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IMF Team Evaluates Nica Economy

March 7, 2008

MANAGUA – The Central Bank is considering decreasing the córdoba’s annual “crawling peg” devaluation rate against the U.S. dollar from 5% to 3% in an attempt to control inflation rates in accordance with international lending obligations, according to Central Bank President Antenor Rosales. But, Rosales says,Nicaragua is not ready to completely detach its pegged currency from the dollar and let it float – a move that other Latin American countries have done in past with the support of the International Monetary Fund (IMF) to curb inflation.

Nicaragua’s inflation rate last year finished at a decade high of 16.9%, the highest in Central America.

“To float a currency demands certain conditions” not in place in Nicaragua, Rosales told The Nica Times.

Rosales’ comments came as an IMF team visits Nicaragua for 12 days to meet with government officials and economists to assess the Ortega administration’s economic scorecard so far this year. Some $600 million in economic aid over three years hinges on the IMF assessments.

“As everyone knows, inflation has shot up,” the head of the IMF delegation, Luis Cebudo, told reporters upon arriving Feb. 26. “We’re going to speak with authorities about fiscal and monetary policy and of the salary policies that should be consistent with a reduction of inflation.”

The visit comes after Nicaragua’s democracy was spared an institutional crisis when the National Assembly threatened to reject the IMF-backed budget in an act of political brinksmanship with President Daniel Ortega (NT, Jan. 11).

The budget has since been approved, but expenditures such as salary increases as high as 26% for health workers and teachers may not be welcomed by the IMF, said Francisco Aguirre, president of the legislative National Assembly’s Economic Commission.

The IMF’s representative in Nicaragua, Humberto Arbulú, told The Nica Times this week that budget issues were still being analyzed and the visit is set to end this weekend.

“In the middle of a mission, we haven’t yet formed an opinion about such an important issue,” he said.

However, he said, the most important issue being discussed is how to reduce Nicaragua’s soaring inflation.

Aguirre, meanwhile, said the IMF is trying to influence “governance” issues – a central theme for the IMF in developing countries where it has pushed for autonomous institutions and conservative public spending.

Critics of the IMF, President Ortega among them, say that by hinging aid on governance demands, the international lending institution weakens sovereignty in poor countries.

Nicaraguan teachers at an IMF protest last week outside of the Central Bank echoed that critique.

Ortega in the past has criticized the IMF for meddling in Nicaraguan affairs, but said that his financially strapped government has had no choice but to negotiate with them.

Venezuelan President Hugo Chávez, for his part, has promised to step in to bail out the Nicaraguan economy in the event that the IMF pulls out (NT, Jan. 25).

Ortega has been heavily criticized for not disclosing the full amount of Venezuelan aid entering the country, and for not including it in the budget. Arbulú said the mission is looking at Venezuelan aid as “foreign support, as if from any other country.”

Rosales said Nicaragua’s economy, with IMF aid, could be 4.5% this year, and inflation could be kept below 8% – a prediction Aguirre, of the opposition Liberal Constitutional Party chided as quixotic considering a possible U.S. recession and skyrocketing oil prices.

“That seems very difficult to me,” said the head of the legislature’s economic commission as he headed into a meeting with IMF officials last week.

Aguirre said the Nicaraguan economy is more like a plane hitting turbulence. “You strap on your seat belt and behave very prudently,” he said.

 

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