Costa Rica - Capital Goods Importation Project

R E S T R I C T E D FILE COPY Report This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on a PROPOSED LOAN to the BANCO CENTRAL DE COSTA RICA for a CAPITAL GOODS IMPORTATION CREDIT PROGRAM IN COSTA RICA September 6, 1956  LlTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT 'ND RCOIIIENDATTONS OF THE PRESIDENT TO THE EXTCU-TF1ErJ 1ECTORS ON A PROPOSED LO;U'I TO THE BAtCCO CE!'TR`L DE CCOSTA RICA I submit the fo'lLowing report and recommendations on a proposed loan of 'i3,000,000 or its equivalent in other currencies to the Banco Central de Costa Rica to assist in financing the Central Bank's capital goods importa- tion credit program. PART I - HISTORICAL 2. In late 1952 the Costa Rican Government initiated a program for the encouragement of imports of capital goods through the extension of credit througlh the iNlationalized Banlcing System. This program has been operated successfully, but because of a reduction in the availability of foreign ex- change reserves, it had to be curtailed appreciably by 19$5 and the Bank was then asked to consider assisting vwith a loan. Previously, Costa Rica's defaulted external debt had been an obstacle to Bank operations in that country. The Costa Rican Government had acted to remedy this situation and by 1954 the dollar debt had been settled; the sterling debt was settled later and a settlement of the F-rench franc debt, wvhich amounted to the equivalent of some qp905,000, was offe,ed on terms understood to be acceptable to the French Bondholders. (A law authorizing thiis settlement is now before the Costa Rican Legislature). Under these circumstances, the Bank consider- ed that debt settleinent had reached a stage where it no longer presented an obstacle to Bank operations in Costa Rica and since the program was deemed suitable for Bank assistance, the Bank in July, 1955 invited negotiators to come to WrJashington. However, the beginning of negotiations was considerably delayed awaiting passage of legislation by the Costa Rican Legislature to authorize the undertaking of such a loan and to empower the Central Bank to negotiate. Plthough the program was suspended for a short period early in '956, it has since been continued on a reduced scale. 3. Formal negotiations for a loan began in lashington on August 20, 1956, with Dr. Mario Saborio, a member of the Board of the Central Bank, and Dr. Jorge Hazera, Counselor of the Costa Rican Embassy in W;ashington, reoresenting the Borrower and Dr. Gonzalo J. Facio, Costa Rican Pmbassador to UJashington, representing the Government. 4. The proposed loan would be the first Bank loan in Costa Rica.  - 2 - PART II - DESCRIPTION OF IHE PROPOSED LOAN Borrower 5. The Borrowier would be the Banco Central de Costa Rica. 6. The Guarantor would be the Republic of Costa Rica, a member of the Bank. Amount 7. The loan would be in the amount of j"3,000,000 or its equivalent in other currencies. Purpose The proceeds of the loan would be used to finance the foreign exchange costs of the program for importation into Costa Rica of capital goods for develooment of agricultural production and processing and other light industries by credits extended to individuals and private enter- prises by the commercial banks of the nationalized banking system, which in turn have received credits from the Banco Central. The proposed loan would assist in the continuation of the procram until 1958. ASmortization 9. Th-e loan would be for a period of seven years with a period of grace of about two years. It would be amortized by semi-annual payments beginning October 1, 1958 and ending October 1, 1963, as set out in Schedule 1 of the proposed Loan Agreement. Interest, Commission and Commitment Charges 10. The loan would bear interest at the rate of 4 3/hZ/ per annum, including the statutory commission of 1%. Tne commitment charge would be 3/4 of 1% per annum, 2nd would accrue froma the effective date of the Loan Agreement or a date 60 days after signature, wihichever is the earlier. Legal Instruments and Legal Authority 11. A draft Loan Agreement between the Banco Central de Costa Rica and the Bank is attached (No. 1). 12. A draft Guarantee Agreement between the Republic of Costa Rica and the Bank is also attached (No. 2). 13. The draft loan and Guarantee Agreements are substantially in the form currently used by the Bank.  - 3 - 14. Tle report cf the Committee orovided for in 1\rticle III Section 4 (iii) of the frticles of iagreement of the Bank is attached (No. 3). PaRT III - APPRAISAL OF T.E PROPOSED LOAN 15. A detailed appraisal of the project (T.O. 92c) is attached (No. 4) A report entitled "Recent Developments in the Costa Rican Economy" (.!.H. 50a) is also attached (Yo. 5). Justification of the Project 16. The program which the proocsed loan would assist has now been in operation long enough to have demonstrated that its administration is effective, 'polications for credit are carefully processed, including consideration by the Iiinistry of 'Igriculture and Industry or the National Production Board, to assure that the credits are for purposes of signifi- cance to Costa Ricals development. The number of delinquent debts has been small and experience gained since the start of the program has indicated that it meets the needs of private enterprise in Costa Rica for importation of the capital goods required for expansion of agricultural production and processing and other light industries. It is exoected that agricultural production will continue to expand in the future to satisfy the requirements of a growJing population; the proposed loan would permit an expansion of recent trends toward greater output and more efficient production, w%ihile at the same time facilitating the establish- ment of light industries, most of which are smeall and are related to the orocessing of agricultural products. Economic Situationi 17. An Economic Report on Costa Rica (I0.H. 31a, ;.ugust 10, 1954) was tranrsitted to the Executive Directors on .ugust 12, 1954 (Secretary's YIeriorandum No. 1-127). The report attached as No. 5 describes developments since that time. 18. Costa Rica has achieved noteworthy economic growth, particularly during the past decade. her economy is largely agricultural. In the Central Plateau, the area of established settlement, agricultural techniques and output are being steadily improved, largely on relatively small owner-operated farms. Thanks to well-conceived agricultural policies and institutions, including unusually good technical services, Costa Rica has been able to increase agricultural output during recent years. There has been in addition movement into formerly unsettled areas in the NJorth, suitable for both cattle and warm-climate agriculture, and to the Pacific Coast, where the foreign-owned Banana Company has been making considerable investments in banana, cacao and African palm oil plantations.  19. Costa rica's principal exports are bananas, coffee and cacao. lmost ail banana exports are made by the Banania Company (a subsidiary of the United Fruit Company); relations between the 3anana Company and the Government have been amicable and a contract increasing the Banana Company's tax payments in Costa Rica was negotiated in 1954. Costa l'ican coffee is of a high-grade, mild type, which finds speciality markets. There is increasing use of modern rmethods involving the use of fertilizers and fungicides, and replacement of old trees with improved varieties. Efforts are being made to increase the yields of cacao plantations by spraying to reduce the effects of the fungus disease. 20. In recent years, Costa Rica has shown skill and prudence in the management of her financial affairs. During 1954 there was a mild inflationary tendency, originating mainly from a small budgetary deficit. This led the monetary authorities to tighten their credit policies, applying most pressure unon importers and inventory holders in order to protect the balance of payments position. Budgetary balance was restored in 1955, and domestic prices, 'Which had been virtually stable Lro,m 1951 through 1953, were almost stable in 1955. 21. At the end of 1955 total external public debt (including j0 million undisbursed under Eximbank loans) was almost ',34 million equivalent, nitii peak service of :2.8 million in 199. Service on the loan now proposed would increase the total service in 1959 to -35 maillion. Costa Rica's present and prospective economic position indicate that this level of service would be -well withini her Payment capacity. Prospects of Fulfillment of Obligations 22. The proposed Borrower is an autonomous central bank whose functions are to organize and direct the nationalized banking system, regulate foreign exchange, promote credit facilities and supervise the operations of all banks and banking agencies in Costa Rica. It is a bank of issue. Its financial position is satisfactory and its operations have consistently showln a profit. The Nationalized Banking System h-as been efficiently operated and the loan procedures and ex?eriences of the individual commercial banks of the System have been good. Provided that the authorities continue to pursue adequate economic and financial policies, the Banco Central should have the foreign exchange required to meet the service of the proposed loan. PhiRT IV - COMPLIANCE -ITH A'RTICLES OF AGREZ1TIENT 23. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  -5- PEAT V - PTC'DIU. lTD'TI1S 24. I recornend th-at the Banlc at this time mike to the Banco Central de Costa Rica (Tith the guarantee of the iRepublic of Costa Rica) a loan of ks3,000,000, or the ec,uivalent thereof in other currencies, for a term of 7 years with interest (including commission) at the rate of 4 3/14% per annum, and on such other terms as are specified in the draft Loan A.greement, and that the Zcecutive Directors adopt a resolution to that effect in the form attached (No. 6). Eugene R. Black September 6, 1956.