costa rica debtby TCRN Staff

In 2009 the burden of public debt rose 2.9 percentage points and ended the year in an amount which represented 42.3% of domestic production.

This is the largest increase in percentage points registered since 1999 and it reverses a downward trend that had that had been occurring since 2003.

In absolute terms, the debt ended the year at ¢7.1 million million, according to the Central Bank in its monthly report for February.

The value of the debt burden is a comparison between the amount of public debt with the value of output (gross domestic product, GDP).

Following the economic crisis of the early ’80s, the public debt came to represent almost the entire country’s production.

After a series of measures, the country managed to lower the amount of debt relative to production up to 60% in 1992, a figure which was maintained for almost 12 years.

Between 2004 and 2008, the debt burden decreased significantly, going from 60% to 39.4%, but rose again last year.

During the first three years of the current government, former Minister of Finance, Guillermo Zúñiga, had estimated that the debt burden in 2009 and at 2010, would increase by three percentage points each year.

The Helio Fallas economist explained that the increase in debt in 2009 versus 2008 was the result of a combination of lower tax revenues and increased spending.

Total revenue fell 7% in 2009 versus 2008 and total expenditures by 16%, according to Central Bank data.

In the February report of the Central Bank it states that the internal debt rose from 27.2% of production in 2008 to 29.8% in in 2009.

The external debt hardly moved (increased from 12.2% to 12.5%).

According to Central Bank data, the internal loans provided mainly by the state banks, the Social Security Fund and the private sector, Fallas said.

“This means that domestic financing at some point could affect interest rates, however, that will depend on the evolution of tax revenue, which in turn depends on economic growth and efforts to reduce tax evasion and total expenditures,” said Fallas.

Another factor is that private sector credit, to the extent it is reactivated, would increase the pressure on interest rates.

Central Bank President Francisco de Paula Gutierrez had said that the country has room to increase the debt burden in 2009 and 2010, due to lower than achieved in previous years, however, also warned that the country can not continue along that path.

On the appropriate level of debt, Fallas said it depends on each country.

To fail, the tax debate should be framed in the lessons of the crisis. “It seems necessary to analyze the structural problems of public finances, as the regressive, the high tax evasion in the tax system and the need to build mechanisms of automatic stabilizers.”