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### Viewing cable 08SANJOSE444, SCENESETTER FOR COMMERCE DAS WALTER BASTIAN'S AND TREASURY

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08SANJOSE444 | 2008-05-27 21:09 | 2011-03-02 16:04 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy San Jose
Appears in these articles: http://www.nacion.com/2011-03-02/Investigacion.aspx

`

    VZCZCXYZ0001
    PP RUEHWEB

    DE RUEHSJ #0444/01 1482152
    ZNR UUUUU ZZH
    P 272152Z MAY 08
    FM AMEMBASSY SAN JOSE
    TO RUEHC/SECSTATE WASHDC PRIORITY 9768
    INFO RUEHMU/AMEMBASSY MANAGUA 5323

` `

    UNCLAS SAN JOSE 000444

    SENSITIVE
    SIPDIS

    DEPT FOR WHA/CEN, WHA/EPSC, WHA/PPC AND EEB
    PLEASE PASS TO USTR DOLIVER/AMALITO
    PLEASE PASS TO TREASURY SGRAY
    MANAGUA FOR DAVID KRZYDA: PLEASE PASS TO DAS BASTIAN AND DAS ONEILL

    E.O. 12958: N/A
    TAGS: CS ECON ETRD PGOV PREL
    SUBJECT: SCENESETTER FOR COMMERCE DAS WALTER BASTIAN'S AND TREASURY
    DAS BRIAN O'NEILL'S TRIP TO COSTA RICA

    REF: A. SAN JOSE 410
         ¶B. 07 SAN JOSE 1926

    ¶1. (SBU) SUMMARY: Embassy San Jose warmly welcomes Commerce DAS
    Walter Bastian and Treasury DAS Brian O'Neill.  Both visit Costa
    Rica as the effort to implement CAFTA progresses through the final
    stages of modifying Costa Rican laws to conform to commitments made
    under CAFTA.  The Arias administration remains deeply committed to
    CAFTA, and is slowly making progress.  The government's pro-CAFTA
    coalition remains fragile.  Eight of 13 CAFTA-related bills have
    been completed; five others remain in progress, including those
    covering controversial intellectual property (IP) and insurance
    issues.  Apart from the CAFTA debate, the Costa Rican economy
    continues to post positive figures:  foreign direct investment (FDI)
    remains high, tourism numbers have been stable or increasing, and
    exports have been growing (now exceeding USD 8 billion).  Also in
    the backdrop of the all-consuming CAFTA saga are positive reforms
    underway within the Ministry of Finance.  Treasury's Office of
    Technical Assistance (OTA) programs have contributed to the GOCR
    increase in tax collections (36 percent in 2007) and an increasingly
    more sophisticated approach to budgeting.  END SUMMARY.

    -------------------
    THE CAFTA SCORECARD
    -------------------

    ¶2. (U) As of May 27, the national assembly (Asamblea) had completed
    over half the CAFTA legislation (eight of 13).  A ninth bill (on IPR
    reforms) was bounced by the Supreme Court for constitutional
    questions (see para 5 below).  The four remaining bills (on
    modernizing telecommunications, opening the insurance market, making
    additional IP changes, and ratification of various standing CAFTA
    amendments) are in varying stages of action:

    COMPLETED BY ASAMBLEA:
    Signed into law:              6
    Pending signature:            2

    WORKS IN PROGRESS AT THE ASAMBLEA:
    Returned by Supreme Court:    1 (Asamblea to correct and vote
    again)
    Under debate:                 4

    TOTAL                        13

    ---------------------------------
    THE NEVER ENDING CAFTA CHALLENGES
    ---------------------------------

    ¶3. (SBU) The Asamblea made more progress on CAFTA legislation in the
    four months from November 2007-February 2008 than its predecessor
    had in the previous four years, but momentum dissipated after the
    EIF extension was granted.  The leaders of the 38-seat pro-CAFTA
    coalition well understand the need to keep moving, but have found
    this challenging.

    ¶4. (SBU) The principal challenge is maintaining and managing the
    government-led coalition of 38 members (the G38).  This is important
    because a two-thirds majority (precisely 38) is needed to form a
    quorum, to set rules, and to manage most legislation.  Several weeks
    ago, Christian Unity Party (PUSC) member Bienvenido Venegas, tried
    to parlay his vote into a political trade for more attention and
    resources from the central government for his home district
    (Puntarenas).  Though the GOCR cooperated to a point, Venegas's
    support has remained elusive.    Now, the Libertarian Movement (ML)
    party is challenging the GOCR by delaying action on legislation.  ML
    has not cooperated with the G38 to grant fast track authority --
    needed in order to meet the October deadline -- to the remaining IP
    bill and a bill comprised of CAFTA's amendments.  The current
    impasse prompted Foreign Trade Minister Marco Vinicio Ruiz to
    publicly comment on the inaction and state his deep concerns that
    the inaction "is counter to the interests of the nation and
    achieving FTA approval prior to the October 1 deadline."  Privately,
    COMEX officials describe a frustrated ML party that desires a higher
    profile for its cooperation with the GOCR on CAFTA but feels
    short-shrifted.  Also, ML may recognize that its ultimate party
    fortunes are limited and the current situation best defines a moment
    of pivotal power -- and one to exploit -- for the party.

    ¶5. (SBU) An ongoing challenge for concluding the CAFTA deal is the
    Supreme Court, specifically the Constitutional Chamber (Sala IV),
    which reviews most legislation between the required first and second
    votes of the Asamblea.  The opposition has ensured that all CAFTA
    bills are reviewed by the Sala IV, delaying the legislative process,
    but only one bill has been bounced for corrections to date.  COMEX
    and USTR recently met in Costa Rica and discussed changes to the

    returned IP bill.  Progress was made but discussions between the two
    parties will continue the first week of June in Washington.  The
    Asamblea is to begin action on these corrections as soon as COMEX
    completes its modifications to the IP bill in consultation with
    USTR.

    ¶6. (SBU) Political distractions constitute another challenge.  A
    special committee has been taking testimony on allegations that the
    Colombian FARC had ties to some political figures, including
    legislators, in Costa Rica.  To date there have been no significant
    revelations.  Another new focus has been the Arias Administration's
    decision to propose two major extraordinary budget items to
    reinforce public security in the country and address the issue of
    food security.

    ¶7. (SBU) Although the political situation may seem totally consumed
    by the CAFTA debate, there are horizons beyond CAFTA which pose
    still another challenge:  changing post-CAFTA political alliances.
    Portions of the Arias Administration's likely post-CAFTA agenda are
    attractive to the current opposition party, Citizens Action Party
    (PAC), and anathema to some members of the current CAFTA coalition
    (G38).  For example, the Arias Administration has long advocated an
    increase in taxes in order to invest in better government and is
    currently promoting an extraordinary budget of about $88 million to
    promote food production and subsidize food consumption.  It appears
    likely that the five ML legislators will oppose significant aspects
    of these proposals, although at the moment the ML are quasi-members
    of the G38.  PAC, on the other hand, promotes state-orientated
    solutions and is likely to support the administration's post-CAFTA
    proposals to some degree.  The danger for the GOCR lies in the
    transition period when the G38 must be maintained in the face of
    potential political re-alignment.

    ----------------------------------------
    A COMMITMENT, YES. . .BUT WITH A CAVEAT?
    ----------------------------------------

    ¶8. (SBU) Despite these challenges, the Arias Administration remains
    committed to completing the legislation and implementing CAFTA.
    President Arias (and by implication, his pushing to complete CAFTA)
    remains popular.  He received a 50 percent good or very good rating
    in a UNIMER poll released March 24 with the lowest negative rating
    (14 percent) since taking office.  The public and most political
    parties are tired of the protracted CAFTA debate and want to close
    this chapter and move on to other important issues on the horizon.

    ¶9. (SBU) The GOCR claims to understand that the extension to October
    1 was a one-time exception.  Yet, we still sense the hidden
    expectation  by GOCR that intractable aspects of the remaining
    legislation, for example, IP or insurance, might be resolved through
    last-minute, high-level political bargaining.  This is an
    unrealistic expectation on the part of GOCR since USTR is obligated
    by its Congressional mandate to implement CAFTA as negotiated and
    ratified.  In his April visit, AUSTR Eissenstat clearly defined
    USTR's mandate in ensuring that the new laws and regulations are
    CAFTA compliant (Ref A).

    -----------------------------------
    THE NEAR TERM SIGNIFICANCE OF CAFTA
    -----------------------------------

    ¶10. (U) Without CAFTA, the textile and the tuna sectors are at risk
    due to the short-run possibility of the loss of Caribbean Basin
    Trade Promotion Act (CBTPA) trade preferences on October 1 and the
    long-run risk that Costa Rica will not have permanent, tariff-free
    access to the U.S. market.  For Costa Rica, both risks would portend
    a competitive disadvantage with its CAFTA neighbors.  Business
    leaders predict 20,000 jobs in the tuna and textile sectors are at
    stake.

    ¶11. (U) In the intensely competitive textile industry, buyers want
    price certainty which Costa Rican companies currently cannot
    provide.  Indicative of the uncertainty, the industry contracted
    from $730 million in 2002 to $557 million in 2006.  The Costa Rican
    textile industry is heavily reliant on the U.S. market and the
    preferential treatment it receives under the CBTPA (Ref B).  The
    U.S. accounted for 86 percent of its total textile exports in 2006
    and CBTPA lowers the U.S. tariff from 18 percent to zero for most
    textile products.  Thus, without an implemented CAFTA, industry
    uncertainty has reached critical levels as producers openly talk
    about moving production outside of Costa Rica.

    --------------------------------
    ARE THERE OTHER ECONOMIC ISSUES?
    --------------------------------

    ¶12. (U) In spite of the anticipation of a downturn, the Costa Rican
    economy continues to post positive economic indicators.  The economy
    registered 6.8 percent growth in 2007 and is projected to grow by
    3.8 percent in 2008.  Other highlights include:

    - FDI remains high.  From 2000 to 2007, FDI grew from $409 million
    to an estimated $1,885 million in 2007.  The U.S. contributed
    roughly 60 percent of FDI in recent years, while the European
    Community contributed roughly 15 percent.

    - Tourism numbers have been stable or increasing.  Annual tourist
    visits to Costa Rica doubled in the ten year period from 1998 to
    2007 from 943,000 to 1,900,000 (estimated) in 2007.  For the first
    quarter of 2008, the media reported a 17 percent increase in visits.

    - Export totals have been growing.  Costa Rica's exports totaled
    $8.2 billion in 2006.  Costa Rica's economy is relatively open to
    world trade, with exports accounting for 37 percent of GDP in that
    year.  While the traditional agricultural exports of bananas,
    coffee, sugar and beef are still the backbone of export trade, a
    variety of industrial and specialized agricultural products have
    broadened export trade in recent years.

    ¶13. (U) On fiscal affairs, the Finance Minister, Guillermo Zuniga,
    and the Central Bank President, Francisco de Paula Gutierrez,
    demonstrate prudent management of the economy and a commitment to
    reform.  In 2007, the GOCR experienced its first fiscal surplus in
    50 years.  Plus, the Finance Ministry (the Hacienda) has initiated
    several new reforms through the assistance of Treasury's OTA.
    Problematic is the lack of a terrorist finance law in Costa Rica --
    one of many bills in the queue behind CAFTA legislation and key to
    Costa Rica's future participation in the Egmont Group -- and the
    lack of regulatory oversight of international transactions with
    specific regard to money laundering.

    ¶14. (U) Currently, the OTA operates three programs in Costa Rica of
    which two -- tax administration and budget -- are well underway and
    a third, debt management, just launched in February 2008.  Both of
    the established OTA programs have contributed to instituting
    reforms.  All three are summarized below:

    - The OTA's tax administration project started in spring of 2005.
    The OTA interacted mainly with the Internal Revenue Directorate, but
    has also engaged at the Ministerial level and in Customs
    Administration.  The project has primarily focused on improving
    planning and management and technical and management assistance
    which resulted in the improvement of collections (up 36 percent in
    2007) and audit and taxpayer assistance operations.  At the Ministry
    level, work is underway to assist the implementation of an Internal
    Affairs organization through which to investigate allegations of
    misconduct and corruption by Ministry officials.  Finally, the OTA
    will provide an independent source of advice and managerial
    monitoring for a major private initiative to modernize the
    technology infrastructure of tax administration.  The OTA project is
    scheduled to conclude in the fall of 2008.

    - Finance Minister Zuniga requested OTA technical assistance in the
    areas of budget policy and management.  Supported by Embassy San
    Jose and commencing in December 2006, the OTA's work has resulted in
    key reforms, including the implementation of a medium term budget
    forecast for the GOCR.  The budget project also improved the quality
    and quantity of information available to decision-makers and
    constituents regarding the effectiveness of GOCR programs in
    utilizing budget resources to meet Government objectives.  The OTA
    has provided support in the areas of budget execution, audit, and
    control.  The budget policy and management technical assistance
    program is scheduled to conclude in late-2008.

    - The OTA and the Hacienda launched the Government Debt Issuance and
    Management Assistance (GDIM) project February 2008.  The project
    will provide technical assistance in debt management, focusing on
    staff capacity building; risk analysis and management; cash flow
    forecasting; debt sustainability; domestic market development
    (institutional and retail) for government and central bank
    obligations; and fiscal/monetary policy and operations coordination.
     The initial work has focused on improving the secondary market for
    government securities since Costa Rican wholesale financial markets
    are virtually non-existent.  This effort will also support the
    Central Bank as it makes the difficult transition to a more flexible
    exchange-rate and an inflation-targeting regime which will require
    the creation of new markets for managing system liquidity.

    BRENNAN

`