Nicaragua’s Agricultural Cycle Endangered by Lack of Credit
The agricultural sector has issued a warning, fearing that more businesses could fail with the loss of more jobs.
Banks are not offering credit, because they have no money to lend. Economist Nestor Avendano warns of a 20% drop in the GNP.
By Ivan Olivares (Confidencial)
HAVANA TIMES – The onset of the rainy season in May-June and with it the agricultural cycle is “just around the corner”. However, the banks aren’t offering credit, even though the tax reforms have increased the cost of all inputs for this sector.
All those involved in the country’s agricultural chain have issued a cry of alarm, warning about what’s on the horizon: more jobs lost, businesses closing, fewer exports, increased prices, hunger and poverty.
Michael Healy, president of the Nicaraguan Agricultural Producers’ Union (Upanic), explained what’s in play: if last year the country only planted 1.7 million manzanas (2.94 million acres), this year they run the risk of falling far below that quantity.
“The new tax measures affect our sector, but also internal consumption,” because citizens “are losing purchasing power.” If they’re thrown into unemployment, they lose it completely.
Based on national data, the producer noted: “prior to April, there had to be 2.5 people working in the home to be able to acquire the basic necessities; now there’ll have to be between 3 and 3.5 people working, in order to acquire the same things.”
Instead of that, he calculates that between 280,000 and 300,000 jobs have been lost, many of them in the farm sector which represents around 36% of the national employment. As a result, instead of having more people working, there are fewer. On an average, “there are only 1.5 people working in each household,” Healy specifies.
The situation described is especially serious in a country with an economy like that of Nicaragua’s, where agriculture is a fundamental activity in terms of generating employment, food, and commodities for the international markets. In 2018, the country exported 1.7 billion dollars’ worth of agricultural products.
No credit for the agricultural cycle
Economists with the Nicaraguan Foundation for Economic and Social Development (Funides) indicate that the banks can’t “allow themselves the luxury of giving credit,” because they must preserve enough liquidity to satisfy potential demands for withdrawals.
Deposits in the commercial banks fell 20% in 2018, with respect to 2017. Up until December, 2018, the deposits in the national banking system totaled 127.4 billion cordobas, equivalent to around 3.82 billion dollars.
“Nicaragua’s agricultural cycle is also its economic cycle. To paralyze it or neglect it means to hamper the possibility of reactivating agricultural production, which in turn will affect the next two calendar years,” declared Nestor Avendano, president of Consultants for Business Development.
The economist explained that the impact of the bank’s decision to reduce the granting of loans, because these are financed by the deposits that have been shrinking since the onset of the crisis, adds to the problems that the agricultural sector was already suffering.
Specifically, he points out that the tributary reforms raised the tax rates on imports of needed agricultural inputs, machinery, and equipment. As production costs go up and credit is restricted, “the cycle could become paralyzed”, with the additional risk of US and European economic sanctions completely paralyzing public investment.
Repercussions from all this could come in the form of a freefall, a large economic depression, with a 20% drop in the GNP this year, which would imply greater rates of open unemployment that would easily affect 60-70% of the economically active population, while the poverty index would increase from 30 – 60%, Avendano specified.
Ironically, among the good news, “there wouldn’t be any inflation, because there wouldn’t be enough cordobas circulating in the market. The drop in export production would elevate the trade deficit, and the only sure way to finance that deficit would be the 1.6 billion dollars in family remittances, as long as the United States government doesn’t decide to obstruct the flow of these.
Punishing scenario for cattle-raisers
Historically, coffee and cattle are the country’s two principal exports, as well as major sources of employment and of food for local consumption.
The blows struck by the implementation of reforms to the tax code and to Social Security, plus increased electricity bills and constant increases in the cost of fuel, has companies with their backs against the wall, be they urban or rural.
The cattle-raising sector is at the forefront of the agricultural alarm, because “the government’s measures affect us greatly in the countryside. In a short while, the damage will be greater and more serious, and by then it won’t be possible to do anything about it,” explained rancher Rafael Martinez.
Cattle-raising is the largest export sector, with a presence all over the country. This means that the effects will be felt all over the national territory, and especially among the small cattle ranchers, which is an important source of employment.
Martinez detailed that only 10% of cattle ranchers can be classed as “large-scale producers”, while 30% are “medium sized” and 60% are small farmers. This contradicts the official thesis that the tributary reforms only affect the large businessmen.
“We face tremendous threats, because the small producer will have to sell his cow to resolve the need to feed the family or to assure their health; once sold, that cow won’t be replaced, so that this represents a very serious threat for the cattle-raising sector,” Martinez affirmed.
If this scenario were to be fulfilled, there’s a risk of increased poverty and crime, “while the National Police are focusing on attacking marches,” he noted.
Coffee fares still worse
The coffee sector was already experiencing very hard times since before the beginning of the socio-economic crisis that is exhausting the country. Now they see their suffering extended due to the regime’s fever of tax-collecting.
“The sector has a difficult situation in terms of international prices: right now, a 100-pound bag of coffee beans is selling for US $95, when last year it sold for $140; all this in a context where it costs $150 to produce it. In other words, producers are losing $55 a hundredweight,” explained Jose Angel Buitrago, president of the Nicaraguan Association of Coffee Exporters.
At current prices, the association foresees a loss of US 90 million dollars, even if they manage to obtain the same volume of production as last year. However, there’s also a possibility that the yields diminish and that only 2.8 million hundred-pound bags are produced, as opposed to the 3.1 million form last year. This would represent a total loss of $120-127 million dollars.
The problem of the sector’s low yields is compounded by unemployment – Buitrago calculates that some 60,000 jobs have already been lost – the lack of financing, the high price of inputs and the fall in international prices. All of this threatens to have a “domino effect” on the entire economy.
“Without a fix, the agricultural cycle for 2019-20 is endangered. Without an agreement, we’re headed towards catastrophe, and the country can’t bear up under another situation like this one,” Jose Angel Buitrago concluded.
Migration and the arrival of “El Nino”
The production sector employs a million people and generated 2.645 billion dollars in 2018, when it only dropped 1.1%. That strength will be put to the test when the companies have to operate without the 1.5% credit, which restricts their competitiveness. Producers see the measure as “a confiscation, because to survive, we’ll have to use our patrimony,” in the opinion of Guillermo Jacoby, president of the Association of Nicaraguan Producers and Exporters.
The sector is concerned because the United States’ sanctions and the deterioration of the economy have already served as a disincentive, depressing investments in 2019. “The possibility that the Cafta treaty be revised, and the declarations of the European parliament deputies regarding possible expulsion from the Association Agreement with Europe have served to discourage any short-term investment,” Jacoby stated.
He pointed out that the lack of credit and of a skilled labor force (due to high emigration), plus the arrival of “El Nino” and the takeovers of productive land held by experienced producers, will all be felt in the harvesting of some of the crops and will affect the volume of export crops. In addition, he warned about the possibility of losing contracts due to the deterioration in the country’s image.
Jacoby’s projection for 2019 is that the country will export 5 – 10% less than in 2018, implying 200-300 million dollars less. “The impact will be enormous,” he warned.
Among the most affected products, the president of the Association of Nicaraguan Producers and Exporters mentioned sugar, whose international price fell 7%; shrimp at -3%; and coffee – already depressed – whose price fell 9%. “Eight out of ten of our principal export products have lower prices,” he specified.
Other crops such as okra and peanuts are also at risk of a catastrophe if the new tax and social security collection measures are applied to the letter and a serious political agreement isn’t achieved.
(With the contribution of Juan Carlos Bow)