Nica Act hits “Achilles Heel” of the Economy

The economist Jose Luis Medal, in an interview with Carlos F. Chamorro, on “Esta Semana.” Elmer Rivas / Confidencial

 

Jose Luis Medal: the promise of a “gallo pinto economy’” is an unpatriotic fallacy

Application of the Nica Act will deepen damage caused by loss of foreign investment, outflow of deposits, drop in tax revenues and loss of reserves

 

By Ivan Olivares  (Confidencial)

HAVANA TIMES – The Nicaraguan economy was a doll with feet of clay, which depended on the understanding between the private and the public sectors to function. However, the government repression against the civic protests dynamited that privileged relationship, revealing the fragility of the national economy, says economist Jose Luis Medal, interviewed on the program “Esta Semana” (This Week), broadcasted by Channel 12.

“Our economy has two Achilles heels,” and both have to do with the US currency, the economist explained.

The weaknesses to which the expert refers are, on the one hand, the fact that our economy does not know how to live without foreign aid. The other is that our financial system—still solid—is in a situation of check by the continue outflow of deposits, especially in dollars.

Our economy suffers of “dependency on international cooperation,” which has been reduced as a reaction to the violent response of the regime of Daniel Ortega and Rosario Murillo. This “will have a serious effect, since foreign direct investment has already contracted, and family remittances have increased very little,” he detailed.

In parallel, he observes that the other great weakness is the crisis of the financial system. “In March 2018, deposits in dollars (representing 65% of deposits), amounted to 4.041 billion dollars. The Central Bank of Nicaragua (BCN) just published the data to November 30th, showing that the balance was of 3.021 billion dollars. About 1.02 billion dollars have left in eight months of crisis, which represents 25% of deposit in dollars of the entire system,” he noted.

The approval of the US sanctions under the Nica Act “will aggravate an economic situation that is already quite delicate,” because that law “establishes specific instructions to representatives of the United States Government in the World Bank, the Inter-American Development Bank and the Monetary Fund, to restrict the loans that can be granted to the Government of Nicaragua,” he explained.

These resources finance 70% to 75% of the country’s public investment program, which in 2017 represented about 600 million dollars. Additionally, the approval of the Nica Act affects the expectations of economic agents. Seeing this law, and reading the communiques from human rights organizations “any investor will see their expectations turn pessimistic,” which will deepen the fall in foreign investment,” Medal predicted.

The other thing is to understand if the mandate of the Nica Act will affect the projects that are already in execution, or only the new ones. In the first case the effect would be immediate. As soon as 2019. “It is about 500 million dollars that this already weakened economy would not receive. That would be serious,” said the expert.

If only the new projects are affected, the effect would be felt until 2020 or 2021. In both cases, the scenarios to analyze include two negative variables: The contraction of the direct foreign investment—that a study by Funides and Cosep calculates in 750 million dollars—and the massive flight of deposits from the financial system, which in the same report amounts to 1.371.2 billion dollars between April 18th and October 31st, using official BCN data.

The fallacy of the “gallo pinto (rice and beans) economy”

Encircled by statistics that show the new failure of his economic management, Daniel Ortega proposed to apply in the country the “gallo pinto economy,” appealing to the creativity and resistance of Nicaraguans to withstand the hardships of the economic debacle caused by himself.

The problem is that such a proposal is a fallacy, “a total absurdity, because taxes are not collected from rice and beans, which are tax-exempt. Taxes are collected from the sale of televisions, vehicles, and the formal sector of the economy,” recalls Medal.

Illustration by Juan Garcia

Even though it is true that “close to 50% of the population already lives in the gallo pinto economy, if vehicles are not sold—whose sale fully contracted this year—if the formal sector of the economy does not work, which is what generates the tax revenues that allow the Government to function, how will it end up covering the budget?”, questioned the expert.

“Remember that the Government has already adopted certain measures: it reduced the budget, which is a contractive measure of the economy, and tax revenues have fallen. A gallo pinto economy does not generate tax revenues to maintain the state bureaucracy,” he remarked.

Being that the economic pressure will continue in 2019—after two adjustments to the fall of the 2018 budget, and the contraction of public expenditure— “in 2019, the Government will have fewer resources, and that will put pressure on it,” said Medal.

The draft of a new “national defense policy” to be implemented by the Government in 2019, published by Confidencial, reveals that the Ortega administration would cut 30% of public employees next year, to adjust the spending cuts caused by the Nica Act. In 2018, in addition, it is estimated that about 417,000 Nicaraguans lost their jobs.

“If you adopt an unpatriotic attitude, anti-Nicaraguan, ‘after me, let the deluge come’, in which it does not matter that the economy sinks, and that the people—not them—end up eating—hopefully three times a day—gallo pinto. It is the people that are going to suffer the consequences and something similar will happen to what occurred in the 80’s: the economy changed completely, thousands of Nicaraguans died, and while the group in power was not affected, they did not give a damn,” Medal recalled.

“The gallo pinto economy, which did not even exist in the eighties because the elite went to shop at the diplomatic store—and that group of new (Sandinista) entrepreneurs, including millionaires, are not going to eat gallo pinto. When they talk about gallo pinto economy it is for the middle classes, for the independent sectors, not for the elite that supports the Government,” he said.

Even then, he thinks that there are contradictory interests between the Sandinista capital and the Government’s decision not to seek a civic and negotiated solution to this crisis, because “the weakening of the economy will affect us all.”

The difference is that in the eighties there was an ideological factor that prevented doing (or to let us do), certain things; furthermore, there were no Sandinista entrepreneurs. “The Government was sustained in the 80s by a strong inflation caused by putting the Cordoba printing machine to work, but also by the international cooperation of the now defunct Soviet bloc. Today, who is going to finance a medium-term conflict, or even a short term one? He concluded.



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