Country Report Costa Rica July 2008

Outlook for 2008-09

• The government will focus on passing the laws required to bring the Dominican Republic-Central American Free-Trade Agreement (DR-CAFTA) into effect and is confident this can be done well before the October deadline.
• The government will also prioritise a programme to cushion the poor from high food prices, and to encourage farmers to increase plantations.
• Negotiations will continue to form a Central American customs union, which will then seek a free-trade agreement (FTA) with the EU.
• We forecast that GDP growth will slip to 4% in 2008, and to 3.1% in 2009, as export growth is hit by the US slowdown and private consumption by high inflation and falling manufacturing output.
• The current-account deficit will almost double in 2008, owing to strong first-half demand and high oil imports. With just 60% of the deficit forecast to be financed by FDI in 2008, there is a risk of financing difficulties.

Monthly review

• Although progress has been slow on the DR-CAFTA implementation laws, the government is on track to have them all passed by the October deadline.
• Importantly, the two most controversial laws—to liberalise the telecoms and insurance sectors—have already been passed.
• The PAC has lost a legislator to the independent benches following a series of disagreements over DR-CAFTA legislation.
• Monetary policy tightened again in June, with the Central Bank raising its reference rate to 8% to try to contain inflation.
• The government accounts strengthened over the first five months of the year, owing to strong revenue gains. However, revenue growth now appears to be slowing.
• The government is pushing through a programme to support the rural poor suffering from high prices for basic foods, and to encourage local farmers to increase production.
• However, a programme to promote fuel saving measures and reduce the burden of high international oil prices might not pass.
• Inflation accelerated in June to a two-year high of 12.8%, driven by high food prices.
• With free-zone exports starting to fall and import spending very strong, the current-account deficit is widening sharply.

Source: Country Report