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HomeArchiveEconomists: Nicaragua is in Recession

Economists: Nicaragua is in Recession

MANAGUA – Political instability, government corruption and tense relations with the international community has put Nicaragua on very shaky footing in a time of global economic decline, according to analysts and a report from a leading Nicaraguan research foundation.

With remittances, exports and construction down, the Nicaraguan economy is projected to end the year in recession and with dramatic increases in unemployment and poverty levels, according to a report released last month by the Nicaraguan Foundation for Economic and Social Development (FUNIDES).

Yet instead of fostering a positive investment climate and working with foreign donors to soften the blow from the economic thump, the government of Daniel Ortega has instead created a negative business climate and given the international community reason to suspend more than $100 million in aid, according to analysts.

Following last November’s municipal elections, in which the Sandinistas are accused of stealing more than 40 mayoral seats, Nicaragua’s political problems now represent the top concern of the business community, ranking above all economic considerations such as inflation and cost of doing business.

In a recent FUNIDES survey, nine out of 10 business owners polled said that “corruption” and the “political situation” in Nicaragua are the leading factors in the country’s negative business climate today.

The business-confidence survey was part of a larger report that projects Nicaragua’s already beleaguered economy will not grow at all this year, and could dip into recession.

The FUNIDES report, based on government numbers, surveys and international economic projections, calculates that Nicaragua’s economy will grow 0 percent in a best-case scenario, and could end the year with minus 1.7 percent growth.

By comparison, Nicaragua’s economy grew 2 percent last year and 3.8 percent in 2007. In human terms, FUNIDES projects the anticipated recession will translate into 30,000 to 50,000 Nicaraguans losing their jobs this year, and 33,000 to 64,000 more people falling below the poverty line.

“We are now feeling the effects of the world economic crisis,” said economist Carlos Muñiz, one of the principal authors of the report.

Even exports and remittances – two sectors that have motored Nicaragua’s modest economic growth in recent years – are expected to fall in 2009. FUNIDES projects that exports, which grew by 7.5 percent in 2008, could fall 7 percent this year, while remittances could dip by as much as 5 percent.

Though the Central Bank is not expected to release its first-quarter economic figures until the end of May, independent economists say Nicaragua is already in the red based on the figures from the last two quarters of 2008, which registered minus 1.7 and minus 2.7 percent growth, respectively.

“Nicaragua, effectively, is already in a recession,” former Central Bank president Mario Arana told The Nica Times.

Holes in the Budget

Economists for the ruling Sandinista Front remain more optimistic about the situation, projecting 2 percent economic growth in 2009. Based on those projects, Sandinista lawmakers drafted a $1.77 million budget proposal that they and their legislative allies managed to pass April 1 with a slim majority of 49 votes.

The 2009 budget includes approval of President Daniel Ortega’s $1.1 billion “savings measures” plan, which calls for spending cuts in various government ministries and institutions. Sandinista lawmaker Wálmaro Gutiérrez, president of the legislative Budget Commission, said the savings plan will force government offices to save on water, electricity, telephone and faxes.

Earlier government cost-savings measures, such as the implementation of a reduced workday at the beginning of the year, only resulted in reduced productivity and increased government inefficiently, forcing Ortega to repeal the measure last month.

Despite the government’s new savings plan, critics argue that the budget remains unrealistic and underfinanced, with a deficit between $125 million and $286 million, according to different calculations.

The deficit, according to FUNIDES’ Muñiz, is a result of some $65 million in suspended budget assistance from the European countries and another $60 million-plus in anticipated shortfall in the amount of tax income generated due to a slowdown in economic activity.

The government’s proposed solution to bridge the deficit by selling $160 million in treasury bonds is also raising new concerns and questions. Economists question who would want to buy those bonds and what that additional debt would mean for the macroeconomic stability of the country.

“I think what is happening here is that the government is trying to play catch-up,” said opposition lawmaker Francisco Aguirre, former president of the Budget Commission.

The problem, Aguirre said, is that international restrictions placed on Nicaragua as a member of the Heavily Indebted Poor Countries (HIPC) debt-reduction initiative gives the country very little wiggle room to manage the crisis by assuming new debt. The proposed plan to emit treasury bonds could be in violation of its obligations under HIPC, he warned.

“We are operating in a straight jacket,” Aguirre told The Nica Times.

The ALBA Apparition

While the government tries to invent new financial mechanisms to fill the budget holes, the Sandinistas – for the third year in a row – have refused to include Venezuelan foreign aid in the budget.

Instead, the untold millions in Venezuelan aid, which comes to Nicaragua in petrodollar arrangements under the auspices of the Bolivarian Alternative for the Americas (ALBA), continues to be managed by a handful of top Sandinista officials in secretive parallel bank accounts.

Opposition lawmaker and economist Enrique Sáenz called the government’s handling of Venezuelan aid “the biggest privatization in Nicaragua’s economic history” and accused the Sandinistas of handling the foreign aid “as if it were their own private patrimony.”

The Ortega administration, meanwhile, hails the Venezuelan aid as “unconditional assistance” that has saved Nicaragua from complete economic ruin, though they haven’t explained how.

Though there are no official figures, economist Edmundo Jarquín, a former analyst for the Inter-American Development Bank and head of the opposition Sandinista Renovation Movement (MRS), calculates that Ortega and his top Sandinista confidants cleared some $280 million in Venezuelan oil revenue in 2008.

Ortega has said Venezuelan aid for Nicaragua is somewhere between $200 and $500 million. But the true amount of ALBA aid remains a mystery.

Still, analysts note, Venezuelan aid would probably be enough to fill a significant gap in the deficit spending if the government were to include it in the budget and treat it as official foreign aid.

IMF Funds Suspended?

In addition to the $63 million suspended in U.S. Millennium Challenge (MCC) aid and an additional $65 million in suspended foreign budget aid from European donors, new concerns have been raised that the International Monetary Fund (IMF) will also suspend its assistance program for Nicaragua.

In the presentation of the FUNIDES report, economist Muñiz urged the Sandinista government to “reactivate” the IMF accord, which he said has been “paralyzed since December of last year, even though it’s still in force.”

Humberto Arbulú, the IMF’s representative in Managua, denied that the international lending institution has frozen funding for Nicaragua, but admitted that it has been delayed because the Sandinista government hasn’t yet set dates for the IMF mission to come and complete its second and third revisions of compliance.

He said the government is “doing everything possible to advance” the situation and receive its next payment of $30 million, but admitted it has been slow to happen.

“The first transfer (of 2009) should have happened already, two months ago,” Arbulú told The Nica Times. “Things are delayed until the government can be in a condition to sit down and converse. And that doesn’t exist yet, or there would have been a transfer made by now.”

For Aguirre, the problem is that Nicaragua can’t go before the IMF seeking more financing if it hasn’t yet worked out its other financial and budget problems first, creating a chicken-and-egg situation.

“Nicaragua’s economic and financial program is not financed, and you can’t take an unfinanced program to the IMF,” the Liberal Constitutional Party lawmaker said.

White Elephant

Muñiz urged the government to not sacrifice macroeconomic stability in responding to budget deficit. He also stressed the government must work to “overcome its institutional crisis to unblock the foreign aid.”

Doing that, however, means the Ortega administration must address the allegations of election fraud from last November.

The municipal elections remain the central issue behind the suspension of foreign aid, the institutional crisis, the negative business climate and now the budget deficit.

“For us, the fundamental thing, the most important thing, is that Nicaraguans resolve the problem of the elections of last November,” U.S. Ambassador Robert Callahan said recently.

“This is the key point,” the ambassador said, adding that the United States is “waiting for a resolution to this problem.” The EU is also waiting for a resolution to the problem.

But the Ortega government, which has been left scrambling to invent solutions to its problems while blaming others for its woes, has insisted it will not discuss the elections, “not even with historians.”

With an underfinanced budget and a looming recession that could bring more social and political unrest in the country, it remains to be seen how long the Ortega administration can dig in its heels and cling to its costly white elephant.



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