Costa Rica - Highway Studies Project

CIRCULATING COPY TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use FILE: C0PYReport No. P-1154 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COSTA RICA FOR A HIGHWAY STUDIES PROJECT December 6, 1972 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVAL3NTS Official rate: colones 6.62 = US$1.00 Free market rate: Colones 8.60 = US.1.OO  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COSTA RICA FOR A HIGHWAY STUDIES PROJECT I submit the following report and recomnendation on a proposed loan to the Republic of Costa Rica for the equivalent of $1.4 million to help finance a highway studies project. The loan would have a term of 10 years, including a 2-year grace period with interest at 7-1/4 percent. PART i - THE ECONOMY 2. An updating economic report entitled "Memorandum on Recent Economic Developments and Prospects of Costa Rica! was distributed to the Board on May 4, 1972. A country data sheet is attached as Annex II. The long-run development performance of Costa Rica has been among the best in Latin America, combining high average economic growth rates with a continuous effort to distribute more broadly the benefits of development. During the past decade, output expansion of over 6 percent per year in real terms, coupled with some reduction in the population growth rate, resulted in an increase in per capita current GNP from $420 in 1960 to over $560 in 1971. Also in spite of a labor force growing at over 3 percent per annum, open unemployment was kept at a low 4-5 percent of the economically active pop- ulation. The absence of a standing army and minimal defense expenditures permitted the public sector to channel a large share of resources to the economic and social sectors. Today almost nine-tenths cf the population are literate and the mortality rate is one of the lowest in the Hemisphere. However, the vagaries associated with heavy dependence on a few export items as a source of income and growth, together with periods of overly expansionary fiscal and monetary policies, have led to periodic financial difficulties. At present Costa Rica is going through one of these periods of serious fiscal and balance of payments stringency. 3. The Administration which came to office in May 1970 made mobiliza- tion of idle productive resources through credit expansion a major goal of economic policy. During 1971, credit to the private sector increased by over 27 percent, and a large share of banking system credit was financed by Central Bank rediscounting. Central Government revenue grew by only five percent, because of increased import exemptions, a fall in coffee export taxes and a decline in profits of the banana companies, while expenditures increased by over 20 percent. The level of prices increased somewhat more than in previous years, although the main demand pressures were translated into rising imports, which grew by about 30 percent in 1970 and 10 percent in 1971. This unfortunately coincided with a weakening in world coffee and  banana prices, so that export income stagnated in 1971. By mid-1971, net interrational reserves fel1 to the equivalent; of less than four weeks of imports. The rate of real GDP growth also slowed down to around _..5 percent in 1970-71, and is likely to be no more than 4 percent in 1972. 4. In an effort to restore financial stability, the Costa Rican authorities have taken various measures during the past eighteen month^Ls. Tn June 1971, the Central Bank reintrod4uced a dual exchange rate, sil".r to the one that had been in ex stence in the 1