FILE ttpy. lanuary 27, 1959 R E S T R I C T E D. Report No. P-187

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1 FILE ttpy R E S T R I C T E D This report was prepared for use within 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 REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON THE PROPOSED LOAN TO THE BANCO CENTRAL DE COSTA RICA Report No. P-187 AND DEVELOPMENT lanuary 27, 1959

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3 REPORT AND RECOMIENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANCO CENTRAL DE COSTA RICA 1.. I submit the following report and recommendations on a proposed loan to the Banco Central de Costa Rica (the Central Bank) in an amount in various currencies equivalent to $3.5 million to assist the continuation of its capital goods importation credit program. PART I - HISTORICAL 2, The Government of Costa Rica initiated towards the end of 1952 a program for the encouragement of the importation of capital goods and materials for the betterment of agriculture and industry by a special program of credits through the nationalized banking system. On September 18, 1956 the Bank made a loan of $3 million (147 CR) to the Central Bank of Costa Rica to cover program expenditures in foreign exchange over a two-year period. The program operated through credits extended to individuals and private enterprises by commercial banks, which in turn received credits for the purpose from the Central Bank. The full amount of the Loan was disbursed by the Closing Date, September 1, The Central Bank in September 1957 requested that the Bank consider making a second loan to continue the program. 3. A Bank mission visited Costa Rica in late 1957 to review the operations of the first Toan and to appraise the need for further Bank financing. Since authorization for the Central Bank to negotiate a second loan was not approved by the Costa Rican Legislature until October 1958, another Bank mission visited Costa Rica in November 1958 to review developments which had occurred during the intervening year. The reports of these missions concluded that the program had been operating successfully and should be continued. 4. Formal negotiations for a loan took place during December and January. The Costa Rican Government was represented by H.E. Manuel G. Escalante, Ambassador to Washington, and the Borrower by Ar. Guillermo Gonzalez Truque. 5. If the proposed loan is made it would increase the total amount of Bank loans to Costa Rica to $6.5 million equivalent.

4 -2- No. Borrower Purpose Amount (equivalent in $ million) 147 CR Republic of Costa Capital Goods Importation $ 3,000,000 Rica Credit Program Of which has been repaid 242,000 Total now outstanding 2,758,000 Amount sold $ 366,000 Of which has been repaid 242, ,000 NTet amount now held by Bark $ 2,634,000 PART II - DESCRIPTION OF THE PROPOSED LOAN 6. The proposed loan would have the following characteristics: Purpose Borrower Guarantor The loan would assist the development of agricultural production and of processing and other light industries by financing the importation of capital goods and materials under a program which enables commercial banks to extend medium-term credits to finance their purchase. The loan would assist in the continuation of the program until about September The Banco Central de Costa Rica. The Republic of Costa Rica. Amount The equivalent, in various currencies, of $3.5 million. Amortization Interest Rate Commitment Charge 11 semi-annual payments, October 1960 to October /4 per cent 3/4 per cent per annum

5 - 3 - Payment Dates October 1 and April 1. PART III - LEGAL INSTRUMENTS AND LEGAL AUTHORITY 7. A draft Loan Agreement between the Banco Central de Costa Rica and the Bank (No. 1) and a draft Guarantee Agreement between the Republic of Costa Rica and the Bank (No. 2) are attached. The draft Loan and Guarantee Agreements are substantially similar to the Agreements for the earlier loan. 8. The report of the Committee provided for in Article III Section 4 (iii) of the Articles of Agreement of the Bank is attached (No. 3). PART IV - APPRAISAL OF THE PROPOSED LOAN Justification of the Project 9. A detailed appraisal of the project (TO 157a) is attached (No. 4). 10. Agriculture is of paramount importance to the Costa Rican economy and the exceptionally high standard of research and extension services make farmers eager to obtain equipment needed to adopt technological improvements leading to increased output and lower costs of production. Conditions are also conducive to investment in improved facilities for storing, refrigerating and processing farm products as well as for other forms of manufacturing and light industry tending to strengthen and diversify the Costa Rican economy. 11. The proposed loan to assist in financing a continuation of the capital goods import program enables Costa Rica to import, and Costa Rican banks to provide medium-term credit to finance the purchase of, equipment needed by farmers, merchants and manufacturers in order to expand output and to adopt improved methods of production. 12. Experience with the first loan has indicated the ability of the program to make an important contribution to Costa Rica's economic development, and the second loan to assist the program for an additional period of about two years is considered fully justified. Economic Situation 13. A full report on the Costa Rican economy (Sec M57-34) was trans-

6 mitted to the Executive Directors in February A more recent review of economic developments was contained in the report (R 58-18) dated February 24, The rapid increase in national income which has occurred since 1950, has continued despite the recent fall in coffee export prices. Because of falling coffee prices, however, the rate of economic advance is likely to be less rapid than in the past. The country has to some extent managed to avoid the necessity of adjusting fiscal and financial policies to falling coffee prices. It has maintained output and exports by increasing the efficiency, and diversifying the pattern of agricultural production (purposes to which the previous capital goods import loan has made a significant contribution). To the extent that some financial adjustments have, however, been necessary, the Government has demonstrated its ability to make them by taking vigorous steps to balance the budget, and generally to avoid extreme monetary expansion. The result has been that after a substantial loss of exchange in 1956, the exchange situation was stabilized in 1957 and improved in Costa Rica's reserves remain relatively low, giving little room for manuever. However, it may be noted that the rate of exchange for the Colon has remained virtually unchanged since before the war, and in recent years the country has not employed direct import controls. 15. Annual service on Costa Ricats existing external debt is about $5.1 million, or less than 7% of export earnings. Service on the proposed loan would increase debt service in the peak year by $750,000, which, in view of Costa Rica's present and prospective economic position, should be within her payment capacity. Prospects of Ftilfillment of Obligations 16. The proposed Borrower would be the same as in Loan 147 CR, the Banco Central de Costa Rica. Its financial position is satisfactory and its operations have consistently shown a profit. The commercial banks, through whom the loan funds would be relent, have a long record of profitable operations, and under the direction of the Central Bank should continue to administer the program efficiently. Provided that the authorities continue to pursue the sound economic and financial policy of recent years, Costa Rica should be able to provide the foreign exchange required to meet the service of the proposed loan. PART V - COMPLIANCE WITH ARTICLES OF AGREEIMENT 17. I am satisfied that the proposed loan would comply with the

7 Articles of Agreement of the Bank, -S.- PART VI - RECOMMENDATIONS 18. I recommend that the Bank make a loan to the Banco Central de Costa Rica with the guarantee of the Republic of Costa Rica in zn amount in various currencies equivalent to $3,5 million with interest (including commission) at 5.3/4% per annum ard on such other terms as are specified in the attached draft Loan and Guarantee Agreements and that the Executive Directors adopt a Resolution to that effect in the form attached (No. 5). W. A. B. niff, Vice Fresident Washington D.C. January 27, 1959 for Eugene R. Black President