SAN JOSÉ, Mar 24 (Inter Press Service) – The possibility of a recession in the United States is already causing repercussions in Costa Rica, where exports and the value of real estate in tourist areas are expected to contract, according to the president of the country’s Central Bank, Francisco de Paula.

Like several other Latin American countries, Costa Rica has signed a Free Trade Agreement with the United States, its main trading partner, but the treaty’s entry into force depends on the Costa Rican parliament’s approval of certain complementary laws.

Costa Rican officials will have to take measures to weather the turbulence of international financial markets, triggered by the bursting of the U.S. housing market bubble. However, Costa Rica may not be as severely buffeted as other Central American countries, because of the “diversification” of its economy, de Paula said in an interview with IPS correspondent Daniel Zuera.

U.S. Treasury Secretary Henry Paulson admitted last week that the U.S. economy is going through a phase of “sharp decline,” although he avoided the word “recession”, which has already been used by a number of private sector analysts.

The U.S. Federal Reserve lowered its interbank lending interest rate from an annual three percent to 2.25 percent in an attempt to reinvigorate the economy. The markets, according to experts, were hoping for an even larger rate cut.

IPS: How does this affect the Costa Rican economy?

FRANCISCO DE PAULA: The crisis does affect us. There are already some signs, shall we say, of slowdown. It will be very difficult to avoid its effects, from the point of view of external demand. Fortunately we are in a position to face it, as we have ample reserves.

It would be unrealistic to think that we could escape the effects of such a complex situation. Demand for our export products will fall, and we shall have to see what the impact is on the tourism industry.

There is a potential element of compensation, in that U.S. tourists are finding it very difficult to travel to Europe or Asia because of the depreciation of the dollar. There could be a change in direction of tourist traffic, and Costa Rica is well-positioned to attract visitors.

But another concern is that, if the recession bites deep, many people in the U.S. may decide to postpone their vacations. One question is how much that might affect real estate markets, and especially construction, in coastal areas in Costa Rica.

IPS: Will Costa Rica have to follow the Federal Reserve policy of cutting interest rates?

FDP: We are within the U.S. economic sphere of influence, although we have different rhythms, levels and priorities. The United States is more concerned with growth than with inflation. For us, it’s the reverse.

But our interest rates policy cannot be divorced from that of the United States. The Federal Reserve’s decisions directly affect us.

IPS: How would you describe the performance of the Costa Rican economy?

FDP: In the past few years it has performed very encouragingly, with strong growth. In 2007 the economy grew by 6.8 percent, and by 8.8 percent in 2006, with a dynamic export sector and a high proportion of foreign direct investment, which have financed the country’s needs for foreign currency reserves. The fiscal situation has improved. We predict economic growth of about 3.8 percent in 2008.

In 2007 the open unemployment rate was 4.6 percent, the lowest in recent years. Poverty fell by three percentage points and now affects 16.7 percent of the population. I see a dynamic economy, with growth in several sectors, and which is not powered by a strong price increase in a single commodity, as in the case of other countries in the region.

IPS: What is the main concern?

FDP: Inflation, which is still high. The forecast for 2007 was an eight percent rate, but by year-end, inflation stood at 10.8 percent. We have the vulnerabilities of any Central American economy: dependence on imported oil and on certain commodities which have risen in price and hit us hard. We import 100 percent of our wheat, and bread is a staple food.

The impact of commodity prices prevented us from meeting the Central Bank’s inflation targets. Last year we were on target for eight percent annual inflation until August, but in the last four months heavy external shocks knocked us off course.

IPS: Your predecessor, Eduardo Lizano, used to say that the Costa Rican economy “does the doggy-paddle,” because it doesn’t drown, but it barely keeps its head above water. Has it branched out into a more elegant swimming style?

FDP: The “doggy” has been doing a lot of practising. We can take some important decisions. The exchange rate system’s transition process is difficult. In October 2006 it changed from a system of mini-devaluations to one of exchange rate bands, with the goal that our currency, the colón, will eventually float freely with respect to other currencies.

There were some temporary hitches, but the transition will allow the economy to make much more progress. The improvement in public finances, especially in tax collection, will help a great deal. But there is still much to do, for example in tax reform.

IPS: How well have the exchange rate bands succeeded, and when will the colón be freely floated?

FDP: It has been quite a change for us, because previously we had 22 years of the mini-devaluation system. The transition was smooth. Floating the colón is part of a project to control inflation, a different way of setting monetary policy.

One of the requirements is that the exchange rate be flexible. Flexible exchange rates are not an aim in and of themselves, but are one of the instruments we need in order to change the way we implement monetary policy, and to achieve better success in lowering inflation, which is our main concern.

IPS: Is the present boom due to the inflow of speculative capital? How might that affect the country?

FDP: It’s very difficult to measure. Our estimate is that 1.88 billion dollars entered the country in 2007 as foreign direct investment. That more than covered the deficit in the current account of our balance of payments. Of course, there is always concern about the volume of capital of a more speculative nature, which generates “bubbles” of demand, especially consumer demand.

One of the issues that concerns me is the growth of credit in the private sector, especially over the past year. We must be careful, because that could lead to situations like the one we are seeing in the United States, with a crisis resulting from a strong expansion of sub-prime mortgage lending, and consumer spending financed by credit cards. END/IPS/LA NA IF IP QA/TRASP-VD-SW/DZ/JSP-MJ/08) (END/2008)

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