Central Bank Sees Lower Production

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The Central Bank, continuing the government's somewhat conservative predictions for this year, foresees a production growth of 3.8% this year, less than last year's 4.2%. They also predict a similar (4.74%) inflation and higher interest rates.

Central Bank president Rodrigo Bolaños said Wednesday that the lower production figures were due to a probable deceleration of demand overseas stemming from worldwide economic woes and due also to the fiscal deficit (4.5% of GNP) in this country.

Bolaños said the deficit would cause the government to demand more loans, competing for credit with local companies and individuals. This competition, explained Bolaños, will raise interest rates which in turn will cut back plans for investment by private business.

To avoid damaging private business, the Central Bank has been forced to "sacrifice" its inflation reduction plans. This announcement obviously pained Bolaños, a low inflation rate proponent, who admitted, "It was hard for us to swallow this pill."

The absence of a tax reform legislation to raise government revenue also impedes the acquisition of International Monetary Funds in case of a European economic meltdown. The legislation is still pending in the unicameral Legislative Assembly.

The situation is complicated by recent polls that shows the tax reform -- as crafted by President Laura Chinchilla and her advisors -- to be unpopular with the general populace and business. Her talks with Citizen Action Party leader Otton Solis in order to gain a majority also received criticism. (See previous articles.)

As a hedge against European Union economic difficulties, Bolaños said Wednesday that this country would buy $1.5 billion in monetary reserves for 2012-13. (A European monetary crisis would lead to diminished export sales and lower foreign reserves.)