Foreign Relations of the United States, 1961–1963, American Republics; Cuba 1961–1962; Cuban Missile Crisis and Aftermath, Volumes X/XI/XII, Microfiche Supplement

81. Airgram A–46 from San Jose, July 23¹

San Jose, July 23, 1962

SUBJECT: Country Team Recommendation for Fiscal Assistance to GOCR. JOINT EMBASSY/USAID.

SUMMARY

The Ambassador and the Country Team have carefully studied the GOCR’s request for U.S. financial assistance to help the new Government meet the fiscal deficit which it inherited on coming to power. We are convinced on the basis of such incontrovertible indications as shortfalls already evident in current income statements, delays on development projects, and the 40% discount prevailing on Government bonds in the local market, as well as from the IMF report and the GOCR’s statements and analyses, that Costa Rica faces an exceedingly difficult fiscal situation, but that the new government has already shown a sincere determination to invoke politically undesirable but necessary measures to meet its problem and that with some emergency help from outside the GOCR will be able both to face up to the 1962 deficit and to operate on a sound fiscal basis in 1963. The Ambassador and the Country Team agree that if no financial help from the U.S. is forthcoming the political effects will be both serious and widespread in terms of U.S. objectives and interests not only in Costa Rica but possibly in other Latin American countries. Most important the Alliance for Progress will be slowed down in Costa Rica owing to the inability of the GOCR to provide its required share of development projects. Therefore, the Ambassador and the Country Team are fully agreed that there are cogent political and political-economic reasons to justify prompt U.S. assistance to Costa Rica on an emergency basis. We recommend that grant or loans, or a combination of both, be furnished to Costa Rica in the amount of $10 million to be applied to a specific series of development projects to be selected from the 1962 and 1963 budgets, and that in addition the Department use its good offices to the utmost in supporting a Costa Rican request to re-negotiate its outstanding loans with the Export-Import Bank. END SUMMARY

I. The Budget Problem and the Government’s Need for Assistance

The new Government of Costa Rica currently faces a fiscal deficit of such proportions that it has felt impelled to ask U.S. assistance to supplement its own efforts to alleviate the problem. The present situation is a culmination of developments that go back a period of several years, during which time government revenues have not kept pace with expenditures.

Since 1956 government expenditures have increased at a rate of nearly 7 percent per year, while actual revenues during the same period have increased at an average annual rate of only 4.5 percent. Between 1960 and 1961 they actually declined by almost 9 percent, largely because of decreased revenues from import duties, which normally account for about two-thirds of government revenue. Largely through resort to the public credit (unpaid bills, treasury letters, and bond issues), the government has managed in the past to cover its deficits, but at the price of a cumulative stretching of such credit. A point has now been reached where it is apparent that the existing revenue structure will not support a politically suitable level of expenditures unless the government can obtain additional funds from other sources.

There has been much partisan argument among the Costa Ricans regarding who is to blame for the present state of affairs, but the basic figures making up the record of the situation, from a quantitative standpoint, have not been the subject of dispute. The issue has been a matter of interpretation, with disagreement centering on the question of how serious a problem the figures show.

The GOCR now estimates its fiscal problem at $163 million. To cover this deficit it proposes to increase domestic receipts and reduce expenditures resulting in a saving of $73.7 million, to renegotiate the Government’s debt to the Social Security Institute in the amount of $23, and to seek external assistance to cover the remaining $66.3 million. (Enclosure No. 1) At the time of his inauguration (May 8, 1962) President ORLICH believed that $20 million in external assistance would be necessary. Following several discussions with the Ambassador, the amount requested was scaled down to $10 million, the GOCR in the meantime having moved toward further domestic measures to reduce the size of the budget deficit.

In reviewing the GCR’s fiscal situation a number of facts stand out quite clearly. These facts cannot be obscured by arguments premised upon the obvious difficulty of determining the size of the anticipated 1962 budgetary deficit or by arguments over such terms as “treasury deficits”.

1. The straightened circumstances of the GCR’s finances are evidenced when income received as of June 30, 1962 is compared to income estimated for the entire year. The total regular budget income was estimated at $422 million of which approximately $183 million had been received by June 30, 1962. The major short fall is in customs revenues where of an expected total of $249 million only $79.4 million had been paid. The Ministry of Finance does not expect the year end total to pass $180 to $190 millions. Income tax payments have reached $37.5 million of a total estimated $41 million. The emergency character of this problem is evidenced by the GOCR’s determination to produce and live up to a balanced fiscal situation in 1963 (see Enclosure No. 2).

2. It is a fact that the GCR is having a difficult time in meeting its payrolls. Little or no funds are available for the provision of supplies for hospitals, prisons, extension service, etc. The $5 million loan from the Continental Illinois Bank is to be utilized in large part to service external and internal debt and a small part also to pay for the government’s running expenses. The next four months make up a period of low income flow and will present a period of definite budgetary crisis;

3. Lack of local funds are paralyzing work on development projects which fall within the Alliance for Progress category. These include the highway development, the school construction, the low cost housing and water supply improvement projects. This is particularly serious as there is genuine interest on the GCR’s part to implement a dynamic Alliance program;

4. The budget deficit problem has been growing in severity over the past six years. The Central Bank gives the following figures as being the adjusted deficit or surplus:

1957	(−C 20.5)
1958	(−C 18.3)
1959	(−C 32.9)
1960	(−C 29.2)
1961	(−C 91.2)
1962 estimated	(−C108)

The new government has inherited an admittedly bad fiscal situation and appears to be taking determined steps to eliminate the same.

5. The GCR’s credit has sunk to a new low. Bonds are selling at a 40% discount making new issues virtually unmarketable which makes for extremely expensive financing.

6. A large proportion of the GCR’s budgetary expenditures go toward meeting payrolls, but if it should resort to wholesale dismissals it would be legally liable for such a large amount of severance payments that the budget situation would be aggravated rather than improved.

7. Given these conditions, the new government will not let its development program go by the board in its totality. The interest in the Alliance for Progress has not diminished. If external development assistance for local currency use is not forthcoming, it is most likely that the GCR will resort to the issuance of colon notes to cover its operations.

The situation in brief seems to indicate that the GCR has little more than funds with which to meet payrolls. Government offices and official institutions are short of all types of supplies and operating necessities.

[Here follow seven pages of Part II, “Self Help Efforts Being taken by the GOCR to Meet its Fiscal Problem.”]

1. Country Team recommendation for fiscal assistance to GOCR. Official Use Only. 4 pp. DOS, CF, 818.10/7–2362.