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HomeArchiveCentral Bank: Inflation to Continue Climbing

Central Bank: Inflation to Continue Climbing

MANAGUA – Nicaragua’s climbing inflation rate, which reached an accumulated rate of 10.71% in October, is expected to continue rising this month, according to Central Bank President Antenor Rosales.

A food-crop shortage in the wake of September’s Hurricane Felix and subsequent flooding in the northwestern part of the country, combined with increasingly costly oil nearing $100 a barrel, have accelerated the country’s inflation rate to one of the highest in Latin America (NT, Nov. 2).

And if history is any indication of what to expect in the future, inflation will continue to climb this month, Rosales said last week at an International Monetary Fund (IMF) forum at the INCAE business school outside of Managua.

“We have to study what economic history tells us,” he said. “It tells us that three months after such a disaster, inflation still goes up.”

He noted that inflation rates climbed steadily for three months after Hurricane Mitch hit here in 1998, indicating that the inflationary effects of Hurricane Felix will most likely be felt for at least another month.

Inflation is now 3.8 percentage points higher than it was in October of last year, and has already blown past the Ortega administration’s goal of 9.5% accumulated inflation for 2007.

Inflation is a sustained increase in general price levels over a period of time; it hits consumers’ pockets by making currency less valuable and living costs more expensive, especially for the poor.

Minimum Wage Debate

The soaring inflation rate and rising cost of living has led union leaders to call for an increase in the minimum wage, just five months after the last minimum-wage increase.

José Adán Aguerri, president of the Superior Private Business Chamber (COSEP), warns that any negotiation to increase minimum wage must be done carefully and according to the law, so as not to result in more unemployment.

Aguerri notes that the government already increased the minimum wage 18% across the board last June – a decision he claims that led to another 10,000 Nicaraguans to leave the country in search of work abroad.

The Minimum Wage Law stipulates that the any increase in the minimum wage should be done on a sector by sector basis, taking both inflation and productivity into account. Aguerri said that COSEP has already asked the Central Bank to provide it with the official growth numbers for each sector of the economy, to determine whether another minimum wage increase is viable.

He says the government, which has the last word on minimum-wage rates, must be “very responsible in making a decision.”

He notes than an increase in minimum wage affects only those who have jobs in the formal economy – a minority of Nicaragua’s labor force.

The government’s decision, Aguerri told The Nica Times this week, “will determine the employment rate in the future, and how small businesses will be affected. It will determine how many people will be in the formal economy with benefits, and how many will be outside the formal economy, without benefits.”

Given that the legislative National Assembly breaks in mid-December for yearend recess, Aguerri says it is unlikely that any decision about minimum wage will be made until the first trimester of 2008.

Globalizing Recession

At last week’s INCAE conference, economists warned that Nicaragua’s struggling economy could be headed for harder times if the U.S. economy’s lax performance persists.

Dominique Desruelle, the IMF’s Central America division director, warned that Latin America and particularly Central America are “vulnerable to major external shocks, especially a recession in the United States.” He added that the U.S. housing-market decline, which has stunted the U.S. economy’s growth in recent months, isn’t expected to recover in the near future.

The United States is Nicaragua’s main trading partner, and U.S. remittances accounted for 12% of Nicaragua’s Gross Domestic Product last year.

Rosales said the Central Bank is working to reduce interest rates as a tool to reduce inflation, though he said Nicaragua is not prepared to liberalize the córdoba.

IMF representatives and others at the conference urged Nicaragua to strengthen its state financial institutions, such as the Central Bank, as a long-term goal to combat inflation.

INCAE professor Eduardo Montiel said the history of nations shows there’s an inverse relation between the autonomy of the Central Bank and inflation rates, adding that Nicaragua has “ruined” institutions compared to the rest of the region.

To reduce Nicaragua’s trade dependence on the United States and reduce the impact that a potential U.S. recession would have on the national economy, Rosales said Nicaragua has worked to diversify its trade, mostly with other countries in Central America.

However, IMF Central America representative Alfred Shipke warns that even trade within Central America is susceptible to U.S. market fluctuations.

“All of Central America is dependent on the U.S.,” he told The Nica Times.



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