Nicaragua’s Growing Debt with China May Darken Its Future

Will the new Chinese financial life-raft eventually weigh down Nicaragua’s economy?

By Ivan Olivares (Confidencial)

HAVANA TIMES – In less than six months, Nicaraguan rulers Daniel Ortega and Rosario Murillo have contracted new loans worth over US $567 million from China. That debt and the regime’s policy of indebtedness “compromises the future of the new generations of Nicaraguans, who will have to pay back those loans,” along with their high interest rates, assure economists consulted by Confidencial.

Between January and May of 2024, Nicaragua’s National Assembly – largely made up of deputies loyal to Ortega, who were “elected” in the November 2021 balloting farce – approved four new loan packages from China. The loans are aimed at financing three energy projects, plus a new airport at Punta Huete, 58 kilometers (36 miles) northeast of Managua.

The plan for a new airline terminal is the largest of these projects, with a projected budget of approximately 399.6 million dollars. A loan in this amount [2.875 billion Chinese yuan] was authorized on February 9, to finance the “Reconstruction, Expansion and Modernization of the International Airport at Punta Huete.” The construction project will take place in the municipality of San Francisco Libre, across Lake Xolotlan from the Nicaraguan capital, and is scheduled for completion in 2028.

A similar loan of US $72.7 million is earmarked for financing the design and construction of a photovoltaic plant to power the water systems of the Nicaraguan Aqueduct and Sewer Company (Enacal), located in San Isidro, Matagalpa.

A third loan for US $26.9 million dollars [194 million Chinese Yuan] was approved on April 10, for the construction of three gas storage tanks in Leon. The fourth loan, for $68 million dollars, was contracted for the construction of another photovoltaic plant in Ciudad Dario, Matagalpa, with a capacity to generate 67.4 megawatts of electricity.

Nicaragua’s “fruitful” relationship with China

In the last trimester of 2023, prior to acquiring the current US $567 million dollars in loans from China, Nicaragua’s public debt already topped US $10 billion dollars. Juan Sebastian Chamorro, an economist and former political prisoner now banished and living in the United States, stressed that in evaluating these loans, the costs detailed in small print must be taken into account, since it’s these extras that enhance the cost of this type of international credit.

The current Nicaraguan dictatorship, however, has a different point of view. Deputy Walmaro Gutierrez, president of the National Assembly’s Production, Economy, and Budget Commission, declared: “If we add together all these projects, we can see that in a period spanning barely six months, we’ve been able to access a total of US $567 million dollars through Chinese cooperation.”

“If we add this to the US $100 million dollars we received for budgetary support in 2019 from China’s Eximbank, we’re talking about total resources of around US $667 million dollars that have been made available to us.”

To the deputy, those loans, “reaffirm the positive results of the fruitful relationship between Nicaragua and the People’s Republic of China.”

A multitude of extra fees

In reference to the loan for a new airport, Juan Sebastian Chamorro noted the list of additional charges included under the concept of different fees. “While it’s true that these aren’t classed as interest, they’re commissions, or fees, that don’t go towards the project, but to the commission or loan agent, while the debtor country (Nicaragua) is the one to pay them.”

The text of the Law, as it appears on the National Assembly website, offers details of the financial agreement for the airport construction project. It establishes a 15-year term on the loan, with a grace period of 54 months (4 ½ years), and an interest rate of approximately 5.2%. There is also an “initial fee” of 1.3%; a “commitment fee” of 0.7%; an “opening fee” of 0.5%; and a “management fee” of 1.0%.

“Clearly, the contract has the same provisions that financial institutions generally try to insert when dealing with legal limits on interest rates for new debt contracts. This happens not only in the context of certain countries, but in a market context. Many countries have mechanisms to limit the interest rates [allowed on new loans], so they invent other charges that don’t appear as part of the interest rates, to evade the legislation. Without fear of being mistaken, I see an exuberance of such charges and commissions, which serve to disguise the real interest rate,” the expert asserted.

China the only option

Another problem could be the fact that the loan amount has been defined in Chinese yuan or renminbi. As such, the Nicaraguan National Treasury assumes the risk that an appreciation in the value of the Chinese currency could obligate the country to disburse more dollars or Euro’s to purchase the quantity of Yuan necessary for the loan payments.

In terms of the interest rate alone on these loans (around 5.2%), Chamorro stated: “It seems high, higher than the World Bank. However, the regime has to accept it, since it no longer has access to that source of financing.”

A large part of the international financial community (among them the Inter-American Development Bank, the World Bank, and the International Monetary Fund) has shut the spigot on loans and international cooperation agreements with the regime, in response to the killings and repression that the regime has perpetrated since 2018.

More recently, the Central American Bank for Economic Integration (Cabei), which had become the chief financer of the Ortega-Murillo government, announced an end to new loans to Nicaragua and El Salvador, because continuing to grant them resources represented a great risk for the Bank, which can no longer allow itself the luxury of concentrating such a high percentage of its loan portfolio on those two clients.

Read more from Nicaragua here on Havana Times.