Document of The World Bank

FOR OFFICIAL U S E ONLY

Report No. 44738-CR

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED CATASTROPHE DEFERRED DRAWDOWN OPTION (CAT DDO) LOAN

IN THE AMOUNT OF US$65 MILLION

TO

THE REPUBLIC OF COSTA RICA

August 12,2008

Sustainable Development Department Central America Country Management Unit Lat in America and the Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Republic of Costa Rica - GOVERNMENT FISCAL YEAR January I -December 31

A P L BCIE

CAFTA CAPRA C A T DDO CCRIF CCSS CEPREDENAC C F A A CFIA

CGR CNE

CPS CRC CSCR D P L D P L DDO

DRM DRMP DVRP FDI GDP GoCR HFA IADB IBRD

DR-CAFTA

CURRENCY EQUIVALENTS (Exchange Rate Effective as o f July 1,2008)

Currency Unit = Colones 1 Costa Rican Col6n (CRC) = 0.001893 U S Dollar (US$)

1 US$ = 530.61 CRC

Metric System WEIGHTS AND MEASURES

ABBREVIATIONS AND ACRONYMS

Adaptable Program Lending Central American Bank for Economic Integration (Banco Centroamericano de Integracibn Econbmica) Central America Free Trade Agreement Central America Probabilistic Risk Assessment Catastrophe Deferred Drawdown Option Caribbean Catastrophe Risk Insurance Facility Social Security Institution (Caja Costarricense del Seguro Social) Central American Coordination Center for Natural Disaster Prevention Country Financial Accountability Assessment Costa Rican Association (Bar) o f Engineers (Colegio Federado de Ingenieros y Arquitectos de Costa Rica) National Budget Office (Contraloria General de la Reptiblica) National Emergency Commission (Comisidn Nacional de Emergencia); subsequently changed to National Risk Prevention and Emergency Management Commission (Comisidn Nacional de Prevencidn de Riesgos y Atencibn de Emergencias) Country Partnership Strategy Costa Rican Col6n Costa Rica Seismic Code (Cbdigo Sismico de Costa Rica) Development Policy Loans Deferred Drawdown Option for Development Policy Loans Dominican Republic-Central America Free Trade Agreement Disaster Risk Management Disaster Risk Management Program Disaster Vulnerability Reduction Program Foreign Direct Investment Gross Domestic Product Government o f Costa Rica Hyogo Framework for Action Inter-American Development Bank International Bank for Reconstruction and Development

FOR OFFICIAL USE ONLY

IFMIS IMAS IMF INS INVU

JBIC JICA KFW L A C M D G s MIDEP LAN MINAE NEF NFPS N R M S

NRPEM

OECS OFDA PCN P F M P M L P N D P R U G A M

SETENA S IAM S IGAF U N D P UN/ISDR WMO

Financial Management Information System Institute o f Social Assistance (Instituto Mixto de Ayuda Social) International Monetary Fund National Insurance Institute (Instituto Nacional de Seguros) National Institute for Housing and Urban Development (Instituto Nacional de Vivienda y Urbanismo) Japan Bank for International Cooperation Japan International Cooperation Agency German Bank for Reconstruction (Kreditanstalt f i r Wiederaufbau) Latin America and the Caribbean Region Mil lennium Development Goals Ministry o f National Planning and Economic Policy Ministry o f the Environment and Energy National Emergency Fund (Fondo Nacional de Emergencias) Non-financial Public Sector National Risk Prevention and Emergency Management System (referred to as the National Risk Management System) National Risk Prevention and Emergency Management Plan (Plan Nacional de Prevencibn de Riesgos y Atencibn de Emergencias) Organization o f Eastern Caribbean States Office o f Foreign Disaster Assistance Project Concept Note Public Financial Management Probable Maximum Loss National Development Plan (Plan Nacional de Desarrollo) Metropolitan Area Master Plan (Plan Regulador Urbano de la Gran A'rea Metropolitana) Environmental Technical Secretariat (Secretaria TCcnica del Ambiente) Mesoamerican Environmental Information System Integrated Financial Administration System United Nations Development Programme United Nations International Strategy for Disaster Reduction World Meteorological Organization

Vice President: Pamela Cox Country Director: Laura Frigenti

Sector Director: Laura Tuck Sector Manager: Guang Z. Chen

Task Team Leader: Armando E. G u z m h Escobar

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

Republic of Costa Rica Catastrophe Deferred Drawdown Option (CAT DDO)

TABLE OF CONTENTS LOAN AND PROGRAM SUMMARY .............................................................................................. 11

I . INTRODUCTION ............................................................................................................................ 1 I1 . COUNTRY CONTEXT .................................................................................................................. 2

A . Recent Economic Developments in Costa Rica ......................................................................... 3 B . Macroeconomic Outlook and Debt Sustainability ...................................................................... 4 C . Exposure to Disaster Risk ........................................................................................................... 7

I11 . THE GOVERNMENT’S DISASTER RISK MANAGEMENT FRAMEWORK ...................... 10 A . Enforcement o f Building Codes ............................................................................................... 10 B . Land U s e Planning and Environmental Protection ................................................................... 11 C . Institutional and Legal Framework ........................................................................................... 11 D . Emergency Management Framework ....................................................................................... 16 E . Emergency Financing Framework ............................................................................................ 18

IV . BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ................................................... 22 A . Link to Country Partnership Strategy ....................................................................................... 22 B . Collaboration with other Donors .............................................................................................. 22 C . Relationship to other Bank Operations ..................................................................................... 23 D . Lessons Learned ....................................................................................................................... 23 E . Analytical Underpinnings ........................................................................................................ -24

V . THE PROPOSED CAT DDO ...................................................................................................... 26 A . Operation Description ............................................................................................................... 26 B . Disaster Risk Management Program ........................................................................................ 26

V I . OPERATION IMPLEMENTATION .......................................................................................... 29 A . Poverty and Social Impact ........................................................................................................ 29 B . Environmental Aspects ............................................................................................................. 30 C . Implementation, Monitoring, and Evaluation ........................................................................... 3 1 D . Fiduciary Aspects ..................................................................................................................... 31 E . Flow o f Funds and Audit ........................................................................................................... 32 F . Risks and Risk Mitigation ......................................................................................................... 32

ANNEX 1 : LETTER OF DEVELOPMENT POLICY ..................................................................... 34 ANNEX 2: COSTA RICA CAT DDO POLICY MATRIX .............................................................. 42 ANNEX 3: FUND RELATIONS NOTE .......................................................................................... 43 ANNEX 4: COUNTRY AT A GLANCE ......................................................................................... 46 ANNEX 5: MAP ............................................................................................................................... 49

..

This program document was prepared by an IBRD team consisting o f Francis Ghesquiere. Carlos Costa. N ie l s Holm- Nielsen. Joaquin Toro. Edward Anderson. Marcela Tarazona. Ana Maria Torres. Emma Phillips. Ana Daza. Silvia Delgado. Diane Stamm. Maricarmen Esquivel. and Armando Guzman (all from LCSUW); Marta Elena Molares- Halberg. Catarina Portelo (LEGLA); Ana Lucia Armijos. Lars Moller. Maria Ivanova Reyes Peguero (LCSPE). Ricardo Tejada (BDM). Antonio Leonard0 Blasco (LCSFM); Luis Corrales (LCSEN); and J . Humberto Lopez (PREM) . This operation was undertaken under the general guidance o f Laura Frigenti (LCC2C). Laura Tuck (LCSSD). Guang Z . Chen (LCSUW). Gregor Wo l f (LCSSD). Stefan G . Koeberle (LCSOS). and Todd Crawford (LCSDE) . Peer reviewers were Abhas Kumar Jha (Country Sector Coordinator and Lead Specialist. ECSSD). Juan C . Belausteguigoitia (Lead Environmental Economist. LCSEN). and Olivier Mahul (Senior Insurance Specialist. GCMNB) .

i

LOAN AND PROGRAM SUMMARY

Republic of Costa Rica

Catastrophe Deferred Drawdown Option (CAT DDO)

Borrower

Implementing Agencies

Amount

Terms

Tranching

Development Objectives and Description

Benefits

Republic o f Costa Rica.

Ministry o f Finance (Ministerio de Hacienda), Ministry o f National Planning and Economic Policy (MIDEPLAN), National Budget Office (Contraloria General de la Republica, CGR), and National Risk Prevention and Emergency Management Commission (CNE). US$65 million.

Disbursement-linked fixed spread loan, denominated in U S dollar with a variable interest rate. Each disbursement wil l be payable in 29.5 years (including a 5 year grace period) with level repayments o f principal. Principal amounts repaid and/or prepaid prior to the Closing Date wi l l be available for subsequent disbursements. The Borrower wishes to maintain al l r isk management options embedded in the CAT-DDO, including the possibility o f changing the amortization schedule for undisbursed amounts. Single-tranche operation,

The overall development objective o f the proposed operation i s to enhance the government’s capacity to implement i t s disaster risk management program for natural disasters. This program document proposes a US$65 mi l l ion Catastrophe Deferred Drawdown Option (CAT DDO) as budget financing for the Government o f Costa Rica (GoCR) for three years, renewable up to four times (for a total o f 15 years).

The C A T DDO will provide a source o f immediate liquidity in case o f a natural disaster. The C A T DDO will complement other instruments in the country and provide a source o f bridge financing while other sources (for example, concessional funding, bilateral aid, and reconstruction loans) are being mobilized following a natural disaster. This operation wil l support two key pol icy areas o f the Costa Rica Disaster Risk Management Program: (a) strengthening o f the institutional and legal framework, and (b) mainstreaming disaster risk in the National Development and Investment Programs.

ii

Risks

Proi ect ID Number

Several r isks were identified during project preparation, and those that deserve attention are as follows: (a) Deterioration o f Costa Rica’s macroeconomic situation due to internal and external factors (rated moderate). Costa Rica currently benefits from a robust macroeconomic framework. (b) The resources made available under the C A T DDO may be insufficient in the aftermath o f a major catastrophe (rated as h). The C A T DDO i s meant to be one o f several sources o f liquidity for the government in the immediate aftermath o f a disaster, and the assessment o f liquidity needs shows that the proposed amount o f the C A T D D O i s appropriate for Costa Rica. (c) Coordination is a systemic risk in any emergency management project (rated h). In Costa Rica, the CNE has strong capacity for leading an emergency response and institutional efforts. (d) Lack o f acceptance o f the Government Disaster Risk Management Program (rated h). Government efforts to strengthen disaster risk management in the country i s the result o f years o f consultations and a general concern about the increase in losses due to adverse natural events. (e) Political risk (rated h). The country is politically stable and has l ow turnover o f senior officials. ( f ) The procedures implemented prove unable to disburse funds rapidly (rated as - low). Given the inherent purpose and structure o f the instrument, the Bank team wil l work closely with the GoCR and relevant Bank deDartments to ensure Drompt disbursement. P111926.

. . I

111

I. INTRODUCTION

1.

2.

3.

4.

This program document proposes a US$65 mi l l ion Catastrophe Deferred Drawdown Option (CAT DDO) as budget financing for the Government o f Costa Rica (GoCR) for three years.’ The C A T D D O was developed by the Bank to respond to Middle Income Countries’ request for loans that better address their immediate funding needs in the aftermath o f natural disasters. The main purposes o f this new product are to develop/enhance the capacity o f borrowers to manage natural hazard risk, and to provide a source o f immediately available liquidity that could serve as a source o f bridge financing while other sources (for example, concessional funding, bilateral aid, or reconstruction loans) are being mobilized fol lowing a natural disaster.

The overall development objective o f the proposed C A T DDO i s to enhance the government’s capacity to implement i t s Disaster Risk Management Program for natural disasters. The C A T DDO wil l complement other instruments in the country in l ine with the Bank’s comprehensive framework for disaster risk management and emphasis on disaster prevention, as opposed to only disaster response.

Costa Rica benefits from a strong emergency management system. In recent years, the country has also made substantial progress toward implementing a robust disaster risk management framework, focusing on actions to mitigate natural disaster risks and lower the country’s vulnerability in the context o f the “Hyogo Framework for Action 2005-2015: Building the Resilience o f Nations and Communities to Disasters.”2 Specific steps that demonstrate such progress include the following:

The recent strengthening o f the institution and legal framework reflected in key disaster risk management actions such as: (a) adoption o f Law No. 8488 o f 2006 and i t s reglamento (regulations) in 2008, and (b) implementation o f a mandatory contribution o f 3 percent o f financial surplus or profit from al l governmental institutions to be transferred to the National Emergency Fund.

The GoCR’s substantial progress toward mainstreaming disaster risk management in i t s development programs through: (c) incorporation o f Disaster Risk Management in the 2006-2010 National Development Plan (PND), and (d) incorporation o f disaster risk analysis in the M I D E P L A N screening o f investment projects.

By addressing disaster risk issues that affect the most vulnerable segments o f the population, the program supports the Millennium Development Goals (MDGs) by: (a) improving the

The standard drawdown period for the C A T DDO i s three years, renewable four times. The maximum amount available under a CAT DDO for Costa Rica should be no more than the lesser o f 0.25 percent o f GDP or US$500 million. In the case o f Costa Rica, using 2007 GDP figures, the estimated amount i s approximately US$65 million. This figure has been agreed with the GoCR. As a commitment to take action to reduce disaster risk at the global level, governments around the world have adopted

guidelines to reduce vulnerabilities to natural hazards, called the Hyogo Framework for Action (Hyogo Framework). The Hyogo Framework assists the efforts o f nations and communities to become more resilient to, and cope better with, the hazards that threaten their development gains.

1

effectiveness and efficiency o f disaster response mechanisms, (b) integrating principles o f risk management and prevention across al l government agencies, and (c) mainstreaming environmental protection and land use zoning regulations as critical components o f risk management and prevention. Natural disasters disproportionately affect the poor living in slum and squatter settlements on steep hillsides, in poorly drained areas, and in low-lying coastal zones. The poor are the most vulnerable to economic and human capital losses from natural disasters in the country, and very often are victims o f frequent and/or major events.

11. COUNTRY CONTEXT

5. Costa Rica i s an upper-middle-income developing country o f about 4.5 mi l l ion people, has an income per capita o f US$5,900 (2007), and i s wel l known for i t s socioeconomic achievements. The country has a stable political system, with a long democratic tradition, generally effective institutions, a broad social base, and relatively high social indicators, al l o f which have contributed to creating a favorable environment for sustainable growth. Costa Rica’s poverty and inequality are lower than the averages for Latin America and Central America, and social indicators are generally stronger than for comparable countries in the region. Costa Rica, a country with only 5 1,000 square kilometers (1 9,730 square miles), has experienced steady economic expansion over the past 15 years, primarily due to the implementation, since the late 1980s, o f a strategy o f outward-oriented, export-led growth, openness to foreign investment, and gradual trade liberalization. Costa Rica has also been a wor ld leader on environmental issues, ensuring that economic growth i s not achieved at the expense o f i t s r ich natural endowments, and successfully developing linkages between environmental protection and poverty reduction.

6. As a result o f the growth experienced during the last 15 years, the percentage o f Costa Ricans living in poverty-using the national poverty lines-fell from 32 percent in 1991 to 20 to 22 percent during 1994-2006. Over the same period, extreme poverty stayed close to 5 to 7 percent. In 2007 the increase in real incomes and social transfers pressed the poverty rate down to a record l ow o f 16.7 percent, while extreme poverty decreased to 3.3 percent. Income inequality, measured by the Gini coefficient, i s around 0.48 (2004), which is below the Latin American average o f 0.52. However, the current administration i s strongly committed to further reducing both poverty and inequality through equitable growth, better targeting o f social assistance programs, and improved social services.

7. Costa Rica’s key social indicators are generally stronger than the averages for Latin America and other upper-middle-income countries in the region. L i fe expectancy at birth i s 79 years, which i s higher than in comparator countries, where the average i s 74 years. Close to 96 percent o f Costa Rican adults are literate compared to an average o f 94 percent o f upper-middle-income countries in the Latin America and the Caribbean (LAC) Region, and infant and chi ld mortality rates in Costa Rica (12 per 1,000) are significantly lower than comparator countries (30 per 1,000). But there i s one notable exception, secondary education, where coverage lags the comparator countries by a substantial margin.

2

A. Recent Economic Developments in Costa Rica

8. Costa Rica’s recent macroeconomic performance has been one o f the strongest in Latin America. Gross domestic product (GDP) growth reached 8.8 percent in 2006 and 6.8 percent in 2007 (Table 11.1) compared to the region’s average growth o f 5 percent and 4.5 percent, respectively, for the same years. Costa Rica’s strong economic performance i s attributable to a combination o f internal and external factors. On the internal front, these include relatively high business and consumer confidence, l ow interest rates, growing private consumption and investment, high activity in the construction sector, and robust growth in domestic manufacturing, especially in high-tech industries. O n the external front, these include strong external demand for the country’s exports due to the robust wor ld growth, and considerable increases in tourism and foreign direct investment (FDI) inflows.

9. Inflation in Costa Rica has been increasing after a period o f relatively lower inflation from 2006 to mid-2007, driven in large measure by the high prices o f food and oil. Fol lowing a steady decline through August 2007, when it moderated to an annual rate o f 8.6 percent, headline inflation reversed i t s declining trend, reaching 10.8 percent at end-2007. This reversal has been driven principally by the evolution o f o i l and international food prices and by domestic pressures associated with growing domestic demand under tight supply conditions. The evolution o f food price inflation i s particularly worrisome given the impact i t has on the poor population. Year-on-year food price inflation reached 21 percent in December 2007, with likely severe effects on the poorest, who devote an average o f 45 percent o f their income to food. The government has put in place well-targeted transfer programs to help cushion this impact.

Table II.1. K e y Macroeconomic Indicators, 2004-2007 (percent o f GDP, unless otherwise noted)

2004 2005 2006 2007 Real GDP (% annual growth) 4.3 5.9 8.8 6.8 Inflation Rate (%, end o f year) 13.1 14.1 9.4 10.8 Overall Public Sector Balance -3.6 -2.3 -0.5 0.6

Overall NFPS Balance -2.3 -0.9 0.7 1.3 Central Government -2.7 -2.1 -1.4 0.4

Revenues 13.6 13.8 14.2 15.5 Expenditures 16.3 15.9 15.6 15.1

Rest of NFPS 0.4 1.2 2.1 0.9 Central Bank -1.3 -1.4 -1.1 -0.7

Total Public Debt (net)a 54.1 50.4 44.5 38.4 Current Account Balance -4.3 -4.9 -4.7 -5.7

Merchandise Exports Freight on Board (fob) 34.0 35.3 36.4 35.7 Trade Balance -10.5 -14.1 -15.0 -14.3

Merchandise Imports (fob) 44.5 49.4 51.4 50.0 GDP (US$ million) 18,598 19,909 22,522 26,238 a. Excludes Central Government debt held by the Non-financial Public Sector (NFPS). Source; Ministry of Finance, Central Bank, and World Bank estimates.

10. Costa Rica’s fiscal performance was strong in 2007. The central government posted a surplus o f 0.4 percent o f GDP, i t s best performance since the mid-l950s, while the overall public sector

3

closed with a surplus o f 0.6 percent o f GDP. The combination o f high growth rates and relevant administrative measures introduced by the government have contributed to a significant increase in tax col lect ion-over 27 percent per year in the last two years. This, in turn, led to an increase in the tax-to-GDP ratio o f 1.5 percentage points over that period. Higher tax revenues, together with lower interest rates on public debt, have allowed for increased spending in priori ty areas while simultaneously reducing public debt, which has dropped considerably. Net public debt fel l to a record l ow o f 38.4 percent in 2007, f rom 54.1 percent o f GDP in 2004.

11. Costa Rica’s external position also strengthened in 2007, showing an improvement o f the trade imbalance attributable to an upsurge o f merchandise exports that more than offset the expansion o f imports. The positive export performance was driven by an increase in industrial exports, mainly computer components and microchips, while imports increased by about ha l f the growth rate o f 2006. As a result, the trade deficit for the full year declined from 15 percent o f GDP in 2006 to 14.3 percent in 2007. Notwithstanding the fact that the current account balance increased to -5.7 percent o f GDP in 2007, strong capital inflows equivalent to 6 percent o f GDP allowed the country to increase i t s reserves to over US$4 bi l l ion by the end o f the year.

12. At the time o f writing this document, Costa Rica remains the only signatory to the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) that is yet to pass legislation for the agreement to enter into force. Although the free trade deal was narrowly approved in October 2007 in an historic referendum, DR-CAFTA-related legislation i s s t i l l under discussion in the Assembly. Approval o f that legislation i s a major priority o f the country’s reform agenda. The Executive requested in early 2008 an extension from CAFTA signatories before the deadline expired on February 29, 2008, and expects approval o f CAFTA-related legislation before the new deadline o f September 2008.

B. Macroeconomic Outlook and Debt Sustainability

13. Overall, the macroeconomic framework i s considered adequate for the purpose o f this operation. The outlook for 2008-2010 is broadly positive, but a gradual moderation o f growth i s expected due to the global environment marked by the slowdown o f the U.S. economy and rising fuel and food prices. Growth prospects for 2008 are somewhat weaker than originally expected and the central government i s forecasting a 4.5 percent real GDP growth for 2008. In May, the economic activity index increased by 4.2 percent over the same month in 2007. This growth represents the lowest pace in almost three years, and given that the U.S. i s Costa Rica’s main trading partner and i t s most important source o f FDI, a sharper slowdown in the U.S. would have a direct negative impact on exports, investment, and the country’s external situation. Costa Rica is in a position to respond to such shocks thanks to i t s sound fiscal pol icy and constant efforts to improve tax collection (15.1 percent o f GDP in 2007), which have helped contain demand pressures and reduce public debt, and created space for greater social and infrastructure spending. Moreover, Costa Rica has sizable foreign exchange reserves (US$4.2 bi l l ion as o f June 2008) and has continued taking steps toward a more flexible exchange rate regime in the context o f the transition to inflation targeting. The Government i s currently revising the macroeconomic program for 2008-09, including growth and inflation targets. Given the country’s relatively strong macroeconomic performance, i t is expected that there i s adequate room to maneuver.

4

14. Over the past 12 months, Costa Rica’s external environment has changed from a situation o f abundant capital inflows that pr‘ompted the appreciation o f the currency and forced the central bank to intervene (buying dollars), affecting the disinflation strategy, to a reduction o f short- term capital inflows that put the col6n on a devaluation path since M a y 2008, driving the central bank to intervene (selling) to support the currency. Financial dollarization until end-2007, though declining, remained high. Appreciation pressures on the exchange rate and lower interest rates in colones encouraged a gradual de-dollarization in loans and deposits, but foreign currency deposits s t i l l accounted for over 43 percent o f the total by end-September 2007. Whi le the central government has steadily reduced its foreign exchange exposure through a higher participation of col6n-denominated debt, the banking sector i s exposed to direct and indirect currency risk. The recently completed FSAP (February 2008) update found a stronger and more diversified financial system than in the past, but highlighted remaining vulnerabilities such as the still-high level o f foreign exchange lending to unhedged borrowers, that could eventually result in financial sector difficulties. The authorities plan to press ahead with reforms in 2008, fol lowing parliamentary adoption o f CAFTA’s implementation agenda, so that the consolidated supervision bill, which i s critical for effective supervision o f financial groups and offshore structures, would be passed this year. Furthermore, the authorities are working toward the strengthening o f the prudential regulatory framework-an area where progress could be made without changes in the legal framework-to ensure that banks properly internalize the risks arising from the high level o f financial dollarization, including foreign exchange risk.

15. Inflationary pressures are not expected to decrease during 2008, but the authorities anticipate external and domestic inflationary pressures to moderate in 2009-10 (Table 11.2). L ike other countries in the region, Costa Rica i s confronting a more and more challenging global environment, marked by increasing commodity prices, which, combined with domestic demand pressures, have pushed inflation up. Headline inflation reached 12.8 percent in June 2008, reflecting high food and fuel prices. Food prices have r isen twice as fast as headline inflation (26 percent as o f June), affecting, most importantly, the poor. Perhaps more worrisome, the core inflation rate (headline inflation net o f food and oil) has also been rising-from 8.5 percent in January 2008 to 11.4 percent in June 2008-indicating that there are second-round effects associated with high food and o i l prices. In response to these developments, the authorities are taking steps to avoid a return to double-digit inflation, high public debt, and larger external balances. In July the authorities increased interest rates, tightening monetary pol icy in order to stop and reverse the increase in inflation, and submitted to the Assembly a bill to recapitalize the Central Bank, aimed at increasing the effectiveness o f monetary policy.

16. The exchange rate (crawling) band, introduced in October 2006, was widened twice in 2007, in order to create more room for monetary pol icy action. However, persistent capital flows kept the exchange rate pegged to the band’s floor, forcing the Central Bank to intervene. However, in mid-July 2008, currency speculation became stronger than expected, and the monetary authorities decided to narrow the band, from 17 percent to 11 percent. Though the lower limit o f the band wil l remain anchored at 500 colones, the upper band was moved to 555 colones and wil l continue increasing daily by six cents o f CR colones. The timing and nature o f measures toward greater exchange rate flexibility would depend on exchange rate developments.

17. The expected moderation in GDP growth in the near term suggests that the overall fiscal surplus o f 2007 could turn into a deficit position during 2008-10. The contraction o f domestic

5

demand-both consumer spending and imports-would affect tax revenues, while the rising interest rates wil l increase interest expenditures on the debt. However, the main risk to this outlook would be further global shocks, in particular, commodity price increases, which would have additional negative impact on growth, inflation, and the external current account position.

Table II.2. Macroeconomic Projections for Costa Rica, 2008-2010 2008 2009 2010

Real GDP (% annual growth) 4.5 4.0 5.0 Inflation Rate (%, end o f year) 13.0 10.0 10.0 Overall Public Sector Balance -0.5 -0.7 -0.6 Total Public Sector Debt 41.6 39.7 38.6 Current Account Balance -6.5 -5.5 -5.8

a. Public Sector Debt includes NFPS debt and the Central Bank. Source: Ministry o f Finance, Central Bank, IMF, and Bank estimates.

18. Costa Rica’s current level o f gross public debt o f about 44 percent o f GDP (down from a peak o f 60 percent in 2004) remains relatively high, but appears to be sustainable. During 2008-10, growth is projected to be around 4.5 percent, and the current account deficit would be around 6 percent o f GDP, due to a higher o i l import bill and slower export growth. Tourism receipts are expected to increase over this period. Under this scenario, gross public debt would gradually fall to about 38 percent o f GDP by 2010, while external debt would stabilize at around 11 percent o f GDP. The Bank estimates that Costa Rica could achieve this target with a primary balance o f around 1.6 percent o f GDP, which i s above the historical average o f 1.4 percent o f GDP, but below the positive fiscal outcomes o f the past two years, 3.0 and 3.6 percent o f GDP in 2006 and 2007, respectively. The short-term horizon in growth and inflation would not pose a risk to debt sustainability (see Box 11.1).

6

Box 11.1. Debt Sustainability in Costa Rica

Actual 2006 2007

Real GDP Growth (%) 8.7 6.8

In i t s latest Article IV consultation report o f March 2008, the International Monetary Fund (IMF) finds that Costa Rica’s external and public debt outlook i s sustainable following a downward path in the medium- term horizon. The sustainability o f debt i s maintained even under alternative sensitivity scenarios. The baseline scenario estimates that total public debt (including the non-financial public sector and the Central Bank) would be reduced to 37.4 percent o f GDP by 2012 ( f iom 44.6 in 2007), while the external debt i s projected to decline from 26.4 percent o f GDP in 2007 to 20.5 by 2012. The public sector external debt would be reduced from 17.9 percent o f GDP to 11.2 percent in 2007 and 2012, respectively.

Projection 2008 2009 2010 2011 2012 5.0 5.0 5.0 5.5 5.5

Under the historical average scenario,a debt indicators increase less than 2 percent o f GDP during the short-term horizon, and then converge close to the baseline scenario levels by 2012. The short-term horizon increase in public and external debt ratios does not pose a risk to debt sustainability. The different Bound Tests scenarios present a potential risk for the country’s public debt if growth significantly deviates from the baseline or if the country experiences a one-time real depreciation o f at least 30 percent. Despite these stress tests, the debt-to-GDP ratio w i l l remain below 50 percent by 2012.

11.8 10.8 Average Nominal Interest Rate on Public Debt (%)

Inflation Rate (GDP deflator, %) 11.2 9.0 Average Real Interest Rate (%) 0.5 1.8

9.4 9.7 9.7 9.2 8.6

-0.1 2.7 4.1 4.7 5.3 9.5 7.0 5.5 4.5 3.3

CAE4 (% o f GDP) -3.3 -4.5 I -5.4 -4.4 -4.9 -4.8 -5.2 Source: IMF Article I V Report, March 2008.

a. The historical average scenario i s the main sensitivity analysis evaluated by the IMF under i t s most recent DSA for Costa Rica. T h i s scenario assumes that the key macroeconomic underlying variables are at their historic average (of the last 10 years) during the projection period. The key variables include real GDP growth, real and nominal interest rates, inflation rate, and current account, among others.

C. Exposure to Disaster Risk

19. Due to its geographic location and geotectonic characteristics, Costa Rica i s exposed to a large variety o f natural hazards, including hydro-meteorological (floods, cyclone^,^ and landslides) and geophysical (earthquakes and volcanoes). The most important events for the country have been the following:

Floods. The frequency o f floods has been on the increase in Costa Rica, and this natural hazard now represents the main sources o f loss in the c o ~ n t r y . ~ Floods in November 2005

A cyclone i s an atmospheric system characterized by the rapid inward circulation o f air masses about a low-pressure center, usually accompanied by stormy, often destructive, weather (for example, hurricanes, typhoons). Cyclones circulate counterclockwise in the Northern Hemisphere and clockwise in the Southern Hemisphere.

Wind patterns and seasonal changes cause variations in the sources and intensity o f rainfall. Every year, northerly trade winds predominate from December to March, causing intense rainfalls along the Caribbean and Northern watersheds. Interaction with the Inter-tropical Convergence Zone and Caribbean tropical cyclones increases rainfall amounts and intensities from April to November.

4

7

and December 2007 caused US$25 mi l l ion and US$80 mi l l ion worth o f damage, respectively. In M a y 2008, tropical storm Alma affected 20 counties, resulting in 21,000 people directly affected, over 1,150 houses destroyed, and more than 130 roads cut off. Direct economic loses are estimated at US$40 mil l ion. CNE has been able to efficiently respond in all these cases, and after the passage o f Law No. 8488 in 2006, more resources have been made available to the institution.

0 Hurricanes. Costa Rica i s also exposed to hurricane risk on i t s Caribbean coast. Hurricane Joan caused economic losses estimated at US$200 mi l l ion in October 1988. More recently, Hurricane Cesar (July 1996) resulted in economic losses estimated at US$53 million, destroying 165 educational centers, 157 roads, 150 bridges, and 10 hospitals and health centers, and damaging housing and irrigation systems. Two years later, Hurricane Mitch, one o f the most destructive events in Central America, caused economic losses amounting to approximately US$98 mi l l ion (935 houses were affected, 69 bridges were damaged, 93 educational centers were impacted, and the agricultural and fishery sectors experienced serious losses). The new coordinating role o f CNE under Law No. 8488 makes i t possible to achieve better institutional coordination during extreme events.

Earthquakes. Costa Rica i s located on the subduction zone o f the Caribbean and Cocos tectonic plates, and the fracturing movements o f these two plates have caused frequent earthquakes in the country. The Telire-Limdn earthquake in April 199 1, a particularly severe earthquake, caused close to US$ lOO mi l l ion in economic losses and 53 fatalities. New alert systems established by the GoCR (under the coordination o f CNE), and support to the Volcanic and Seismic Observatory, provide the country with the tools to better address events o f this type in the future.

0 Volcanoes. There are at least nine active volcanoes in Costa Rica. Five o f them (Rincdn de la Vieja, Arenal, Poas, Irazzi, and Turrialba) have caused significant damage in the past. For example, the eruption o f Irazzi in March 1963, which lasted for two years, caused economic losses o f approximately US$35 mil l ion. The Arenal eruption in July 1968 completely wiped out a whole village bearing i t s name (Arenal), causing economic damages o f up to US$15 mi l l ion and 87 fatalities. Volcanoes Turrialba and Pods have shown recent signs o f a progressive reactivation.

Landslides. Landslides and torrential debris flows are among the most costly in terms o f human lives. They are triggered by intense rainfall, earthquakes, and volcanic eruptions. In M a y 1973, the Tilaran-Arena1 landslide had an estimated economic impact o f US$4 mi l l ion and 26 fatalities.

20. The natural disaster hotspot study financed by the World Bank’ ranks Costa Rica number two in the world among countries most exposed to multiple hazards, with 36.8 percent o f the total area exposed to three or more adverse natural events. The study estimates that 77.9 percent o f Costa Rica’s population and 80.1 percent o f the country’s GDP reside in areas at high risk o f multiple hazards.

’ “Natural Disaster Hotspots: A Global Risk Analysis,” W o r l d Bank, 2005.

8

21. Costa Rica experienced 49 major natural disaster events during 1910-2008, which affected 1.4 million people. The estimated loss by type o f event during this period i s presented in Figure 11.1

Figure 11.1. Costa Rica Natural Disasters, 1910-2008

400

350

300

g 250

200

150

100

50

0 Flood Humcane Earthquake Volcano Drought

Source: World Bank based on information from EM-DAT: The OFDNCRED International Disaster Database, 2008; and CEPREDENAC, Impact0 Economico en Ddlares (US) 1960-1999,2001.

22. Data on estimated losses for emergencies declared by Presidential decree (without including recurrent disaster events) show annual losses o f US$22 mi l l ion on average during 1999-2007 (see Table 11.3). During the same period, the Government allocated an average o f US$5 mi l l ion per year to attend these disasters, with a significant increase in recent years. The average time for executing resources allocated to the declared emergencies was around three years, with an average o f 55 percent o f the assigned resources executed during the first year.

Table II.3. Estimated Losses and Budget Allocation for Declared Emergencies (US$ million)

Year 1999 2000 2001 2002 2003 2004 2005 2006 2007

Estimated losses 29.8 24.5 23.8 15.8 1.5 1.6 39.6 10.8 50.3

Budget allocation 8.3 3.1 1.6 1.1 1.5 1.7 7.0 13.1 7.9 Source: CNE.

23. Whi le Costa Rica has been spared by major disasters in recent years, i t i s not immune to the potential o f a catastrophic event. Hurricane Joan in 1988 and the Telire-Limdn earthquake o f 1991 serve as a reminder o f the country’s exposure to large events. Recent probabilistic analysis shows that the Probable Maximum Loss (PML) o f an earthquake occurring in Costa Rica with a return period o f 50 years would be about US$390 million, and the estimated P M L for an earthquake with a return period o f 100 years would be about US$850 (IADB 2006).

9

111. THE GOVERNMENT'S DISASTER RISK MANAGEMENT FRAMEWORK

24. Costa Rica benefits from long and solid experience in managing disaster risk. Over the years, the country has built an efficient and effective disaster response system that has gained legitimacy among the population. Despite its high exposure to adverse natural events, the country has also managed to limit vulnerabilities through the effective enforcement o f building codes, environmental standards, and land use planning. In addition, the country has made substantial progress toward strengthening its institutional and legal framework and in mainstreaming disaster risk management in its development program. These recent actions are expected to substantially influence future development and help further reduce the country's vulnerability to adverse natural events.

A. Enforcement of Building Codes

25. Since the 1841 earthquake that destroyed the city o f Cartago (the former capital o f Costa Rica), construction with weak materials and unreinforced structures (for example, adobe, bahareque [mud walls], brick, and stone masonry) has been forbidden by laws and decrees. The Costa Rica Seismic Code has been in place since 1974 and has undergone two major updates, in 1986 and 2002.6 Another update i s underway. The Code currently consists o f a number o f key documents including: (a) the Cddigo Sismico de Costa Rica (Costa Rica Seismic Code, CSCR)7; (b) the Cddigo de Cimentaciones de Costa Rica (Foundations code); (c) the Micro-zonijkacidn Sismica del Valle Central8 (Earthquake Micro-zonation); (d) Macrozonijcacidn de la Amenaza de Deslizamientos en e l Valle Central (Landslide Macro-zonation); (e) the Manual para la Construccidn de Viviendas de un Piso con Bloques de Concreto' (Social Interest and Self- construction Housing Building Manual); and ( f ) construction and urban planning laws and by- laws."

26. Compliance with the CSCR i s mandatory by law." The code regulates the design and construction processes for any civ i l construction to be used for housing, industrial, and commercial purposes. The CSCR establishes and prescribes procedures and details on elements and structures, f rom the simplest to the most complicated (that is, from masonry frames and walls to complex structural components, and their dynamic-static behavior). Materials must also comply with quality and resistance parameters (for example, cement, concrete, brick, steel rods, wire, cement blocks, and aggregates). Nonstructural schemes are also subject to compliance (for example, electric, mechanical, potable water, safety, health, and environmental

CSCR: Law No. 61 119; November 9th, 1977. CSCR: httu:llwww,cfia,or.cr/codirzo.htm.

* http://www.crid.or,cr/digitalizacionlpdDspddoc 1497 l ldoc 1497 1 .htm. Construction o f less than 60 square meters i s exempted from complying with the CSCR;

http://www,crid.or,cr/digitalizacion/pdf/spa/doc3365/doc3365-portada.pdf. lo Construction Law: Decreto-Ley No. 833 de 4 de noviembre de 1949; Urban Planning Law: Ley No. 4240 de 15 de noviembre de 1968, Publicada en L a Gaceta No. 274 de 30 de noviembre de 1968; Construction Regulatory Framework: Reglamento a la Ley de Planificacion Urbana No. 4240; Publicado en La Gaceta No. 56, Alcance 17 del 22 de marzo de 1983.

Law No. 61 19 del 9 de noviembre de 1977; 6082 Alcance N" 187 a la Gaceta No 242.

10

components). l2?l3 A separate and detailed chapter about single-family housing schemes, for the use o f engineers and architects, i s also available.

27. The Costa Rican (Bar) Association o f Engineers and Architects (Colegio Federado de Ingenieros y Arquitectos de Costa Rica, CFIA) has the legal mandate14 to supervise the professional practice o f its members, including their performance in design and construction procedures. CFIA’s supervisors visit all works under construction and verify that the works respect and comply with the design standards approved by the Municipality, the Ministry o f Health, the National Institute for Housing and Urban Development (Instituto Nacional de Vivienda y Urbanismo, INVU), and the CFIA.

28. C iv i l engineering students must do practical exercises and homework, and take exams applying the CSCR while taking “Structural Design” courses. This enhances their access to information and their academic background and social awareness, providing some understanding o f the major interests at stake when facing natural hazards.

B. Land Use Planning and Environmental Protection

29. Most o f the 80 municipal governments in Costa Rica have established land use plans. T h i s i s particularly the case for those under the Plan Regulador Urbano de la Gran A’rea Metropolitana (PRUGAM), a plan for an urban area which concentrates most o f the country’s population. Compliance protocols have been developed by the national environmental authority (Secretaria Tdcnica del Ambiente, SETENA), showing that norms are generally respected, particularly when related to urban alignment, r i gh ts o f way, and environmental and water source protection. Natural hazards, “geo-aptitude,” environmental fragility, and geotechnical protection prescriptions are included in these plans. In the case o f larger projects, (for example, hydroelectric, urban, tourist, infrastructure development), the national environmental authority (SETENA16) requests specific natural hazards assessments. l7 Financial institutions, such as banks or government agencies, also request compliance with established standards.

C. Institutional and Legal Framework

30. The country recently made substantial progress toward strengthening i t s disaster risk management framework, with particular emphasis on proactive actions to mitigate natural disaster r isks and lower the country’s vulnerability. The recent reform centers around the adoption o f Law No. 8488, which strengthens the institutional and legal framework for disaster risk management. In l ine with these reforms, the GoCR has also taken steps to mainstream DRM in i t s entire development program. These actions demonstrate the authorities’ commitment to a more proactive approach to disaster risk management.

l2 http:llwww.cfia.or.cr/descargas/guia_tramitaci6n_2.pdf. l3 Blue print Visa Bby-law: http://www.cfia.or.cr/descargas/leyes/4,pdf?”mite de Visado de Planos para la Construcci?>=n.pdf l4 CFIA Organic Law: http://www,cfia,or.cr/descargas/leyes/l O.pdf?!=a para Edificaciones.pdf

SETENA: Protocolo para planes reguladores: http://www.setena.clo.cr/D documentos.htm l6 SETENA: http://www.setena.po.cr/

Guia Ambiental para l a Construcci6n: http://www.setena,go.cr/u documentos.htm

11

31 The current institutional and legal framework i s the result o f a long evolution. The f i rst steps toward the establishment o f a Disaster Risk Management (DRM) system in Costa Rica were made following the catastrophic eruption o f the I r a A volcano in 1963. An ad hoc commission was created to respond to the emergency, caused by the ash eruptions in the Central Valley and the laharic torrential flows in Taras, Cartago. This commission was about to be dismantled when the Arena1 volcano erupted in 1968. The Commission was then revitalized and renamed Defensa Civi l (Civi l Defense). A year later, Law No. 4374 o f 1969 created the Comisidn Nacional de Emergencia (National Emergency Commission, CNE) and endowed the Fondo Nacional de Emergencias (National Emergency Fund, NEF). Because o f poor management, the NEF was virtually dismantled by 1980, but was then revamped with improved administrative controls, and CNE strengthened, in 1983.

32. Law No. 7914 o f September 1999 amended Law No. 4374 to modify the objectives, structure, and name o f the CNE. The latter became the National Risk Prevention and Emergency Management Commission (Comisidn Nacional de Prevencidn de Riesgos y Atencidn de Emergencias), but kept the acronym CNE. With a staff o f 120 people and a 10-member interinstitutional board o f directors (Box 111. l), the Commission i s responsible for planning, coordinating, directing, and controlling emergency response at the national level. Law No . 791 4 put CNE in charge o f the init ial attention to the affected population; the assessment o f damages and needs; the coordination o f public entities and the private sector; and the development, contracting, and implementation o f rehabilitation and reconstruction plans and projects.

33. Seeking to further strengthen i t s disaster risk management system, and after several years o f broad consultations, Costa Rica adopted in 2005 a National Risk Prevention and Emergency Management Plan (Plan Nacional de Prevencidn de Riesgos y Atencidn de Emergencias, NRPEMP). This NRPEMP i s a strategic planning instrument that guides the interaction among subsystems and defines institutional responsibilities, budget, and monitoring and evaluation o f entities involved in disaster r isk management activities. The plan comprises specific programs oriented toward improving institutional planning, strengthening the regulatory frameworks, generation o f financial resources, developing and promoting preventive activities (related to development, education, dissemination, research, and public information), management and control o f emergencies, preparedness, and coping with the immediate needs o f rehabilitation and reconstruction. With the NRPEM, the concept o f Risk Reduction (Gestidn para la Reduccidn del Riesgo) was given the status o f a “transversal public pol icy axis,” linking and influencing all other development projects and programs at the national and regional levels.

34. The activities o f the NREMP are coordinated by CNE and the agencies involved in its implementation for the National Risk Management System (NRMS). As such, the NRMS integrates all the efforts o f the public entities, the private sector, and c iv i l society, at the national, municipal, and regional levels, for risk reduction and emergency relief. The system i s composed o f three subsystems: (a) mitigation and prevention, which addresses the risk- generating factors; (b) preparedness and response, which coordinates the entities’ efforts to respond to emergencies; and (c) rehabilitation and reconstruction, which brings the tools and resources required in the reconstruction and rehabilitation phases for public infrastructure, social-interest infrastructure, and public services. Figure 111.1 depicts the functional structure o f the NRMS to orchestrate the coordination among the central government, decentralized government entities, local governments, the private sector, and c iv i l society. The NRMS i s a

12

network o f entities that incorporate the concept o f risk management as a transversal axis for planning and development activities in the country.

Box 111.1. The National Risk Prevention and Emergency Management Commission (CNE)

Law No. 8488, article 17, mandates the CNE board o f directors be composed o f the Ministry o f the Presidency, the Ministry o f Public Works, the Ministry o f Finance, the Ministry o f Public Security, the Ministry o f Health, the Ministry o f Housing and Urban Development, the Ministry o f the Environment and Energy, the executive officers o f the Social Support Institute, the National Insurance Institute, and the ranking representative o f the Costa Rica Red Cross. The CNE’s membership configuration seeks to ensure cross-sectoral coordination, and the incorporation o f social and environmental considerations in al l aspects o f the development o f the National Risk Prevention and Emergency Management Plan (NRPEMP).

Law No. 8488 o f 2006 mandates that al l public institutions and local governments should act according to CNE’s directions, giving priority to disaster emergency response over their ordinary duties. A t the time o f preparing this document, CNE was in the process o f formulating an institutional restructuring plan.

35. The structure o f the NRMS and incorporation o f disaster r isk management as a fundamental element o f the country’s development process was further strengthened in 2006, when the GoCR adopted Law No. 8488, modifylng the previous Law No. 7914 by: (a) incorporating risk management as part o f all development policies; (b) establishing the creation o f a National Disaster Risk Management System; (c) restructuring CNE’s Board o f Directors; (d) mandating that al l central government entities and local governments must allocate resources for relevant disaster and risk activities in their programs and budgets; and (e) mandating that 3 percent o f financial surplus or prof i t from all governmental institutions i s transferred to the National Emergency Fund to finance the NRMS. Law No. 8488 also expands the exception regime (estados de excepcidn) concept in emergency situations, which allows CNE to use abbreviated procedures to procure goods and services and to hire personnel (nombramientos de ernergencia), and gives CNE the responsibilities o f designing and implementing the National Risk Prevention and Disaster Management Plan, coordinating preventive actions in situations o f imminent risk, implementing mitigation actions and responses to emergency situations, and coordinating the National Risk Management System.

13

Figure 111.1. National Risk Management System Functional Structure

Technical

Superior level

Technical level {

{ Sectoral level

{ Institutional level

1 Operational level

’I” National Forum Subsystems for Disaster Risk Oversight

Management Committees

Sectoral Committees

Center for Emergency

Networks

Source: Adapted from the National Risk Prevention and Emergency Management Plan o f Costa Rica.

14

3.0

2.5 c

P 2.0 = 69

2 I n 1 5

1 0

0.5

0 0 2001 2002 2003 2004 2005 2006 2007 2001 2002 2003 2001 2005 20% 2007

36. The GoCR i s keen to move further in the implementation o f L a w No. 8488 and implementation o f the NREMP. Already, the regular budget o f C N E has been increased fourfold to support the commission’s new focus on prevention and risk reduction rather than only emergency response. This budget includes CNE’s operational budget (presupuesto administrativo) and resources for disaster prevention activities (see Figure 111.2).

Figure 111.2 CNE Regular Budget Allocation, 2001-2007 CNE Disaster Risk Reduction Investments, 2001-2007

I I I

37. A variety o f positive results are emerging for the recent reforms, including the following. The mandatory incorporation o f DRM in all development policies was formalized in the 2006-201 0 National Development Plan, which obliges all l ine ministries to include a disaster analysis and actions in their annual programs. In this context, the GoCR i s also considering the establishment o f a comprehensive monitoring mechanism for disaster risk prevention and reduction investments by key l ine ministries, so that information on DRM mainstreaming activities in all sectors can be used in the future for analysis. Furthermore, as part o f the modernization o f the planning process, M I D E P L A N has also introduced a disaster risk review that wi l l help identify the necessary measures to reduce exposure to adverse natural events. Under this measure, government agencies submitting investment projects are now required to conduct a disaster risk assessment o f the proposed investment and to include mitigation measures in case the project i s exposed to adverse natural events.

38. In parallel to CNE’s budget increase, additional resources are becoming available through contributions made mandatory by Law No. 8488. The GoCR has already taken the necessary steps to ensure that the 3 percent contributions from surplus or prof i t from all governmental institutions are transferred to the National Emergency Fund. This measure has positively impacted CNE’s ability to carry out disaster prevention and rehabilitation activities. To ensure transparency and accountability, the GoCR is also taking steps to improve i t s mechanisms to monitor the transfers and other voluntary contributions. In addition to i t s regular budget allocation, the GoCR i s also using external resources to finance projects that include some risk prevention and mitigation components, as shown in Figure 111.3. These resources from the Inter- American Development Bank (IADB), the Central American Bank for Economic Integration (Banco Centroamericano de lntegracidn Econdmica, BCIE), the Japan Bank for International

15

Cooperation (JBIC), the German Bank for Reconstruction (Kreditanstalt f i r Wiederaufbau, KFW), and others currently total approximately US$414 mil l ion.

Figure 111.3. Risk Mitigation Investments Funded with International Financing

CONAVI MOFT ICAAyAyA CATASTRO FONAFIFO MAG

Source: Ministerio de Hacienda.

39. Finally, steps are being taken to strengthen the NRMS, including a restructuring plan for CNE that should enter into force in the coming year right after the commission opens i t s new premises, currently under construction. The mainstreaming o f disaster risk management activities at al l levels in Costa Rica’s development program i s expected to have a major impact on reducing existing vulnerabilities and avoiding the creation o f new risks.

D. Emergency Management Framework

40. With the adoption o f Law No. 8488, the GoCR also committed to strengthen the country’s emergency management framework. T h i s framework relies on Costa Rica’s Political Constitution, which includes an exception regime applicable in an emergency situation, times o f war, internal crises, and public disasters (Art. 180). T h i s exception facilitates the State’s ability to deal with a crisis when it cannot adequately resolve a situation through i t s ordinary means and resources. I t can be used in two specific circumstances: (a) for “humanitarian assistance” in minor and local emergencies, or (b) when the government declares a state o f emergency for events that overwhelm local authorities.

41. Under Law No. 8488, a state o f emergency can be declared only by the Executive Power, through a decree that specifies the occurred event, the general characteristics o f the crisis, and outlining the areas covered by the declaration. The main consequence o f a Declaration o f Emergency i s the possibility, which only the C N E has, to access the exception regime and use abbreviated procedures to acquire goods and service and to contract personnel (nornbrarnientos de emergencia), as long as there exists a direct causal link between these resources and the events generated by the emergency. The state o f emergency also widens the Government’s power to impose temporary restrictions, easements, expropriations, occupations, demolitions and so forth. Whi le the exception regime allows for accelerated procedures, budget execution remains subject to subsequent economic, judicial, and fiscal checks.

16

42. Law No. 8488 defines three phases for managing a disaster: response, rehabilitation, and reconstruction. The definition o f each phase is general and the scope i s relatively similar to the commonly accepted concept o f these terms. For the reconstruction phase, the law permits a maximum o f five years during which the CNE can use the exception regime to complete i t s program. Furthermore, the Government can decree the end o f the state o f emergency when the CNE has completed the three phases.

43. The notion o f “humanitarian assistance” has been introduced by Law No. 8488 to facilitate support to municipalities in the case o f local, minor, and high-frequency emergency events. This enables the CNE to use the exception regime without a declared state o f emergency, so as to acquire and deliver humanitarian aid, and to contract the required goods for cleaning the debris in affected areas (for a maximum o f 100 hours). This mechanism can be activated by a direct request from the mayor o f an affected municipality.

44. Law No. 8488 also strengthens the institutional framework for disaster risk management under the NRPEM system, in which the CNE has the primary coordinating role. The law goes further in situations o f emergency, and gives the CNE responsibility for both the coordination and execution o f emergency plans for all three phases fol lowing a disaster. Thus, the CNE i s responsible for planning, coordinating, directing, and controlling the emergency response, including attending to the affected population, assessing the damages and needs, elaborating recovery plans, coordinating institutions, territorial entities and private sector, and contracting and executing the rehabilitation and reconstruction projects.

Box 111.2. Reconstruction Planning

Two instruments are used to support the planning and execution o f projects under a state o f emergency:

(a) The General Emergency Plan, also known as the Regulating Plan (Plan Regulatorio), i s the instrument that defines, organizes, and prioritizes the required actions to confront a crisis. The General Emergency Plan generally consists o f a diagnosis o f the situation (the triggering event, a synthesis o f the damages and needs) by sector and geographic location; the identification, organization, and prioritization o f the three phases o f response, rehabilitation, and reconstruction; the delimitation o f the institutional responsibilities [including those o f the CNE and the local governments]; the calculation o f the approximate amount o f the investment necessary; and the identification o f the extraordinary resources (human, technological, or material) required. This plan i s formulated under the direction o f the CNE within two months after the declared state o f emergency and approved by the Junta Directiva o f the CNE. This plan i s binding on both public entities and local governments.

(b) The second instrument i s the Investment Plan, which develops each o f the projects defined in the General Plan. The Investment Plan consists o f technical documents that detail the scope, activities, and budget o f each project. I t i s prepared by the CNE in collaboration with the public entity andor municipality affected by the evept. Like the General Plan, the Investment Plan i s approved by the Junta Directiva o f the CNE. Once an Investment Plan i s approved, the Executing Unit takes charge o f the technical development o f the project, while the CNE controls the fiduciary aspect.

Smaller and local emergencies that do not fal l under a declaration o f emergency do not rely on Emergency and Investment Plans. Instead, they are managed by a direct application from local governments to the CNE. Once an application i s received and approved by CNE, the services authorized by the law, such as the supply and delivery o f humanitarian aid and emergency equipment, are contracted through simplified procedures.

The National Budget Office (Contraloria General de la Repriblica, CGR) and the internal audit office o f CNE are responsible for supervising the appropriate use o f resources obtained from the National Emergency Fund.

17

45. The law obliges other institutions and local governments to act under the direction and coordination o f the CNE and to attend to the emergency, with priori ty on ordinary works. Under this framework, public institutions are required to provide technical assistance to the CNE in the evaluation o f damages and in the formulation and execution o f emergency and investment plans. Once the damages have been assessed and a General Emergency Plan has been prepared, the CNE wil l generally designate an Executing Unit (Unidad Ejecutora). These units are staffed by technicians nominated by the Ministry or a corresponding public entity that works in collaboration with CNE personnel. T h i s system allows for the mobilization o f the necessary technical capacity and specialized knowledge to support the development o f rehabilitation and reconstruction projects.

E. Emergency Financing Framework

46. Costa Rica benefits from a strong emergency financing system that allows the country to face small-to-medium-size events with financing from i t s ongoing budget and existing reserves. The proposed C A T DDO would complement this emergency financing system by providing resources above and beyond the resources currently available (that is, for medium-to-large-scale disasters or when the accumulated cost o f small disasters cannot be financed with available resources).

47. The main source o f financing for emergencies, rehabilitation, and reconstruction in Costa Rica is the National Emergency Fund (NEF). T h i s Fund i s capitalized by mandatory transfers from public institutions and donations from various sources. In particular, Law No. 8488 mandates that all public institutions transfer 3 percent o f their financial surplus or profit to the National Emergency Fund. The NEF currently holds close to US$80 mil l ion. Allocations from the NEF are often complemented by budget resources from other government agencies. Under Law No. 8488, public institutions are also allowed to allocate budget resources for relevant disaster activities at their discretion. Because this formula allows l ine ministries to execute some o f their resources via the exception regime, and because they generally participate in the staffing o f the executing unit, government entities are generally keen to transfer funds from their investment budgets to CNE when a disaster occurs. Table 111.1 provides a summary o f such budgetary transfers in recent years.

Table III.1. Allocations to CNE from Public Institutions Institution Actual Disbursements (US% 000)

2003 2004 2005 2006 2007

Presidency 1,111.9 1,165.8 1,284.9 1,737.8 1,497.0 Ministry o f Economy, Industry and Trade - - 0.1 0.1 0.1 Ministry o f Public Works and Transportation -

Ministry o f Justice Ministry o f Commerce

- - - 2,950.8 3.8 3.8 3.8

75.4

- -

- - - -

1.9 - Ministry o f Environment and Energy 1.9 1.9 1.9

Total 1,113.8 1,167.7 1,366.1 1,741.7 4,453.6 Source: Ministerio de Hacienda, Integrated Financial Administration System (SIGAF).

18

48. Under i t s existing risk financing strategy, Costa Rica has access to sufficient funding to face small-to-medium-size disasters (recurrent events). The C A T DDO would allow for Costa Rica to respond to disaster emergencies above and beyond this current level o f reserves (medium-to- high-severity events). In this context, the instrument could be considered as the second l ine o f defense for the Government, making resources available in case o f medium-size events or when cumulative events generate losses beyond the capacity o f the National Emergency Fund.

49. The C A T DDO wil l also allow for better protection in case o f a major disaster. Recent analysis shows that the Probable Maximum Loss (PML) o f an earthquake with a return period o f 50 years occurring in Costa Rica would be about US$390 million, and the estimated P M L for an earthquake with a return period o f 100 years would be US$850 (IADB 2006). As a quick and flexible source o f financing, the C A T DDO i s particularly wel l placed to provide bridge financing while other sources (for example, concessional funding, bilateral aid, and emergency reconstruction loans) are being mobilized fol lowing a major disaster (Box 111.3).

Box 111.3. Catastrophe Risk Financing Strategy

A r isk financing strategy should differentiate between a range o f higher-frequencyllower-cost events and lower- frequencylhigher-cost events. Lower layers o f risk (higher-frequencyllower-cost events) can generally be financed through reserve mechanisms, special budget appropriations, and budget reallocations. These sources o f f i n d s are rarely sufficient to face higher layers o f risk for which other risk financing instruments are generally needed. This C A T DDO operation has been designed to provide liquidity in case o f medium-size (or cumulative) disasters that cannot be funded with the internal reserves and to provide bridge financing while other sources o f funding are being mobil ized in case o f major disaster.

Strategy I Instrument pzq -1

Low High r- Hieh L o w

R e s e m s : National Emergencies Fund

Source; World Bank, Financial and Private Sector Development - Global Capital Markets Development - Non-Bank Financial Institutions Unit (FPD-GCMNB), 2008.

50. To further protect i t s contingent liability, the GoCR i s also exploring the feasibility o f a catastrophe fund to support the insurance o f public assets to reduce i t s fiscal vulnerability to adverse natural events. With assistance from the Bank, the National Insurance Institute (Instituto Nacional de Seguros, INS) i s currently developing a financial strategy for improving

19

and expanding the coverage o f its public assets. The init ial exercise shows that for the current portfolio o f insured public assets, in a scenario where there i s no occurrence o f a major natural disaster, the creation o f such a fund backed by a guarantee from the Central Government would allow for the creation o f a reserve faster than is currently the case, and a substantial lowering o f insurance costs. The I N S i s also identifylng and addressing the legal, institutional, and operational requirements for the establishment o f a catastrophe risk fund for public assets. Results from the ongoing work are expected to be available by December 2008.

5 1. Under the Central America Free Trade Agreement (CAFTA) concluded in January, Costa Rica also agreed to liberalize i t s insurance sector. Under this agreement, Costa Rica made specific commitments to gradually phase out tariffs and to open markets to external competition. In this context, Costa Rica committed to fully open i t s insurance market to competition, with the vast majority o f the market opening by January 1 , 2008, and full opening o f the sector by January 1, 2011.

52. Finally, the GoCR i s closely fol lowing the development o f the World Bank Multi-country Cat- Bond initiative. This program aims at facilitating the issuance o f Catastrophe Bonds for sovereign governments exposed to natural disaster risk. The design o f a f i rst operation is underway and is expected to bear h i t by the end o f the year (Box 111.4).

20

Box 111.4. The Country Risk-Financing Framework and the World Bank

To help countries reduce their reliance on post-disaster external assistance, the World Bank has promoted a country risk-financing framework, which i s partly based on corporate risk management principles, but also considers economic and social factors such as the government’s fiscal profile and the l iving conditions o f the poor (Gurenko and Lester 2003; Ghesquiere and Mahul2007).

This risk management approach relies on the identification and assessment o f the contingent liability o f the state in case o f natural disasters, and on the financing o f this contingent liability using a combination o f retention mechanisms and market-based financial instruments. By ensuring that sufficient liquidity exists following a disaster, modem funding approaches can help speed recovery, ensure that scarce government funds are wel l used, and reduce the risk-enhancing effects o f moral hazard. Wi th sufficient liquidity following a disaster, key government officials can immediately focus on recovery and not be distracted by having to close short-term funding gaps. In addition, catastrophe risk management can assist countries in the optimal allocation o f risk in the economy, which may result in higher economic growth, better mitigation, and more effective poverty alleviation. The country risk financing framework i s based on three pillars:

Assessment o f the Government’s Contingent Liability. Governments in low- and middle-income countries are generally unaware o f the full financial risks that natural disasters expose them to. The first step in understanding the government’s contingent liability i s to develop precise risk models that accurately reflect the country’s risk exposure to natural disasters and the losses associated with various events. Second, a dialogue must take place regarding the role o f the government and the roles and responsibilities o f the government and individuals in the aftermath o f a catastrophic event. The contingent liability o f the government due to natural disasters i s often implicit, because the law usually does not clearly define the financial responsibility o f the government when a disaster hits the country. The government thus acts as a (re)insurer o f last resort, without knowing precisely i t s catastrophe risk exposure. By understanding the full exposure and the extent o f public intervention in recovery efforts, i t i s possible to ascertain the contingent liability carried by the government.

Financing o f Sovereign Risk. Once exposure to disaster loss i s quantified, the sovereign government can generally define what level o f recurrent losses it i s capable o f retaining on its books. This can be done through a formal reserve mechanism, budget reallocation in case o f disaster, and contingent lines o f credit. The C A T DDO, as developed by the Bank, i s considered to be one o f the most flexible and efficient risk-retention instruments currently available. Beyond the level o f losses that i t i s wi l l ing to retain, the government can use market-based instruments to transfer its remaining contingent liability arising from natural disasters by insuring public assets and by protecting its budget against major losses through sovereign insurance. Unfortunately, because risk transfer mechanisms have a cost, and because not al l risk can be transferred, a government will always retain some exposure on i ts books.

Promotion o f Risk Transfer to Comuetitive Insurance Markets. The government can reduce its contingent liability by encouraging private competitive insurance solutions for the transfer o f private risks. This can be done by creating an enabling environment that allows private insurers and reinsurers to offer competitive products and, possibly, through the establishment o f catastrophe insurance programs based on public-private partnerships, including catastrophe insurance pools. This allows the government to reduce i t s contingent liability in the case o f a natural disaster. The government can thus concentrate i t s financial support to the poor and disadvantaged. Such risk transfer i s more likely to happen in countries where the domestic property insurance market i s sufficiently developed, as in most middle-income countries.

Source: Adapted from Cummins and Mahul, “Catastrophe Risk Financing in Developing Countries: Principles for Public Intervention,” World Bank report, 2008.

21

IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

A. Link to Country Partnership Strategy

53. The overall objective o f the upcoming Country Partnership Strategy (CPS) from FY09 to mid- , F Y l l i s to support the Government o f Costa Rica (GoCR) in implementing i t s two main

development priorities for the next two years: (a) addressing emerging challenges to continued growth and competitiveness, including fiscal risk management; and (b) continuing to reduce income poverty and increase equity in social service provision. In this context, the Government has requested Bank support for the following selected areas:

Four lending operations, totaling about US$258 million, targeted to specific areas in which the Bank has global expertise or suitable instruments for managing risk, notably the Catastrophe Deferred Drawdown Option (CAT DDO). Reimbursable technical assistance for the Social Security Institution (Caja Costarricense del Seguro Social, CCSS) in both the management o f pension assets and supporting continued strengthening o f the health system. Non-reimbursable technical assistance related to competitiveness, poverty targeting, and streamlining o f social assistance.

54. This C A T D D O is one o f the four lending operations agreed for this CPS, al l areas deemed o f high priority for Costa Rica’s development, which the Government believes address issues for which there wi l l be sufficient support in the legislature and in society at large. As indicated by the CPS, the C A T DDO would provide Costa Rica a rapid source o f funds in the event o f a major natural disaster (floods, hurricanes, earthquakes, volcano eruption, and landslides), enabling a quicker response to address emergency needs. This instrument would be accompanied by the further implementation o f a comprehensive Disaster Risk Management Program. The specific CPS outcome to which this operation would contribute i s the development o f risk reduction strategies for emergency response and diversified risk management instruments.

B. Collaboration with other Donors

55. During preparation o f the C A T DDO, the Bank coordinated with the fol lowing key partners in the Central American region on disaster risk management initiatives that include Costa Rica: the Central American Coordination Center for Natural Disaster Prevention (CEPREDENAC), the United Nations International Strategy for Disaster Reduction (UN/ISDR) in Central America, the Inter-American Development Bank (IADB), the Wor ld Meteorological Organization (WMO), and the Provention Consortium. K e y initiatives supported through these collaborations are the Central America Probabilistic Risk Assessment (CAPRA) and the Mesoamerican Environmental Information System (SIAM).

56. Throughout the drawdown period, the GoCR and the Bank would maintain a close pol icy dialogue on disaster risk management issues through both ongoing initiatives and proposed or planned new initiatives. Close coordination wil l also be maintained with other international organizations actively assisting Costa Rica in the area o f post-disaster recovery and mitigation,

22

including the United Nations Development Programme (UNDP), the IADB, the Off ice o f Foreign Disaster Assistance (OFDA), the Japan International Cooperation Agency (JICA), and the Government o f Spain.

C. Relationship to other Bank Operations

57. The Bank recently started various technical assistance projects in Costa Rica to support i t s Disaster Risk Management Program. For example, the National Insurance Institute ( INS) i s developing a financial strategy for improving and expanding the coverage o f i t s public assets with Bank support. Costa Rica is also one o f the two pi lot countries included in the Central America Probabilistic Risk Assessment (CAPRA). CAPRA, a regional initiative led by CEPREDENAC in collaboration with the UNASDR, the Wor ld Bank, and other national government entities and institutes o f Central America, wil l identify and evaluate the main sources o f potential losses (both geographically and by sector) from disasters, combined with an assessment o f government capacity to finance recovery operations. Results from this study wil l nourish the formulation o f strategies and policies to strengthen the national risk prevention and emergency management system, and to develop a risk financial strategy.

D. Lessons Learned

58. Disasters must be managed instead of being treated as exogenous shocks to development that cannot be proactively addressed. This has been documented in a wide array o f studies and is the underpinning o f the Hyogo Framework for Action, the international agreement adopted by 168 Governments.18 Costa Rica has acknowledged that hazard risk i s a manifestation o f flawed development plans, and managing hazard risk is good practice in sustainable development.

59. The design of this CAT DDO takes into account the lessons learned from 25 years of Bank operations and programs in the area of disaster risk management, as reflected in the Independent Evaluation Group Report “Hazards o f Nature, Risks to Development: An Evaluation o f World Bank Assistance for Natural disaster^."'^ The report recommends that the Bank assist i t s most vulnerable clients to shift from focusing entirely on disaster response to implementing programs and policies for comprehensively managing disaster risk. The most important lessons from the more than 500 projects that were evaluated are the following.

60. Disaster risk management i s most efficient when based on adequate risk identification. To support government programs that mainstream risk reduction, Costa Rica has developed detailed hazard maps at the municipal level. The available information in the country i s used to support decision making and land use planning, and as an input for risk modeling and the design o f projects for prevention and risk reduction. The country i s also leading the region in the

~~

The Hyogo Framework for Action (HFA) was formulated as a comprehensive, action-oriented response to international concern about the growing impacts o f disasters on individuals, communities, and national development. Based on careful study o f trends in disaster risks and on practical experience in disaster risk reduction, and subjected to intensive negotiations during 2004 and early 2005, the HFA was finally adopted by 168 governments at the World Conference on Disaster Reduction, held in Kobe, Hyogo Prefecture, Japan, 18-22 January 2005. l9 “Hazards o f Nature, Risks to Development: An IEG Evaluation o f World Bank Assistance for Natural Disasters,” World Bank Independent Evaluation Group, 2006.

23

establishment o f the Central America Probabilistic Risk Assessment (CAPRA) initiative, a platform that should allow for extensive analysis o f the risks by sector and geographic location.

61. The need to support investments in ex ante disaster risk management. Costa Rica has made important progress in this aspect by establishment o f the National Risk Management System (NRMS), and approving the National Risk Prevention and Emergency Management Plan (NRPEM). In the context o f designing the disaster risk management program for this operation the Bank i s working with the Government o f Costa Rica in identifying adequate implementation mechanisms for the risk management plan, including a mechanism allowing relevant agencies to invest in risk reduction works.

62. The value of prior strategy for reconstruction fmancing. I t i s essential for faster recovery after a disaster event that a country prepares for how to finance the recovery and reconstruction process. When this i s not done the result has often been expensive debt instruments, diversion o f resources from ongoing development programs, or slow and insufficient reconstruction financing. Costa Rica’s CNE has access to reconstruction financing through a variety o f sources. The proposed operation wil l strengthen the country’s risk financing strategy, thus helping to minimize budget restructuring and ensure continuity in the implementation o f development programs, including those financed by the Bank.

63. The importance of securing the availability of a flexible source of funding to cover early recovery in case of a natural disaster. The immediate availability o f liquidity i s critical for a Government to reestablish critical services as fast as possible in the aftermath o f a disaster event. T h i s can help accelerate recovery and minimize business interruption, which i s often the highest economic cost associated with disaster events, and secure critical public facilities such as those for health services. The Bank has experimented with various instruments to accelerate the availability o f resources after major disasters. (a) The Organization o f Eastern Caribbean States (OECS) Emergency Recovery and Disaster Management Program Project Adaptable Program Lending (APL) program, launched in December 1998, was organized as a horizontal A P L with a floating phase available in case o f emergency; (b) the Colombia Disaster Vulnerability Reduction Program (DVRP-APLI ), 2005, includes an embedded contingency loan o f U S $ l S O mi l l ion that would be disbursed against a positive l i s t o f imports; (c) the Caribbean Catastrophe Risk Insurance Facility (CCRIF), launched in January 2007, has proven to be an efficient use o f parametric insurance instruments to provide immediate liquidity to countries affected by adverse natural events. Each o f these instruments was considered for the current operation; however, none proved as quick and flexible as the C A T DDO.

E. Analytical Underpinnings

64. The general framework for analysis and preparation o f this operation was based on a large number o f key documents and publications, o f which the principal were: (a) The “Hyogo Framework for Action,” agreed upon in 2005 by 168 governments and that formulates guidelines for comprehensive disaster risk management actions; (b) the 2006 Independent Evaluation Group Report, “Hazards o f Nature, Risks to Development: An Evaluation o f World Bank Assistance for Natural Disaster,” and (c) the 2007 Wor ld Bank Working Paper by F. Ghesquiere and 0. Mahul, “Sovereign Natural Disaster Insurance for Developing Countries: A

24

Paradigm Shift in Catastrophe Risk Financing,’’ which identifies several cases where government’s risk-neutral assumption does not hold, thus making rational the use o f ex ante risk financing instruments, and makes the argument that securing funds ex ante i s essential for a cost-effective government risk financing strategy.

65. In preparing this document, a variety o f country studies related to disaster risk management and risk financing were taken into account. Particularly important documents included: (a) the “Natural Disaster Hotspots, A Global Risk Analysis, Disaster Risk Management Series,” World Bank, 2005; (b) the IADB-published “Indicators o f Disaster Risk and Risk Management,” and i t s “Costa Rica Case Study,” which provides an overview o f Costa Rica’s main achievements in disaster risk management; and (c) an upcoming paper by F. Ramirez Cortes and F. Ghesquiere, “Mecanismos Para l a M o v i l i z a c i h y E j e c u c i h de Recursos Financieros en Situaciones Pos Desastre en Costa Rica,” which analyzes the functioning o f the Costa Rica Emergency Management System.

66. Other documents that have informed the preparation o f the economic, environmental, and social elements o f the operation and helped guide the government’s pol icy direction in i t s disaster risk management program include: (a) the “Costa Rica Public Expenditure Review, Enhancing the Efficiency o f Expenditures,” World Bank-IADB, Report No. 4077443, March 3 1, 2008; (b) “Costa Rica Poverty Assessment Recapturing Momentum for Poverty Reduction,” February 12, 2007, World Bank, Report No. 35910-Cr.; (c) “Costa Rica Country Financial Accountability Assessment,” World Bank and IADB, Report No. 34976-CR, June 30, 2005; and (d) “Costa Rica Social Spending and the Poor,” World Bank, Report No. 24300-CR, 2003.

h

25

V. THE PROPOSED CAT DDO

A. Operation Description

67. The Catastrophe Deferred Drawdown Option (CAT DDO) will help Costa Rica reduce its fiscal vulnerability by providing budget financing in case o f a natural disaster occurring on Costa Rican soil. I t wi l l help ensure that affected populations receive assistance as soon as possible after a disaster, and wil l support the continuity o f development programs directed to alleviate and reduce poverty. Drawdown condition, financial features, and renewals are as follows.2o

0 Drawdown Triggers. Funds may be drawn down upon occurrence o f a natural disaster resulting in a declaration o f a state o f emergency by the President o f Costa Rica through an Executive Decree, in accordance with Law No. 8488 o f January 1 1,2006.

Financial Features. The financial features o f the C A T DDO are similar to those available for the Deferred Drawdown Option for Development Policy Loans (DDO DPLs), with one exception: the C A T DDO would have a revolving feature; that is, amounts repaid prior to the closing date would be available for drawdown.

Drawdown Period and Renewals. The drawdown period for this operation wil l be three years. The C A T DDO may be renewed up to four times. The adequacy o f the macroeconomic framework and the Disaster Risk Management Program would be reconfirmed and updated upon renewal. Renewal would take place no earlier than one year, and no later than six months, before the expiry date. Renewals would require that the original program (disaster risk management and macroeconomic framework) remains largely in place.

68. In preparing this operation, the Bank team reviewed Costa Rica Emergency Management System, which was found to be robust and able to handle the resources that would be made available under the C A T D D O in case o f an emergency.

69. This operation recognizes the progress achieved by the GoCR in implementing a proactive disaster risk management program, which i s expected to substantially influence the country development and help reduce vulnerability to adverse natural events. A list o f prior actions supporting this operation and already implemented by the Government are shown in Box V. 1. In addition, Box V.2 shows details on how the operation adheres to good practice in pol icy lending.

B. Disaster Risk Management Program

70. The Disaster Risk Management Program supported by this C A T D D O consists o f two key policy areas: (a) strengthening o f the institutional and legal framework, and (b) mainstreaming disaster risk management in the National Development and Investment Programs. These pol icy

2o “Memorandum from the President to the Executive Directors, Subject: Proposal to Enhance the IBRD DDO and to Introduce a DDO Option for Catastrophic Risk (CAT DDO),” Document No. 42396, World Bank, January 29,2008.

26

areas are consistent with the “Hyogo Framework for Action 2005-2015: Building the Resilience o f Nations and Communities to Disasters” for implementing disaster risk reduction. The National Risk Prevention and Emergency Management Commission (CNE) monitors and reports annually on the country’s progress on this in i t s “National Report on the Implementation o f the Hyogo Framework o f Action.”

71. The actions that the Government o f Costa Rica (GoCR) has taken in regard to the first pol icy area are the passage o f Law No. 8488, “Emergencies and Risk Prevention,’’ approved by the Legislative Assembly in 2006, and Executive Decree 34361, issued in 2008.

0 Law No. 8488 and Redamento. The law established the legal framework to guarantee the reduction o f the causes o f risk, and the timely and coordinated risk management in times of disasters. The reglumento define in greater detail the disaster risk management system, CNE, GoCR’s disaster prevention responsibilities, a state o f emergency declaration, a general emergency plan, and financial resources. This is expected to enhance CNE’s capacity to coordinate and incentivize disaster risk management activities.

0 Allocation o f Resources. Law No . 8488 mandates that all central government entities and local governments must allocate resources for relevant disaster and risk activities in their programs and budgets. In addition, i t establishes that 3 percent o f financial surplus or prof i t from all governmental institutions i s transferred to the National Emergency Fund to finance the National Risk Management System. This strengthens the government’s capacity to effectively support disaster mitigation activities in a sustainable manner.

72. The actions that the GoCR has taken in regard to the second pol icy area are derived from the mainstreaming o f disaster risk in the National Development Plan and National Investment Program.

National Development Plan (PND). Disaster Risk Management (DRM) was incorporated in the 2006-2010 PND through the strategic action on land planning as part o f the Social Development and Poverty Reduction component. The incorporation o f DRM in the P N D obliges al l l ine ministries to include risk analysis and mitigation initiatives in their annual programs. A comprehensive monitoring mechanism for disaster risk prevention and reduction investments by key line ministries i s being prepared, so that information on DRM mainstreaming activities in all sectors can be used in the fbture for analysis. In addition, CNE has been requested to (a) establish o f the National Risk Management System (NRMS), (b) design and implement the National Risk Prevention and Emergency Management Plan (NRPEM), (c) strengthen early-warning systems, and (d) strengthen risk management at the community level. This i s a significant strengthening o f the government’s DRM program, because i t inserts risk management consideration at every level o f the country’s development programs.

Investment ProDams. The Ministry o f National Planning and Economic Policy (MIDEPLAN) recently added a disaster risk review in the project proposal format for national investments. Under this measure, government agencies submitting investment projects for approval by M I D E P A N are now required to conduct a disaster risk assessment

27

o f the proposed investment and include mitigation measures in case the project i s exposed to adverse natural events. This improvement, along with the environmental review, has great potential to control and effectively address disaster risk in future investment programs. The country can benefit and i s currently assessing systems that could assist public officials in the decision-making process by assessing the disaster risk o f planned investment projects. This i s a significant strengthening o f the government’s DRh4 program, because i t inserts risk management consideration in the review o f all investment projects for the country.

Policy Area Strengthening o f institutional and legal framework.

Prior Actions Actions Taken Adoption o f Law No. 8488 and its reglamento.

Implementation o f a mandatory contribution o f 3 percent o f financial surplus or profit from al l governmental institutions to be transferred to

Adopted.

Implemented.

I the National Emergency Fund. I Incorporation o f Disaster Risk Management in Mainstreaming disaster risk in the I Achieved.

National Development and Investment Programs.

the 2006-20 10 National Development Plan

Incorporation o f disaster risk analysis in the MIDEPLAN screening o f investment projects.

(PND). Achieved.

Box V.2. Good Practice in Development Policy Lending

Principle 1: Reinforce ownership This operation i s driven by the Government o f Costa Rica and enjoys solid ownership in the country. The CAT D D O i s aligned with the government’s Disaster Risk Management (DRM) strategy. This operation recognizes the priority given to DRM by the GoCR as reflected in the Social Development and Poverty Reduction component o f i t s National Development Plan.

Principle 2: Agree up front with the government and other financial partners on a coordinated accountability framework

The proposed CAT DDO i s based on a coherent framework of previous actions and expected outcomes that i s based on the GoCR’s Disaster Risk Management Program (DRMP). The regular preparation o f the “National Report on the Implementation o f the Hyogo Framework o f Action” and i t s contents on progress on DRM according to international standards w i l l help facilitate the dialogue with the Bank.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances The operation features the client’s requests, and the policy matrix has been adapted to country circumstances and the CAT D D O modalities. This i s in recognition o f the GoCR’s work on and investment in DRM actions, with a strong emphasis on disaster prevention rather than on emergency response alone.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement As indicated, funds may be drawn down upon occurrence o f a natural disaster resulting in a declaration o f a state o f emergency by the President o f Costa Rica through an Executive Decree, in accordance with Law No. 8488 o f January 11,2006.

Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support

The policy matrix contains outcomes that are closely linked to the supported policy actions and indicates the main responsible entity. This w i l l help the Bank and GoCR review progress during project implementation.

28

VI. OPERATION IMPLEMENTATION

A. Poverty and Social Impact

73. The implementation o f the Catastrophe Deferred Drawdown Option (CAT DDO) i s expected to have a positive poverty and social impact. In general terms, improvements in national disaster risk management and vulnerability reduction strategies are expected to benefit the poor. Costa Rica has a relatively wel l developed set o f social protection programs, but many o f i t s poor s t i l l fal l outside their scope.2’

74. This operation wil l benefit f rom the priority given by the current administration to strengthening Costa Rica’s social safety net. This strengthening should ensure “that social protection i s available to the poorest, most vulnerable groups, thus protecting them against r isks and shocks while improving their access to basic services.”22 More efficient spending and better targeted social protection programs wil l increase this operation’s impacts.

75. As has been extensively documented, the poor are the segment of the population most at risk from the impacts o f natural and man-made disasters, particularly in terms o f health and productivity. Law No. 8488 and i t s reglamento mandate the actions that the GoCR wil l implement to reduce vulnerability to disaster risk, which causes losses o f l i f e and social, environmental, and economic damages that mainly affect the poor.

76. Therefore, the poor are expected to benefit in the form o f improved ability to return to, or improve, the existing socioeconomic, health, and environmental conditions found before the occurrence o f a disaster event. The National Risk Prevention and Emergency Management Commission (CNE), for example, has worked to minimize disasters with indigenous and other groups located in the Atlantic watershed, an area vulnerable to floods in the southeast o f the country near the border with Panama. The Government o f Costa Rica’s (GoCR’s) disaster risk prevention and emergency management pol icy efforts wil l help the country achieve the Mil lennium Development Goals (MDGs) by improving the potential for more productive workdays and a better quality o f l i fe for the rural and urban poor and other vulnerable groups.

77. The disruption o f public utilities, such as potable water or sewage systems, communications, and transport infrastructure during a disaster event, increases the probability o f the poor and other vulnerable groups (such as indigenous groups) suffering from increased gastrointestinal and other illnesses. The incorporation o f (a) disaster risk management in the National Development Plan, and (b) ex ante disaster risk considerations in the Ministry o f National Planning and Economic Policy (MIDEPLAN) national investment project approval process have the potential to reduce and minimize the incidence o f illnesses among the urban and rural

21 Social protection programs are public interventions designed to help people better deal with risk, and to ensure basic levels o f well-being to the poor. Part o f this social protection network is the assistance given by the C N E in the event o f a disaster, and the compensatory program o f the Institute o f Social Assistance ( IMAS) that provides direct transfers to families that are poor o r have suffered as a result o f a natural disaster (emergency subsidies). 22 “Costa Rica Poverty Assessment-Recapturing Momentum for Poverty Reduction,” W o r l d Bank, 2007.

29

78.

poor after a disaster hits, because these vulnerable groups are, for example, more l ikely to l ive near point sources o f water pollution.

The C A T DDO wil l help the GoCR to enhance i t s capacity for disaster risk management, by supporting the implementation o f i t s Disaster Risk Management Program at the national level. The mandatory transfers o f governmental institutions to C N E wil l better position the GoCR to address ongoing activities toward: (a) the existing institutional and legal framework to enforce compliance o f adequate settlement and construction standards o f public and private affordable- housing programs; (b) the existing legal and financial provisions to explore affordable natural- hazard insurance schemes (under the National Insurance Institute [INS]); (c) the strengthening o f the capacity o f municipalities to include and enforce disaster prevention considerations in their master plans (with CNE’s support); and (d) the promotion o f local organization and education campaigns targeted to poor neighborhoods and vulnerable communities, including indigenous groups (with Ministry o f Education and CNE support).

79. In addition, the C A T DDO wil l foster accountability, transparency, and greater public participation by supporting the implementation o f Law No. 8488, which mandated the creation o f CNE. The full adoption o f the new reglamento is a key step to effectively implement this law. Law No. 8488 also mandates strengthening o f the capacity o f local government and civ i l society organizations to address emergency situations. I t directs the CNE to develop mechanisms that allow their participation at the decision-making table with respect to the design and implementation o f policies that affect local governments and their communities, including indigenous groups.

80. Disasters have historically been a powerful source o f poverty. The proposed operation supports policies that seek to alleviate poverty by strengthening disaster risk management in Costa Rica. In case o f a declaration o f emergency, the activation o f the C A T DDO will avoid the need o f deviating funds originally designated to development projects. This wil l guarantee the continuity o f development plans, mainly targeted at alleviating the needs o f the poor.

B. Environmental Aspects

81. The project i s expected to have significant positive impacts on the environment and natural resources, by providing the GoCR with critical funding for implementing measures that reduce environmental degradation and their adverse consequences on the population. In particular, this operation wil l help the GoCR support and strengthen the following areas: (a) disaster risk management institutional, legal, and pol icy frameworks, by focusing on key program milestones and outcomes; (b) risk identification, assessment, and monitoring capacities by enhancing i t s institutional framework; (c) knowledge management and education, by implementing relevant programs (such as the National Education Plan for Risk and Disaster Reduction, building new schools with infrastructure less vulnerable to disasters, and renovating old schools, accordingly); (d) reducing underlying risk factors such as developing new projects in safe areas; and (e) preparedness for effective response and recovery by supporting the CNE.

82. Since the raison d’2tre o f the operation itself i s to support the government’s effort in mainstreaming disaster risk management into a number o f key sectors, the operation’s design i s proactive with respect to internalizing environmental concerns, reflected in the role o f the

30

Ministry o f the Environment and Energy (MINAE) as a member o f the C N E board o f directors. Other positive impacts on the environment are expected to derive from improved environmental management at the national and local levels. The CNE i s mandated to support local municipalities in implementing binding land-use zoning regulations.

83. The C A T D D O operation places particular emphasis on assuring improved transparency and accountability o f social and environmental issues with respect to governmental oversight and decision-making processes. In compliance with OP 8.60, the regulations in place for reducing adverse effects and enhancing positive effects have been reviewed and are described below and in chapter I11 o f this document. All risk prevention activities are subject to environmental impact assessments, and even if the emergency response (primer impacto), rehabilitation, and reconstruction activities are in principle exonerated o f an ex ante assessment, a report on any impact i s often prepared and filed. Thus, social, economic, and environmental considerations are taken into account by the GoCR during an emergency situation, and the fol lowing steps taken during an emergency are regulated by law.

C. Implementation, Monitoring, and Evaluation

84. Whi le the Ministry o f Finance (Hacienda) is the main counterpart o f the Bank for this C A T DDO, implementation o f the program i s a shared responsibility among the Ministry o f National Planning and Economic Policy (MIDEPLAN), the National Budget Office (Contraloria General de la Repziblica, CGR), and the National Risk Prevention and Emergency Management Commission (CNE).

85. Throughout the drawdown period, the satisfactory implementation o f the Disaster Risk Management Program would be monitored periodically. Such periodic monitoring may take place at a frequency consistent with the information needs o f the Bank, but no less than every 12 months, and could be initiated by either the Bank or the borrower. In broad terms, the program i s expected to result in: (a) a strengthened CNE capacity to coordinate and incentivize disaster risk management activities, (b) a well-funded and functioning system to finance risk reduction and disaster recovery activities, (c) the generation o f analysis and inclusion o f risk mitigation initiatives in the program o f l ine ministries, and (d) an increasing proportion o f investment projects that properly integrate disaster management considerations.

86. If at any time during the drawdown period the Bank concludes that the hazard risk management program is not being implemented in a manner satisfactory to the Bank, the Bank would promptly advise the borrower o f the need for a subsequent review to confirm that the program i s implemented satisfactorily before it would be able to grant any request for drawdown. In this case, follow-up monitoring would be more frequent until a review confirms that the program i s back on track. Once the Bank i s satisfied that drawdown conditions are again in place, the Bank would inform the borrower that i t s eligibility to submit disbursement requests has been restored.

D. Fiduciary Aspects

87. The Country Financial Accountability Assessment (CFAA), completed in 2005, indicates that the fiduciary environment in Costa Rica i s generally adequate, stating that the treasury management i s solid and the internal control has in place a legal framework and independence,

31

which are the basis for a sound Public Financial Management (PFM) system. The methodologies for budget formulation are well documented and are applied. There are efficient controls on government funds liquidity, and the financial reports provide considerable information on government finances.

88. The Government has built a strong foundation for a well-functioning PFM system (particularly with regard to the Integrated Financial Management Information System (IFMIS) or the Integrated Financial Administration System (SIGAF), including Expenditure Execution and Treasury subsystems), and has a clear vision for further modernization. Treasury operations are managed through a highly effective single treasury account system. The control framework is now consistent with international standards, and implementation across the entire public sector i s in progress.

E. Flow of Funds and Audit

89. The Bank would make loan disbursements to a dedicated account that forms part o f the country’s official foreign exchange reserves at the Central Bank o f Costa Rica. After the deposit o f C A T D D O proceeds, the Central Bank o f Costa Rica would immediately credit the disbursed amount to the Ministry o f Finance Treasury Single Account (Cuenta Uizica de Tesoreria), thus becoming available to finance budgeted expenditures. Within two weeks o f this operation, the Ministry wil l provide the Bank with a written confirmation. The legal agreement wi l l include an audit clause for the audit o f financial transactions from the receipt o f the loan proceeds by the Central Bank to the transfer o f the local currency equivalent into a treasury account designated for budget expenditures.

90. The Central Bank o f Costa Rica is the financial agent o f the Government. At the conclusion o f writing this project document, there i s no IMF Safeguards Assessment, and the Central Bank publishes i t s Annual Financial Statements without an opinion o f independent auditors; rather, i t i s signed by the Internal Auditor instead. However, based on a review o f external audit reports and the experience with segregated accounts for investment lending, nothing came to the attention o f the Bank that would indicate that the banking control environment into which the loan proceeds wil l f low i s other than adequate.

F. Risks and Risk Mitigation

91. Fiscal Risks. Through external or internal shocks, the fiscal situation may deteriorate, which would jeopardize the macroeconomic situation. Given the historic and existing positive macroeconomic environment, this risk i s considered moderate. This operation i s intended to lessen this risk by demonstrating active, visible support to the government’s proposed Disaster Risk Management Program. The macroeconomic situation may also be weakened by external factors. Therefore, i t wil l be essential to maintain a close working relationship with the client.

92. The Project Concept Note for the C A T DDO mentioned that resources made available under the C A T DDO may be insufficient in the aftermath o f a major catastrophe, and rated this as low. The C A T D D O i s meant to be one o f several sources o f liquidity to the Government in the immediate aftermath o f a disaster.

32

93. Coordination Risks. Coordination i s a systemic risk in any emergency management project. In Costa Rica, the C N E has a strong capacity for leading an emergency response and institutional efforts. Law No. 8488 mandates that al l institutions and private and public entities should respond to the CNE in the event o f an emergency. The coordination r isks are rated as b, because in general the experience o f Costa Rica has been positive.

94. Institutional Risks. T o date, the implementation o f the Disaster Risk Management Program has been welcomed in Costa Rica. The program supports consultation and evaluation in mobil izing the Government’s and civ i l society’s efforts in disaster risk prevention and emergency activities. This pol icy has increased the credibility, sustainability, and effectiveness o f the policy actions. There is, therefore, a level o f risk associated with opposition to the reform process from special interest groups in the medium term o f the current administration (2006- 10). Furthermore, additional measures to ensure a smooth reform process include a communications strategy for the sector, and dissemination o f guidelines on new disaster risk management activities, which will in turn promote greater public participation.

95. Political risks. The country i s the most politically stable in the region, and there has been a l ow turnover o f senior and technical officials within the GoCR. T h i s creates a low risk o f loss in momentum to complete the reforms supported by this program.

96. In conclusion, this f i rst C A T DDO operation could be considered low risk, since all actions wil l have been met by Board presentation. However, given that this C A T DDO i s the first operation o f its type, i t should be considered medium risk, high reward.

3 3

ANNEX 1: LETTER OF DEVELOPMENT POLICY

a d - . .

01 de Agost:, dc 2008 DM-1779-2008

Robert R. Zocllick Presidente del Bancr.1 lritsrriaciunal de Heconslriicc;t6*? y Fomento Washington. DC

Ref.: Carta de Politica - CAT DDO DPL

Frt primer lugar desec expressrle el agradccimiento de nuestr'o Gobierno y dcl pueblo costarricense pcr el apoyo brindado por el Banco Muridial a nuestro pais en sus esfuerzos de alcanzar nuestras inatas de desarrollo sosten ble y de erradicacicjn de la pobrera. Una dc 10s principales cornpromisus del gobierno dcl Presiderite Ilr Oscar Arias y ckwaments asiat)lr?cidu C ~ M O L I ~ O de 10s ejes del rlesarrollo nacional, en concordoncia con 10s Objetivos de Uesarrollo del Milcnio, es la lucha frontal contra la pubrera y la desiyualdad Para el Icgro de esta meta el Gobierno costarricense tiene cc)nio priuridad la atancidcl a 10s grupas n.1 As wlnerables de la poblocidn. a traves de prograrrras orientados a mcjorar sus coridicivnes dc vida y a la elitnitiacidri de las condiciones que causar si1 exposicion a stuaciones de riesgn

I a politica dcl Estado Costarriceiise incluye el desarrollar e irnplementar las normas y estrategias para rcducir las causas de las perdidas de vidas y las consecuericios sacialcs, econbmicas y ambisrltales, inducidas par a s factores de riesgo de origen natural. El abjetivo de dichas normas, establecidas par a Ley Nacional de Lmergencias vigente (Ley 84881, es el de conferir un rnarco juriuico Agil y eficaz, que garantlce la rediJcc:lbri de las causas de, rlesgo; asi conin el rnanep oportuno, coodinado y eficiente de las situaciones de enicrgcncla, y de 10s fondos asignaaos para la prevencibn. la atencion y la reeuperacibn post- desastre. Asimisma, t ime el ohptivu de Gefinir e rntegrar 10s esfuerzos y las funciones del Gobierno Central, las iiistituciones descentralizodas las empresas piiblicm 10s gobiernos locales, el sector privado y la sociedad civil organirat-la que participan en la prevencihn y atencicjn de impactos negativas d ~ . -l succsos wtastrbficas I

34

Reconociendo el vinculo entre 10s procasos del desarrollo sostenible y .a reduccibn de 10s rtesgos a desastres natdrales acrecentados por el camblo c irnatlco nuestra Gobictrno ha asui-nido el compromisa de ftsrtalecer las politicas socialcs, conviit ihlolas en un rnstr r.mento para la expanstdn de las oportunidades de toda la poblacibr~, Por tal mobvo, el Wan Nacional dc Dcsarrolio 20063-20 10 prqmne especificamente evttar 10s asentamicntos informales del pais que en gelie-al se etiweiilrar~ iibicados en sitios considerados de alto riesgo, ofrecienda eltsrna:ivas a las poblaciones mas vulnerables.

El desarrollo soclsl y econdmico de Costa Kica descansa en el respeto a la cnslitilciorialidad democratica y er su base da recufsos naturales, que incluye entre otros, un agraclable climo tropical con abundantes fmntes de a g ~ a que facilitan la generation hidroelkctrica hmpia, f6rtiles s;rielos de origen volcanico, costas y hermosas playas en el mar Caribe y el oceano Pacifbco. asi G Q ~ O exuberantes bosques [y un 24% de la totalidad del terrilorio nacional protcgido) que atraen a cas4 40s millones de turistas cada aAo, generando ingresos y fuentes de empleo para miles rla cxsfairicenses en todos 10s segrnentm socioocan6rnicos No obstante, csas mismas caracteristieas ambientah y gcogrrificas del pais rcpresentan arrenazas crecierites por exposicidn a catastrofes de orgen natural, tales c ~ n i o inrJnrfac;iuries, huracanes, volcanes, derrumbes y 1crrcwiotos, di! hechc Costa Rica esta clasificada corno URD de las peiscs oxpuestos a mayor riesgo de sufrir desastres multiples

Por otra parte, existe arnplta evidcncia que demuestra que las puhlaciunes humanas en rnas alto riesgo de sufrir 10s impactns de desastres naturales S Q ~ ayuellas que viven en condiciones de pobrera, afectandolas parlicularmnte en terrninos de salud y prodticlividad. Tambih esta claramente documentodo que 10s desastres naturalcs {y aquellos generados por In intcrvencidn humana en el ambicnte) tienen proporciofialmwrlte un efecto mas devastador. et- t&viinos rla pkrdidas de vidas l imarias, economicas y sociales, especialivcrtc: cuartdc afectnn paiscs pobres o en desarrollo. 10s desastres naturales silelen coiisumir un porcentaje considerablsnierite mayor del PIB en paises C O ~ D Casta RILX w donde basta que vcurra una sola catbstrote para bnrrar importantes avances socialcs y cconbmicos.

En conscmricia con gas pollticas del Gobierno dc Casta Rim, el Programa de Gcstibn de Riesgo reconoce que es neccsario realizar actividades de redcrcr:ibr. y tnit:gacir)n coil la participacibn y el trabajo coordinado con 1i-1 suciedad civil y el sector piivado. las instituciones del Estado y IQS gobierncts locales, en todos 10s ambitos geograficos El Prograrna dc Gcstibn de Riesgo de pais se envarca en 10s objetivos eslratBgicos y acciones prioritarras del "Msrr:rj de Acciljn de Hyogo 2005-7015 Construyendo la Resillencia de las Naciones y las Comunidades ante 10s Desastres' , De acuerdo cor6 las lincanilentos del Marco de Accibn. Costa Rica cuenta con una plateforma nacional para a gestiirn del riesgo constituida pot- un alatmrado marc0 Icgal c tnstitucional clilt! iricluye la Cowisibn Nacional de Prevention de Riesgm y Atenciriri de Emergeticias {CNE), el Plan Nacional dc:

35

Prcvcnc.bii de Riesgos y Atenciim de Emergencias, y las rnstancias de coordinaciofi que 19 corlfcrnan.

Et Progtama se resume de la Inanera siguente:

Plan Nacional dc Desarrollo:

Apoyar la implwnentacion del PNQ y la Iegistacibn costarricense tilie define la gestidn de riesgos de desastrcs C O I ~ O un eje transversal de las politicas r acioriales y establecan lineamien',os de acatarniento obligotorio para todas \as iristituciones del Estado con el fin de incorporar fa gestidn de riesgos eri ius planes sectoriales. El PND rnduye el tcma de gesh6ri de riesgo en la a c c i h estratkgicn de ordenamiento territorial dentro del ale de "DesarroIIo Social y Lucha Contra la Pobreza", y asigria a la CNL cuntro nietas especificas, todas relacionadas con la GK- (i) la constitucibn del Sistema Naciorial de Gestidn der Riesgo, (11) el drseiio y cjccucidn del Plari Nacional de Gestion del Hiesgq (iii) el fortalecimlcnto de (os sisternas de alerta temprana y (iv) la atencibn e inforcnaciiiii con acciones y olrras para la gestidn del ricsgo a \as COffmidadeS.

Mantener el campromiso con la mitigacidn de riesgo y ateiickhn a las ernergencias, tomado ios pasos rtecesarios para crear el marco legal e Institur:iunal, asi c ~ m n asegurar 10s reciirsos necesarios qiie permilrqr} la irnplementacrbn sos!enible y adecuada del programa de gcstibn de iiasgo.

Asignaciori de Recursos:

* Dotar de los recursos necesarias para la adccuada operacidri de la CNE y el cumplirniento de sus tuncianes y atribucioncs, asi cotno para la capitalisacibri del Fondo Nacional de Erncrgencias, a travks de las siguientes fuentes

a) Los aportes, la3 corltribuciones, dunaciones y transferencias de persurias fisicas a juridicas. r:8cionales o internac:oriales, estatalas o no gubernan witales,

b) l a s tiansferencias dispuestas por Ley, cquivalentes a1 3% del supef$vit de tndas las institucianes nacionales

c) Las partidas asignadas en 10s presupuestos ordinarios y extraordinarios de la Re pu bl ica ,

d) Los aportes obtcnidos de !os instrurnentos fir?aricrieroos y e) Los interescs que se garieren par la rnversibn transitoria de 10s recursos.

El Fondo es administrado pur la CNE, la ciial esta autorlzada para invertir en titulwi de insti?uciores y emprcsas de! sc;zv.tor publico El Forido esta sujeto a regulaciones adrrsiixstrativas especialcs que le Derrnitcn a !a CNF un rapid0 ~ C C ~ S Q a 10s raciirsos del f orido on casos de emergencia, al estar el l-or~do excluiclo de la aplicacidn de las disposicioix.+:s correspcndientcs a la Caja Unica dol

36

Estado, curitcrnpladas e l la Ley de Adrtiinistracihn Firiariciera y Presupueslos Piiblicos Adicionalmerta, trdas las instituciones y ernpresas pubCicas del Estado y 10s gobiernos locales, estan ob:igadas par ley a incluir en sus presupuestos una partida presupuestana destinada a desarrollar acciones de prevencih t y preparativos para sitmciones de emergenctss en Areas de su cornpeterrcia

Fortalecimiento de la Comisidn Nacional de Preveneidn de Riesgos y Atencibn de Erncrgcncias:

e Apoyar el fortalecimiento de ia CNL con cl fir, de que pueda cxmplir con su nandato de disefiar e implementar el Plan Nacional de Gest ih de1 Riesgo. como irstrurnento de planificaciiiri estratkgica, que paririita la articulacidn s is th ica e integral de tos prograrrias parte de IDS Subsistemas y, adern&, 113 dclirnitacibn de !as cornpetendas institucionales, la asignacidn de I ~ L ‘ U ~ S O S , la organizacicin y 10s rnecanisnios de vertficacihn y control. Para tal propbsito la Ley 8488, reform6 la CNE otorgandoie un rnandato y alribuciones mayores, quc incluyen la maxima abitaridad de coordtnacibn intcrinstitucxmal ante una declaratoria de Cnicrgcnera Nacional, La CNE, por tanto, es la iiisiituci6n rectora de la Geslibn de Riesgos y su Junta Oirectiva (confomiada pur et Presidenfe de la CNE, y 10s Ministros dc la Presidencia, Salud Qbras Publicas y ‘I ransportos. Seguridad Publica, ArnPiente y Energia, Vivienda y Aseixarnientos l-iumanos, Hacierida, y 10s ejecutivas de1 lnstituto Mixto de Ayuda Social -IMAS- y el lissliluto Nacional de Segurns y un representante de Is Cruz Raja Cost3rrlcensc!) dicta las politicas do funcionam entn.

En virtud de lo anterior y para niepraT la capacidad de gestibn de riesgos en el pais, consjderarrios que la Opcidn de Desern b o l s ~ Uiferido durante Catastrofes (GAT-DDO) apoyara 10s esfiierzos de nueslrc, gobicrno para I) mejarar ia eficicncia y efectividad de .os mecanisrnos de respucsta a desestres, iij integrar 10s priiicipros de la gcsti6n del rresgu en todas las inst4tucionss del gobierno c iii) incwporar la protetccibn arritriental y las regulacioncs de ordenamlento del tcrritorio c o r 0 componentcs criticos de la gestibn dcl riesgo.

Conscicntes de la importancia de fortalecer Ias capacidades nacionaks para llevar a cabo el prograrria riacional de gestidn d e ricsgo, el Gobierno ratifrca su sol cituj at Banco Mundial para llevar a cabo en el pais la ‘Opcibn de Desembolsa Diferido durantc CalBstrofes’’ (CAT-DD0) y su c:orripromso de seguir adelante con el

Prograrna de Gesti6n de Riesgo.

37

(Original in Spanish)

Republic of Costa Rica Ministry o f finance {Hacienda)

Office of the Minister

Augus: 1 I 2OC8 DM-1179-2008

Mf. Robert I3 Zoellick President Iiitsrr!ational Bank tor Reconstruction and i)cvelopment Washington D C.

Ref.: Development Policy Letter - CAT DDO

Deaf Preskknt Zocllick:

I-irsf, I would likc to express the gratitude 0' the Govcrnrnent anc people of Costa Rica for the s~pp0.t providcd by the World Bank of oiir efforts to reach the p a i s c f siistainable development and poverty eradicaiiwi in our country. One of Itla rriain commitments of Presitlent Dr. Oscar Arias' govecrtrrrsnt. anc also one ot the core natronal development tliemcs, in accordance with the Millcnniuni Developrneir! Goals is fhe fight against poverty ai-d inequality. To achieve this Goal. one of the priorilies r;l tlie Casta Ricari Government is to reach the mas! Vuhlerabk papvlatiorl through programs directed a? irnprovirig their livlng conditions and eradicating 'the cmditions tlial cause !heir exposure to disaster risk

The policy of the State in Costa Rica includcs developing and implementing the norms and stratesics to reduce the root causes, including saciaf, sc:nncxnic. and environtnentd, that Icad to the loss of life and o t w r risks from natural disasters The objective of ttiesa riorrls, established by the current National tmergency Law (Law 8488j, is tc confer an efficient and effective legal framework that guarantees thc rediiction of underlying s~citcos of disaster risk. and the appropriate coordinatwl, and c:fficicn: rnanageme?t of erncrgcncy situatroiis, includirg the funds assrgned Inr prevcntion response, a i d ;m:-disaster recovery effurls. I rkewtse the ob!ectrve of

38

these iioriiis IS to define and integrate the affnrtr; and activities ul all the cntitcs that are involved in the! prcventi37 of ard response to catastrophic everils. iricliiding tqe Central Goverrirnent dcccntralized institutbrrs, public utilil.es. local gowiirrnerrls. the private sector. arid civil society

Recognizing the lir k bcfwticn sustainable development processes arid 1tie ~educ::i!~r~ of the rrsk to na'iLral cisastcrs, which are likely IC, ircreasc due to global warmiiiy, mi: Goverrment IS cvrnrrri'ted to strengthening social policies, making them an rristiurnrml to increase opporturiilies for O L : ~ enltre popvlatiori For this reason, the Na~iorlal T)eveloprnent Plan 2006--201Q proposes specifically to avoid irregular settlerritsrits in the carintry. wPich in general. arc located in areas of bigh disaster risk, and lo offer alternatives to our r r cs l vul7erablc pcoplo

Casts Rica's social and ecoiiorriir: development rests on the rcspect for democratic irislitutinns and or> the country's nattrral resources. I he former include. among otliec's, a pleasant tropics: climate with abundant water sources thi4 facilitate the generation of m a n energy through hydrutrlectric plants, fertile soils of uoJcanic arigrn beautiful beaches on the Caribbean Sea and the Paerfic Ocean. and liish forests (24 percent of ou1 national terntory rs protec?ed area) that attract almost 2 million tourists every year, generating income and sources of employment for thousancs of Costa Ricans in all soc'oecanomic sectors. However. these same envtrotiriiwfal and geographic: charackristics of the coaiitiy represent increasing exposure t3 catastrophic risk posea by ilatural avenls such as floods, hurricanes, volcanoes, lanaslides, and earthquakes. In fact. Costa Rica is classified as one of thc countries with the highest risk to muItipk disasters,

There is arnpia evidence that demonstrates that the populatan living n povcrty is at higner risk frurn disasters triggered by natural hazards, wifh particularly negative effects on their health and productivity, It is also well docmerited that disasters triggered by riatiiral hazards (and those yewrated by envrroiimental niisrrianagernent) have more devas?ating effects, m terms of human tife and economic and social losscs. when lhey affec: lw poor and when they affect dcveloping countries, bhtural drsaslters usually corisiirnc! a considerably higher percentage of CDP 111 countries like Costa RIca. where a single catastrophe can erase signifcant social arid ecorwinic a c h icvc rn e n ts ,

In awordance with the polictes of the Government ot Costa R i m , the National Risk Prevention and Ernsrgericy Managcrnont Plan recoy i l ks the need to carry out disaster risk reauction and mitigation activities, with the coordinated participation of civil society and the private sector, and the national arid local yovcrnrnent institutions throughoul the country. 1 he National Risk Prevention and Emergency Manageiner?t Plan is franied within the strategic abjectivcs and priority actirrris of the "Wyogo =ramework for Action 2035-201 5: Building the Rcsdionce d Natrons arid Cornrnuni'.ics :o Disasters." In agreemen: with the Franiewtrrk guidelines, Costa Rica has a nst'onal platform for disaster risk management, with solid legal and irstitutional framework [bat includes the National Risk Prevention and Emergency Managenten: Curnmiission ( C f F). the National Risk Prcvcntion and krneryericy NlanaGcrne-tt Plan, and the coui dinating entities

39

National Development Plan [NDP):

Supiiurt implemerihlion of the NDP and the Costa Rican legislation that defines disasrer risk ~nanap?rne~ t as a crass-cutting t h c r e af riatinnal policies. and establishes binding guidelinss and agreements for all govei ririrent instituxow, with the purpose of mainstremirig risk managsrnent En their sectoral plans The NDP includes the issue of risk management in the strategic actiolis for terriiorial planning willrin the 'Social Development and Fight Agarns: Poverly" pillar. arid assigns Four speeci+ie goals ta the CNC, in relation lo 2isaste-r Risk Management. (a) elaboration of the National Risk Prevention a d Fmergency Management $ystern, ( b ) design ard irnplsmentatiun of the Noiional Risk Pwvenlrun and Emergency Management Plan, (b) streng:t+ening tne early warning systems, and Id) community icsponse and inforration mechanisms through the implementatian of community risk inanagement acttoris ana works.

Maintain its commitment to disaster risk mitigation and emergency response. taking the necessary steps to create the corrcsponding legal and instifutiona fi.afTisVmrk, and to allocate the nrFcessary resources to alhw the sustairiak)le and adequate mpferncntation nf thc disaster risk managernerrl yogram.

Allocation of Funds:

Fnsure provisitxi of the necessary r e s o w e s for the adequate operation of the CNE and the capacty to perfam its maridate and authority, arid tor the fLinding for the Natioria, Emergencies Fund, through the following sowces:

f. Contributions, donations, and transfers from national and intetr-atiorlai individuals and legal antities, and from gcwerr;mental a d nongovernmental sources

, I Mandatory lrensfers froin national agencies as inclicntcd by Jaw eryivaient to 3 percent of their budget surpluses or profils

,- Dudgct item allocations in the country's regular and cxtraordiriary oudgets

Profits from ftnavcial instruments. a.?d

:*: Interest earnod from the Fun6 resource deposits

The Fx id is administerer:' by the CNE, which has the authority tu invest rn the financial instruirrenis of the public scclnr's institutions and enterprises Tile riind is suqecl lo special adrninistra:ive regulations that permit CNE rapid access i o the Fund's resmirceS n c a w ot emergency. as the Tund is excluded from application ot the National Single Account regu'atians, as per the La& for financial Adrninistratm arid

40

Public dudget. In additiur, all the sta!e and oca1 govemrrsen: pubtic s m t v inst tirtiors anc enterpr ses are required by law to inctude in their budgets an allocatloti to develop disaster risk 3reveritir,ri and emergency preparedwss activities i r i a-8a.s and acalities t inmi their jur sdiction

Strengthening of the National Risk Prevention and Emergency Management Commission (CNE}:

Support thrs strcnglhening of lhe GVI i so it can fulfill its mandate of desiyiitng and implementing the National Ris< Prevention and Emergency Management Plan, as a strategic plann ng instfurrent t l ial permits the systematic integration of its subsystems and prog’arns, and clelirreatinn of its institot onat responsibilities, the allocation of furds, and the estabLshmcnt of organizational ana monitoring rncxhanisms Law 8488 reformed CNE for this purpose broadening its mandate as the rnaximurr, Iri~r;3r-iristitutiofl~l cooydrnatrng authority in the event of a National Eniergency. Tkre fore . the CNk JS the institution respansibie for Disaster Risk Management in the country, and tts tjoard of Cirectws (comprising the President of the CNE; thc Ministers of Presidency, Health, Public Works and Traiispomrt. Public Security Environment and Energy, Huusiril; and tiurnan Settlements, and Finawe; the heads of the Institute of Social Assistance [IMAS] ard the National lrssilrance Institute [INS]. and a representativc fro* the National Ked Cross), dictotcs the norrns of operation

In light of the above and to erihance the country’s disaster risk nianagemmt capacity, we consiaer that the Catastropk! Draw Dawn Option (LA1 -0CO;i will suppod the offacs that our government is macing to: {a) improve the effi;=rency arid effectivcnncss of cmcrgcncy response mechanisms, (b) mainstream dsasler risk management prirlciples in ail government ayeircies, and (c) integrate ervironmeqtal pmtection anti teriilorial planning reguiatioris as criticai c ~ r t i p ~ n t t s for disaster risk management

The Governmcnt of Costa Rica. recoyriizing the imporrance of sti-engtherl rlg Costa Hlca’s national capacity to implemert the natiaiial disaster risk manageinert pr yrarn. ratifies its req~iest to thc Work Bank to irnpletnenl a “Calsstrophe Clravr, Down 4ptio:Y (CAI-UDO) in Ihe ( :c~ i~r~ i ry and reiterates its commitment to !hc program.

41

I

l o

x D

ANNEX 3: FUND R E L A T I O N S NOTE

Public Information Notice (PIN) No. 08/31 March 10,2008

IMF Executive Board Concludes 2007 Article IV Consultation with Costa Rica

On February 15, 2008, the Executive Board o f the International Monetary Fund (IMF) concluded the Article IV consultation with Costa R i ~ a * ~ .

Background Since the last Article IV Consultation, Costa Rica’s economy has continued to grow rapidly. Real GDP grew by 8.8 percent in 2006, and economic activity remained strong in 2007 driven by both domestic and external demand. Early estimates suggest that, for the year as a whole, growth was close to 7 percent. Unemployment declined to 4.6 percent, the lowest level since 1994.

Inflation steadily declined between late 2006 and mid-2007, thanks in part to the October 2006 switch to a crawling band regime and the subsequent widening o f the exchange rate band. However, inflation rebounded in the second hal f o f 2007, partly because o f sharp rises in international o i l and food prices, and ended at 10.8 percent in December 2007.

The current account deficit widened to 6.0 percent in 2007, driven by a surge in nonresident income on foreign direct investment. Both exports and imports grew strongly during the year. The current account was more than fully financed by foreign direct investment inflows. Net international reserves reached a historical high o f over US$4 bi l l ion in December 2007.

Public finances continued to improve in 2007. According to the latest preliminary figures, the central government closed with a surplus o f 0.4 percent o f GDP, the best performance since 1957, while the overall public sector posted a surplus o f 0.6 percent o f GDP. In parallel, public debt fe l l to about 43 percent o f GDP at end-2007. These results stemmed mainly from strong revenue growth due to administrative measures and the economic expansion.

Monetary aggregates have kept expanding rapidly. Private sector credit has been growing at over 30 percent (y/y) in 2007, fueled by a construction sector boom and strong consumption demand. Driven in part by sustained capital inflows, lending rates declined sharply, and deposit rates became negative in real terms.

The financial system has become stronger and more diversified, though important vulnerabilities remain. Judging by traditional prudential indicators, banks appear wel l capitalized, profitable, and

23 Under Article IV o f the IMF’s Articles o f Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. A t the conclusion o f the discussion, the Managing Director, as Chairman o f the Board, summarizes the views o f Executive Directors, and this summary i s transmitted to the country’s authorities.

43

highly liquid. Recent acquisitions o f domestic private banks by large foreign banks have intensified the process o f consolidation in the sector. Vulnerabilities include high dollarization o f assets and liabilities, and s t i l l large offshore banking activities.

Executive Board Assessment Directors commended the authorities for the strong performance o f the Costa Rican economy in 2007, reflecting the continued implementation o f sound economic policies. Directors welcomed the ratification o f the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR) and the reduction in the poverty rate to a historical low. The near-tern prospects for the Costa Rican economy remain favorable, based on robust domestic demand. At the same time, Directors stressed the need to be vigilant to downside risks, mainly related to the intensity o f the slowdown in the U.S. economy.

Directors considered that the main pol icy challenges wil l be to lower inflation and take forward the authorities’ well-focused structural reform agenda. Reform priorities include fully implementing CAFTA-DR, completing the transition to inflation targeting, passing legislation for a substantial tax reform, and strengthening financial regulation and supervision.

Directors praised the authorities for their impressive fiscal performance, which resulted from effective tax administration efforts and tight control o f nonpriority spending. This pol icy has also contributed to a substantial reduction in public debt. Looking ahead, Directors considered that a prudent fiscal pol icy will be key to containing demand pressures. They encouraged the authorities to maintain the fiscal stance achieved in 2007-r even improve on it-to support the disinflation objective. Directors supported the authorities’ plans for a substantial tax reform, which would permit higher spending in priority areas-including social and infrastructure spending-while preserving a sound overall fiscal stance. They welcomed the authorities’ interest in developing a full-fledged medium-term budget framework.

Directors welcomed the steps already taken by the central bank toward greater exchange rate flexibility in the context o f a gradual transition to a fbll-fledged inflation targeting framework.

They acknowledged the constraints on monetary policy imposed by continued large capital inflows under the current crawling band exchange rate regime, the appreciation pressures on the colbn, and falling U.S. dollar interest rates. However, most Directors stressed that the recent substantial cut in interest rates-which has made interest rates even more negative in real terms-could give further impetus to the already robust level o f aggregate demand, and compromise efforts to reduce inflation and subdue inflationary expectations. These Directors encouraged the authorities to put in place institutional conditions for greater exchange rate flexibility, including the adoption o f regulations for hedging instruments, which would permit a needed monetary pol icy tightening. A few other Directors cautioned that raising interest rates could trigger further capital inf lows and increase the pressure on the exchange rate. Directors welcomed the init ial step taken in 2007 to recapitalize the central bank, and called for a permanent recapitalization through a one-step stock operation that would also underpin the disinflation strategy.

44

Directors observed that the current account position i s projected to be sustainable over the medium term, and that the real effective exchange rate appears to be in l ine with fundamentals and within the margins o f the staf fs estimated equilibrium range. The good performance o f nontraditional exports and the diversification o f export products and markets suggest that competitiveness i s being maintained.

Directors welcomed the strengthening o f the financial sector. Nevertheless, vulnerabilities remain, including risks associated with the relatively high level o f dollarization and the lack o f effective consolidated supervision o f financial groups. Directors called on the authorities to move expeditiously to implement the remaining recommendations o f the FSAP update. They encouraged the authorities to press ahead with the approval o f the consolidated supervision bill and with the introduction o f regulations to ensure that banks f i l ly internalize foreign exchange risks. They supported reforms to change the funding arrangements for financial supervision and improve the bank resolution framework.

45

ANNEX 4: COUNTRY AT A GLANCE

7/16/08

Key Deve lopmen t I n d i c a t o r s

(2007)

Population, mid-year (millions) Surface area (thousand sq. km) Population growth (%) Urban popuiation (Oh of total popuiation)

GNi (Atlas method, US$ billions) GNI per capita (Atlas method, US$) GNi per capita (PPP. international $)

GDP growth (Oh) GDP per capita growth (%)

(most recent estimate, 2000-2007)

Life expectancy at birth (years) Infant mortality (per 1,000 live births) Chiid malnutrition (% of children under 5)

Adult iiteracy, male ( % of ages 15 and older) Adult literacy, female ( % of ages 15 and older) Gross primary enrollment, male (% of age group) Gross primary enrollment, female (% of age group)

Access to an improved water source (% of population) Access to improved sanitation facilities (% of population)

Costa Rica

4.5 51 1.4 62

24.5 5,460 9.220

6.8 5.3

79 11

95 95

112 111

97 92

Latin Amenca & Carib

556 20.421

1 3 78

2,661 4,785 8.682

5.5 4 2

73 22

5

91 89

121 116

91 77

Upper middie income

811 41,466

0 8 75

4,797 5,913

10,879

5 7 4 9

70 22

94 92

115 111

93 81

N e t A i d Flows

(US$ millions) Net ODA and offciai aid Top 3 donors (in 2006J:

Germany European Commission Japan

Aid (% of GNI) Aid per capita (US$)

Long-Term Economic T r e n d s

Consumer prices (annual % change) GDP implicit deflator (annual % change)

Exchange rate (annual average, local per US$) Terms of trade index (2000 = 100)

Population, mid-year (miiiions) GDP (US$ millions)

Agncuiture Industry

Services

Household final consumption expenditure General gov't finai consumption expenditure Gross capitai formation

Exports of goods and services imports of goods and sewices Gross savings

Manufacturing

1980

64

13 0 4

1.4 27

18.1 18,8

8.6 101

2.3 4,831

20.2 30 6 21.1 62.6

65.5 18.2 26.6

26.5 36.8 12.2

1990 2000

227 11

25 1 5 1

40 -6

3.2 0.1 74 3

19.0 11.0 17.1 7.0

91.5 308.2 95 100

3.1 3.9 7,403 15,946

(SS oi GDP) 12.3 9.5 29.9 32.1 22.6 25.3 57.8 58.5

72.9 67.0 14.7 13.3 18.5 16.9

30.2 48.6 36.3 45.8 13.2 12.5

2007 a

24

7 7 6

0 1 5

9 4 10 2

516 6 85

4 5 26,236

8 4 29 5 21 4 62 1

65 5 13 5 25 6

48 4 53 0 19 7

Age distribution, 2006 I Male Female

I 70-74

15 10 5 0 5 10 15

percent

Under-5 mortality rate (per 1,000) 7 50

40

30

20

i o

0 1980 1805 2000 2005

E3 Costa Rica W Latin Amencs & the Canbbean

I ;rowth of GDP and GDP per capita (%)

4 1 I

GDP per capita I -4-GDP -

1980-90 1990-2000 2000-07 (average annuei grokvth %)

2.7 2 4 1.8 3.1 5.3 5.3

3 3 4.1 4.1 3.5 6.2 5.6 3.5 6.8 5.7 2.7 4.7 5.5

3.8 5.1 3.8 1.1 2.0 1.4 5.6 5.1 9.2

6.2 10.9 7.6 7.8 9.2 6.6

Note' Figures in itaiics are for years other than those specified. 2007 data are preliminary, Group data are through 2006. .. indicates data arenot available a. Aid data are for 2006.

Development Economics, Deveiopment Data Group (DECDG).

46

Costa Rica

Balance of Payments and Trade

(US$ millions) Total merchandise exports (fob) Total merchandise imports (tin Net trade in goods and services

Current account balance as a % of GDP

Workers' remittances and compensation of employees (receipts)

Reserves, including gold

Central Government Finance

(% of GDP) Current revenue (including grants)

Current expenditure

Overall surpluddeficit

Highest marginal tax rate (%)

Tax revenue

Individual Corporate

External Debt and Resource Flows

(US$ millions) Total debt outstanding and disbursed Total debt service Debt relief (HIPC, MDRi)

Total debt (% of GDP) Total debt service (% of exports)

Foreign direct investment (net inflows) Portfoiio equity (net inflows)

2000

5,813 6,389

454

-705 -1.4

136

1,318

12.4 12.3 14.0

-3.0

25 30

4,458 848

-

27.9 8.0

400

2007

9,288 12,582 -1,267

-1,499 -5.7

598

4,114

15.5 15.2 13.7

0.6

25 30

6,632 597

-

30.3 5.0

1,681

lComposition of total external debt, 2006 I

Other mulU. la1araI 1207

Bilateral 261 Shon4em 2 326

Private Sector Development 2000 2007

Time required to start a business (days) - 77 Cost to start a business (% of GNI per capita) - 21.3 Time required to register property (days) - 21

Ranked as a major constraint to business (% of managers surveyed who agreed)

Access tolcost of financing .. 60.1 Anticompetitive or informal practices .. 48.7

Stock market capitalization (% of GDP) 18.3 8.6 Bank capital to asset ratio (%) 10.8 10.7

Governance indicators, 2000 and 2006

Voice and accountability

Political stability

Regulatory quality

Rule of law

CQntml of corruption

0 25 50 75 100

82006 Country's percentile rank (0-100) 02000 hwhw valuer mply boner mbn@

S o u m Kaufmann-bay-Mastnrui W o M Bank

Technology and Infrastructure

Paved roads (% of total) Fixed line and mobile phone

High technology exports subscribers (per 100 people)

(% of manufactured exports)

Environment

Agricultural land (% of land area) Forest area ( X of land area) Nationally protected areas (% of land area)

Freshwater resources per capita (cu. meters) Freshwater withdrawal (% of internal resources)

CO2 emissions per capita (mt)

GDP per unit of energy use (2005 PPP $ per kg of oil equivalent)

Energy use per capita (kg of oil equivalent)

W

(US$ millions)

IBRD Total debt outstanding and disbursed Disbursements Pnncipal repayments Interest payments

IDA Total debt outstanding and disbursed Disbursements Total debt service

IFC (fiscal year) Total disbursed and outstanding portfolio

Disbursements for IFC own account Portfolio sales, prepayments and

repayments for IFC own account

of which IFC own account

MlGA Gross exposure

2000

22 0

28

51 8

58 48.5

2 4

1 4

9 3

e42

2000

121 8

33 12

2 0 0

48 41

0

4

72 0

2006

24 4

64

44 7

57 46 8 23 6

25,975

1 5

9 9

883

2008

53 5

11 3

1 0 0

154 99 42

24

79 0

Note: Figures in italics are for years other than those specified. 2007 data are preliminary .. indicates data are not available. -indicates observation is not applicable.

Development Economics, Development Data Group (DECDG).

8/4/08

47

Millennium Development Goals Costa Rica

With selected targets to achieve between 7990 and 2075 (estimate closest fo date shown, +/- 2 years)

Goal 1: halve the rates for S I a day poverty and malnutrition Poverty headcount ratio at $1 a day (PPP, % of population) Poverty headcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitile (%) Prevalence of malnutrition (% of children under 5)

Goal 2: ensure that children are able to complete primary schooling Primary school enroliment (net. %) Primary completion rate (% of relevant age group) Secondary school enrollment (gross, %) Youth literacy rate (% of people ages 15-24)

1990 1995 2000 2006

87 75 82 87 89 45 61 86 97 98 98 QQ

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) 101 101 102

Proportion of seats heid by women in national parliament (%) 11 16 19 39 Women employed in the nonagricultural sector (% of nonagricultural employment) 37 37 39 40

Goal 4: reduce under-5 mortality by two-thirds Underd mortality rate (per 1,000) 18 16 14 12 Infant mortality rate (per 1,000 live births) 16 14 13 11 Measles immunization (proportion of one-year olds immunized, %) 90 91 82 89

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) 30 Births attended by skilled health staff (% of total) Q8 98 QQ

Goal 6: halt and begin to reverse the spread of HlVlAlDS and other major diseases Prevalence of HIV (% of population ages 15-49) 0.3 Contraceptive prevalence (% of women ages 15-49) 75 80 96 Incidence of tuberculosis (per 100,000 people) 22 19 17 14 Tuberculosis cases detected under DOTS (%) 119 102

Goal 7: halve the proportion of people without sustainable accass to basic needs Access to an improved water source (% of population) 96 97 97 Access to improved sanitation facilities (% of population) 92 92 92 Forest area (% of total land area) 50.2 46.5 48.8 Nationally protected areas (% of total land area) 23.6 C02 emissions (metric tons per capita) 0.9 1.4 1.4 1.5 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 9.1 9.2 9.3 9.9

Goal 8: develop a global partnership for development Fixed line and mobile phone subscribers (per 100 people) 10 14 28 e4 internet users (per 100 people) Personal computers (per 100 people) Youth unemployment (% of total labor force ages 15-24)

0 0 8 28 7 15 23

6.3 11.1 11.0 15.0

Education indicators (%)

:aL- 25 2000 2002 2005

-0-Pnmary net enmllment rabo ( )

-C+~abo of girls to boys in pnmary a semndary education

I IYeasIes immunizatlon (% of 1-year olds)

OCosta Rica OLaUn America 8 the Caribbean I

iCT indicators (per 100 people)

70 7 I BO

50 40

30

20 10

0

0 Fixed + mobile subscribers

Note: Figures in italics are for years other than those specified. .. indicates data are not available.

Development Economics, Development Data Group (DECDG).

6/4/08

48

Map section

CCoorrddii ll lleerraa ddee GGuuaannaaccaassttee

CCoorrddii ll lleerraa CCeennttrraall

CCoorrddii ll lleerraa ddee TTaallaammaannccaa

CCoorrddii ll lleerraa ddee TTii llaarráánn

Cerro ChirripoCerro Chirripo(3,810 m)(3,810 m)

Cerro DurikaCerro Durika(3,296 m)(3,296 m)

Volcán TurrialbaVolcán Turrialba(3,328 m)(3,328 m)

Volcán IrazúVolcán Irazú(3,432 m)(3,432 m)

Cerro KámukCerro Kámuk(3,554 m)(3,554 m)

A L A J U E L AA L A J U E L A

G U A N A C A S T EG U A N A C A S T E

P U NP U N TTA R E N A SA R E N A SC AC A RR TTA G OA G O

L I M Ó NL I M Ó N

P U NP U N TTA R E N A SA R E N A S

HHEE

RREE

DDII AA

SS AA NN JJ OO SS ÉÉ

TTeemmppiissqquuee

NicoyaNicoya

Santa CruzSanta Cruz

La CruzLa Cruz

UpalaUpala

CañasCañas

San RamónSan Ramón

PuertoPuertoViejoViejo

GuácimoGuácimo

SiquirresSiquirres

BribriBribri

SixaolaSixaola

TurrialbaTurrialba

San IsidroSan Isidro

NeilyNeily

San VitoSan Vito

PalmarPalmarSurSur

GolfitoGolfito

San IgnacioSan Ignacio

San MarcosSan Marcos

SantiagoSantiago

JacóJacó

OrotinaOrotina

QuesadaQuesada

San RafaelSan Rafael

Los ChilesLos Chiles

CarmonaCarmona

PlayaPlayaNaranjoNaranjo

LiberiaLiberia

PuntarenasPuntarenasAlajuelaAlajuela HerediaHeredia

CartagoCartago

SAN JOSÉSAN JOSÉ

SSiixxaaoollaa

CChhiirrrr

iippóó

ddeell AA

ttlláánnttii

ccoo

GGeenneerraall

RReevvee

nnttaazzóónn

CChhiirrrr

iippóó

SSaann CC

aarrllooss

GGrraannddee

Lago deLago deArenalArenal

A L A J U E L A

G U A N A C A S T E

P U N TA R E N A SC A R TA G O

L I M Ó N

P U N TA R E N A S

HE

RE

DI A

S A N J O S É

Tempisque

Nicoya

Garza

Santa Cruz

Flamingo

La Cruz

Upala

Cañas

San Ramón

PuertoViejo

Guácimo

Siquirres

Bribri

Sixaola

Turrialba

San Isidro

Neily

San Vito

PalmarSur

Golfito

Parrita

San Ignacio

San Marcos

Dominical

PuertoQuepos

Santiago

Jacó

Orotina

Quesada

San Rafael

Los Chiles

Carmona

PlayaNaranjo

Liberia

PuntarenasAlajuela Heredia

Cartago

Puerto Limon

SAN JOSÉ

NICARAGUA

PANAMA

Sixaola

Chirr

ipó

del A

tlánti

co

General

Reve

ntazón

Chirr

ipó

San C

arlos

Grande

Lago deArenal

Caribbean Sea

Bahía deCoronado

PACIFICOCEAN

Golfo deNicoya

Golfo dePapagayo

Lago deNicaragua

Golfo Dulce

To Rivas

To Changuinola

To Cerro Pando

To Puerto

Armüelles

To David

Cordi l lera de Guanacaste

Cordi l lera Central

Cordi l lera de Talamanca

Cordi l lera de Ti larán

Cerro Chirripó(3,810 m)

Cerro Durika(3,296 m)

Volcán Turrialba(3,328 m)

Volcán Irazú(3,432 m)

Cerro Kámuk(3,554 m)

86ºW 85ºW 84ºW 83ºW 82ºW

84ºW 83ºW 82ºW

10ºN

11ºN

9ºN

10ºN

11ºN

COSTA RICA

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 20 40

0 20 40 Miles

60 Kilometers

IBRD 33392R

JULY 2008

COSTA RICASELECTED CITIES AND TOWNS

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES