Macroeconomic Numbers on Right Track

December 22, 2006

With exports topping $1 billion for the first time ever, record levels of foreign reserves, and a dwindling foreign debt, Nicaragua’s macroeconomic indicators suggest that the economy is on the right track heading into 2007, despite modest economic growth of less than 4% for the year.

Even inflation, which some predicted would top 10% this year, is only at 6.9%, down two points from last year.

President Enrique Bolaños, whose five-year term ends Jan. 10, has encouraged his former political nemesis, President-elect Daniel Ortega, to continue with the same economic and financial policies. And Ortega, a former Marxist, seems to be in agreement in many areas. He’s even reportedly considering keeping in place several key members of Bolaños’ economic team, including Central Bank president Mario Arana and Finance Minister Mario Flores.

Though critics of Bolaños claim that important social-relief programs have not received adequate attention from his government, the administration touts good marks in many macroeconomic areas, which it claims is necessary for larger poverty-relief efforts.

The biggest economic news this year was Nicaragua entering into the Central American Free-Trade Agreement with the United States (CAFTA), which has already born fruits in the form of record-high export levels.

Overall, year-end export estimates were expected to exceed $1.05 billion, up 20% from last year.

Under CAFTA, exports to the United States this year grew 54% from last year, and exports to the rest of Central America were up 40%, according to the Central Bank. The principal products contributing to the increase are coffee, dairy, meat, beans and lobster.

Investment has also increased dramatically under CAFTA. Since the trade accord was first signed last year, 15 companies have invested under the free-trade zone scheme, totaling $256 million and creating an estimated 8,650 jobs, according to investmentpromotion group ProNicaragua.

Another 13 companies, totaling $189 million and 3,800 jobs, are in talks to decide whether to invest in Nicaragua, says Pro-Nicaragua.

International reserves also reached a record high this year, with year-end estimates at $911 million, up from $730 million at the close of 2005.

Banking deposits also reached a new high, indicating recovered confidence in Nicaragua’s financial system after the banking crisis of 2001.

As of November, banking deposits here reached $2.15 billion, up $100 million from 2005.

At the behest of the International Monetary Fund (IMF), the administration this year also passed several structural reforms to the fiscal and financial systems of the country, including: the Law of Financial Administration; the Tax Reform Law; the Civil Service Law; the Law of Bank Superintendence; and the General Banking Law, among others.

Another important advance was negotiated debt relief for Nicaragua’s once-gargantuan foreign debt. The government this year managed to lower the debt service to a level considered almost sustainable.

As of Oct. 21,Nicaragua’s foreign debt was $4.4 billion, down from $5.3 billion last year.

And at year’s end, the government was in the process of finalizing negotiations with the Inter-American Development Bank and the IMF’s Heavily Indebted Poor Country’s Initiative (HIPC) to whittle it down to $1.6 billion, which would mean Nicaragua’s debt service would return to the amount it was at in 1979, and be at a level considered sustainable for the first time in 25 years.

Not all economic news this year was rosy, however. And there is disagreement over some of the official economic statistics. Economist Nestor Avendaño has been a leading critic of the government’s economic model and poverty reduction statistics, mostly the unemployment numbers.

The Central Bank claims that unemployment in Nicaragua is only 5.6% – a statistic that has been lambasted as unrealistic by Avendaño and others, who place unemployment closer to 27%.

The Central Bank’s Arana later said that the unemployment statistic only includes those who are out of work but trying to find a job.

He said there is another sizable group of some 1 million Nicaraguans who are unemployed but “not necessarily looking for work.”

Avendaño, however, says that “everyone in Nicaragua works,” but that most people are in the informal economy doing what they can to survive and not necessarily registering in the government’s official labor statistics.

Some critics argue that the formal-economy jobs the government has created, namely free-trade zone jobs that pay average hourly wages of $0.80 (the lowest wage in Central America), aren’t worth leaving the informal economy for.

 

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