By Wendy Anders

The Guatemala-based Central American Institute for Fiscal Studies (ICEFI) in a recent report states that while good public debt management can be a tool for promoting a country’s development, if the debt goes beyond the country’s ability to pay, it can stress public finances and divert resources from social programs and other essential needs.

Costa Rica was singled out in the ICEFI report as one Central American country that is “on the verge of fiscal unsustainability.”

Costa Rica, states the report, has historically failed to comply with its debt commitments due to large investments in the population’s basic needs, insufficient amount of tax revenue generation, and a lack of good public administration systems.

Costa Rica achieved a reduction in the debt / GDP ratio, which was the result of accelerated real growth of its economy, which averaged 6.5% between 2005 and 2007. However, during the economic crisis starting in 2008, the debt suffered a sharp escalation of 14.4 percent.

The report cites “countercyclical policies” that were implemented by the Costa Rican government during the economic crisis period when it enacted the “Shield Plan” (Plan Escudo) which aimed at social protection and to provide an economic stimulus.

The plan was directed towards four main groups:

a) Families received increases of 15 percent in non-contributory pension schemes and increased social programs;

b) Public sector employers were allocated the equivalent to 5% of GDP to benefit workers;

c) Companies were granted resources to invest in educational and road infrastructure;

d) The financial sector which received the USD117.5 million capitalization of state banks.

These programs, conclude ICEFI, expanded annual public expenditures leading to an increase of 18 percent in total indebtedness over the last seven years of financial management, to reach 42.7 percent of the country’s gross domestic product in 2015.

Sixty-five percent of the debt accumulated during 2011-2014 was spent on general public services. Of that percentage, on average, about 70 percent was used for transactions of public debt; i.e for payment of debt interest and amortization.

This practice indicates a runaway debt situation in Costa Rica, stated ICEFI, in which debt is contracted to pay debt, without positive new social or economic returns for the country.

This situation suggests that the country has the inability to generate primary surpluses to service debt and a weak management of public finances.