Public Finances, the Weak Link of Costa Rica

Aldesa analyzed the Macroeconomic Program 2011-12, by the Central Bank of Costa Rica, with projections for 2011.

Wednesday, January 26, 2011

In our view, one of the most important elements of the program and to which attention should be paid, has to do with projections for public finances.

Given the relative similarity of economic conditions between 2010 and 2011, the most important is the role played by the Central Government in managing the growing fiscal deficit.

Although the BCCR estimate a slight deterioration in public finances, with a deficit from 5.3% in 2010 to 5.4% in 2011, it is difficult to see the consolidation of this scenario this year, in the absence of a conscious decrease in government spending.

If revenue increases through tax reform, its impact on revenue would begin to be relevant only by 2012. Added to this scenario is a level of economic activity similar to that of 2010, the result of such reform would be a moderate growth in revenue.

The primary deficit (current income minus current expenditure, excluding interest payments), which drives the government to incur into more debt each month, resulting in a process of acceleration of the deficit, is worsen by increased interest payments. The growth of the primary deficit, absent for almost 10 years, is the most important difference in the macroeconomic scenario and the main threat to economic stability and its adverse consequences on interest rates, exchange rates and inflation.

Leaving the issue of public finances aside, the BCCR's economic projections are more favorable for production, while inflation targets show a more flexible position.

The output growth (GDP) is estimated at 4.3%, above the 4% expected last year. The inflation target as low as 4% to 5%, equal to 2010.

It is expected that conditions of various productive sectors remain similar in 2011, and sectors that were strong, such as agriculture, trade, business services and transportation, continue to contribute significantly to economic growth.

Inflationary pressures are primarily of international character, affected by rising prices of food and raw materials, and may experience higher oil prices if the U.S. economy achieves greater dynamism.
Despite these potential price pressures, a target of 5% is realistic and could help the national economic growth.

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