administration takes over on May 8. 1) The Echandi Administration has about two months to go before transferring power. Echandi has not requested a loan. It is not clear whether his government intends to do so or intends to leave the deficit for the incoming Orlich Administration to handle. In either case the sudden appearance of the deficit will most certainly be fraught with politics. When the PLN assumes power they will naturally exploit the deficit problem bequeathed by the Echandi Administration, both for political purposes and in order to justify the necessary corrective measures. If a United States expert carries on extensive consultations with the Minister of Finance and the Central Bank the United States will find itself in the middle of a political fight. This might prejudice our desire to help the Costa Ricans work out a solution to the problem. 2) Even though Echandi applies for a loan no meaningful assessment of corrective measures could be considered with the present lame-duck administration. 3) It is not clear whether AID is prepared, in principle, to consider favorably a GOCR request of $5 to $20 million for a budgetary support loan.
Because of the political implications involved in Costa Rica’s financial crisis and the undesirability of any action that could be intergrated by the Costa Ricans as a United States commitment to extend financial assistance at this time, ARA recommends that prior to Mr. Fisher’s going to San José the Embassy and AID/Costa Rica be requested to transmit additional information on the problem available through their channels. From this data we should be able to make an adequate preliminary assessment of the situation and recommendations for United States action.
- Costa Rican financial difficulties. Confidential. 3 pp. DOS, CF, 818.10/3–762.↩