Without a Political Accord, Economic Decline in Nicaragua Could Be 20%

Central Bank president Ovidio Reyez

 

If Ortega continues holding on to power, an economic collapse – like that seen in 1979 – is predicted for 2019  

Lacking political legitimacy, Ortega is seeking approval from the IMF to promote tax and Social Security reforms

 

By Ivan Olivares  (Confidencial)

HAVANA TIMES – A technical mission from the International Monetary Fund (IMF) is in Managua this week to meet with Daniel Ortega’s administration, along with business people, economists and labor leaders to evaluate the state of the country’s economy.

Facing the impossibility of hammering out a Stand By agreement with the Fund, the government will receive them with one objective in mind: securing the backing it urgently needs to push through economic reforms that are extremely unpopular.

These two laws, mentioned in the 2019 budget, are the Tax Agreement Law and the Social Security Law. At the same time, the government is also looking to find a way to stop the flow of funds out of the national bank, as people withdraw their money  – which has now passed US $1.3 billion and, if possible, do the same with its battered international reserves.

The problem is that the Executive branch does not have the legitimacy it would need to negotiate new laws, particularly economic laws that are demanding more sacrifices from citizens and the business sector.

In the face of this political limitation, the Executive’s strategy has centered on ensuring that the IMF offers it some kind of endorsement, that the regime’s functionaries could then present to the nation as a whole, whether as an attempt to negotiate with the private sector, or impose a new plan with its parliamentary majority it currently holds in the National Assembly. 

Economist Nestor Avendaño, president of the Consultants for Business Development (Copades) underscores that the IMF cannot take any measures — even if that only means offering advice to the country – when that country is, like Nicaragua, in the midst of such serious conflicts, and in a context in which the Government is even attempting to resolve the political problem that touched off a series of economic problems, but rather looking to force society to surrender due to hunger, fear or exhaustion.

Responding to the government’s expressed desire to elaborate a new program of macroeconomic adjustment and structural reform as it sought concessional financing a few months ago, Avendaño notes “the IMF said ‘no’ to Nicaragua until it resolved the political situation. At the annual meeting in Indonesia, I think our representatives received another similar response: ‘this can’t be done, given that there is no solution to the political problems’.” In any case, if the visit is for more than just talking among experts, it is very likely that the IMF will remind the Nicaraguan government of some of the suggestions it made during its last visit, which included seeking a broad consensus to discuss Social Security reforms, and a review of the electricity rates.

INSS:  An increasing deficit

The news that they are interested in reforming the LCT (ley) is explained by the decline in tax income, with a difference in more than 11 billion córdobas with respect to the initial budget proposal for 2018, and this is easily understood when we look at this year’s projected growth, which is a negative 4 percent.

It would seem that the regime understands that, from an economic point of view, 2018 is basically unsalvageable, and thus they are trying to reform the LCT so that is functions as a sort of lifesaver for 2019—as the proposed reforms would allow for at least the negative 1 percent growth that is predicted.  The problem is that the 2019 predictions are not at all pleasing.

Avendaño points out that just as there were blows to commerce, tourism and the hotel and restaurant industry in 2018, “in 2019 the first to be hit will be the construction and non-metallic mining sectors.  These will be virtually swept away. He adds that “the value added revenues from construction will easily fall by 76 percent in the coming year”, and will have a negative multiplying effect as a strong construction sector can drive the economy. “In this case, we are looking at construction sparking a decline of -9.7 percent in the GDP,” Avendaño added.

He went on to explain that the population as a whole would have less income, causing a negative growth of 11 percent in consumer spending.  “Combining that with the decline in construction gives us an overall negative growth of 20.7 percent for the coming year,” he warned, adding “this reminds me of 1979, the year Somoza left power, when the GDP fell by 26 percent.  This is a very critical situation”.

The other urgent matter is seeking a solution – or something close to one – to the deficit that keeps increasing in the Nicaraguan Institute of Social Security – it was almost 2.4 billion córdobas in 2017, and will have more than doubled to 5.5 billion córdobas by the end of this year, and is expected to soar to 8.6 billion córdobas by the end of 2019.  (1 USD = 32 Cordobas)

“The worsening of the INSS is due to a worsening of the national economy, with massive layoffs that increase unemployment and will undoubtedly affect the INSS’ financial situation, forcing it to implement reforms that may not be agreeable to many Nicaraguans,” according to economist Leonardo Labarca, researcher with the Institute for Strategic Studies and Public Policy (Ieepp).

At the IMF’s recent annual meeting in Bali, Fund authorities reiterated to Central Bank President Ovidio Reyes and Finance Minister Iván Acosta, that this international entity will not negotiate with the Nicaraguan government the disbursement to mitigate the economic crisis, as the causes of the crisis are political and not economic, and therefore the government must first seek solutions to the political crisis.



3 thoughts on “Without a Political Accord, Economic Decline in Nicaragua Could Be 20%

  • Supposedly the Ortega government is close to passing the final law that will set up a government export agency. ENIMEX will also aid under served exporters in the country,, like my neighbors who want to export a quintal or two of beans?? Because of the government will set is own rules as it goes, and will enjoy exoneration from taxes, the private sector feels substantially disadvantaged.

    The private sector’s efforts have worked for many years without issue. I’ve been racking my brain trying to understand why the Ortega government wants to intervene specifically here. It’s a big step back to immediately after the revolution,, when the Sandinista government attempted to create a managed, Cuban and Soviet style economy. It didn’t work then.

    Then, I saw this graphic

    https://screenshots.firefox.com/RbCn…aprensa.com.ni

    and the light went on. The BCN lost $237 million in the month of September alone. I don’t know where those dollars went,, abroad to Panama or CR, or simply into the colchon, but the short of it is,, it brings the BCN closer to the point where the dollar reserve will be insufficient to support the Cordoba.

    At some point the BCN has to start rationing, and prioritizing, access to dollars, as happened to Venezuela early on in their financial crisis. One overwhelming need: petroleum to generate electricity. Despite all the hype about green energy in Nicaragua,, the bulk of the energy available comes from oil. Ironically,, with all the oil in the world,,, Venezuela cannot keep their electric grid functional. Outages are frequent, food spoils, hospitals are dark. Venezuela does not have the money to maintain their electrical infrastructure.

    So,, what does that have to do with ENIMEX? By controlling Nicaragua’s exports,, the Ortega government controls the access to foreign exchange from exports of coffee,, rum,, cigars, etc. They get the dollars,, which they can,, like Venezuela,, put to their own use.

    The producers of coffee,, cacao,, rum,, tobacco will be paid by the government in Funky Cordoba, at an exchange rate the government sets. Like the Cuban Peso, and the Venezuelan Sovereign Bolivar, the Funky Cordoba will work to buy stuff produced within Nicaragua.
    You will always be able to get cujada and beans, but Duracell batteries?? Forget it!

    After stealing what they can ,, the Ortega government will allocate dollars to producers at various exchange rates to purchase items they have to purchase outside of Nicaragua. But, like Venezuela,, the dollars will diminish with time,, and various enterprises,, like in Venezuela,, will simply go out of business because they cannot get the resources they need to keep the processes going. Like Venezuela, the corruption associated with the dollar allocation and exchange rate will be horrific.

    We just have to look to Venezuela to see how the process will play out.

    The IMF has come and gone this week,, “sorry, no new money”,, and the rest of the lenders,, World Bank, IDB, BCIE, will tell Nicaragua the same story. After the NICA Act passes,, they will have no choice but to deny funding requests from Nicaragua.

    There was already talk about increased US pressure on Cuba,, even before that recent stunt at the UN. Cuba COULD send doctors,, the Ortega governments talks about hiring 350. Send dollars,, not so much.

    Venezuela will come under increased US, and international pressure, the world is getting sick of the completely unnecessary humanitarian crisis. And various countries are tired of hosting Venezuelan refugees. Veneauela assistance to Nicaragua is minimal and unlikely to increase.

    So,, where does Danny get dollars?
    Enquiring minds want to know . . . .

    Reply
  • The situation with the social security. They are already taking 22% out of wages. This is multiples higher than other countries. Should be more than enough to fund social security. Check the books and find out what the government has done with all that money. Therein you will find the problem

    Reply
  • Panama had the same problem in the 80s trying to get rid of their dictator,,,,took decades to recover,,,, nica is worse,,,,might not ever recover,,,,,,,,,and its not just due to one man,,, ,,the gov is full of bread gobblers,,,,,they all would have to be rooted out,,,,but how,,,,non will give up their free ride.

    Reply

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