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  Number 431 | Junio 2017
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Nicaragua

Three economic storm clouds looming in Nicaragua’s skies

The Ortega government still seems averse to making any changes to its authoritarian model despite having no friends left in Washington, a bullying and erratic new US President, and a Congress very likely to approve the Nica Act, the economic consequences of which are further complicated by the falloff of Venezuelan cooperation.

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Fernando Delgado, the International Monetary Fund’s mission chief in Nicaragua, presented the IMF’s periodic evaluation of the country’s economy to President Daniel Ortega, Vice President Rosario Murillo, the government’s economic team and representatives of the business elite on May 4,. He confirmed a very positive basic scenario for Nicaragua in 2017 and the medium term, but added that “having said this, not every day can be sunny; there’s always a cloud on the horizon.”

He actually mentioned not just one cloud in the country’s economic sky, but three: the falloff of Venezuelan cooperation, the potential insolvency of the Nicaraguan Social Security Institute (INSS) in the near future, and the possible consequences for Nicaragua of approval of the Nica Act by the US Congress. If that bill passes, it will oblige the US government to veto all loans to Nicaragua by the international financing institutions if our country does not hold transparent elections, among other things.

That first cloud


The imminent insolvency of the INSS the was the “cloud” that has concerned public opinion the most and to which both the traditional media and the social networks paid the most attention. After all, more than a million Nicaraguans depend on it for disability and old-age pensions, as well as other social provisions.

The INSS has been in the red for four years, and the IMF calculates that in two more it will be insolvent. “It’s the primary risk that has to be dealt with and for which solutions have to be sought,” Delgado told the government. Barely a year ago in a similar evaluation, the IMF was predicting that insolvency wouldn’t hit until 2024.

More countries have more elderly


All over the world people are now living longer than they did half a century ago, throwing social security systems into crisis everywhere, particularly in Central and South America. The problem is further complicated in some countries by a large proportion of working age people with precarious informal jobs who don’t pay into the system.

Both structural causes of the crisis are evident in Nicaragua. Some 80% or the country’s working population is found in the informal sector. Moreover the average life expectancy was 45 when the INSS was founded. Today it’s 74 and will be 78 in a few decades. In addition, the fecundity rate back then was 7.5 children per woman compared to today’s 2.5, with an even greater reduction of the birth rate expected in the coming years, further shrinking the gap between the number of young people with jobs that pay into the system and the number of retired elderly owed pensions and increasingly requiring health services.

If we add our economy’s low productivity to these two serious problems, the cloud becomes charged with lightning. The problem isn’t resolvable in the long haul by simply increasing workers’ contributions and reducing their benefits, although the government will quickly have to take some such short-term measures to avoid imminent insolvency.

Immediate measures are needed


Thinking in such immediate terms, economists and social security experts have recommended cutting the insti¬¬tute’s administrative costs, which have increased excessively in recent years, and ending the investments INSS has made with the funds its insured contributors have paid in. With no transparency whatever, INSS has reportedly invested in the construction of high-risk, low-profit luxury buildings and in private projects that have benefited only the government’s intimate circle.

The experts have also argued that the government needs to move into the general spending budget the two new monthly pensions INSS assumed recently for nearly 32,000 war victims and 43,000 elderly who at best only paid in for part of the time established by law. If this measure is taken, the budget is also expected to include a decent pension for veterans now over 60 of either the Sandinista Army or the Resistance, the two sides of the war of the eighties, who for the most part are living in extremely precarious conditions.

Cutting here and there won’t do the trick…


When he returned to government in 2007, Daniel Ortega received the INSS with a surplus of nearly 1.2 billion córdobas (roughly US$67 million), but in the past four years the institution has been accumulating a growing deficit.

In 2013, when the cloud of the INSS crisis was already beginning to loom on the horizon, the government tried to ensure the institution’s solvency by doubling the weeks of required contributions from 750 to 1,500, thus significantly reducing the pension new retirees will receive if they haven’t contributed for what now amounts to nearly 29 years. It also increased employer’s contribution to INSS from 16% to 19% of its workers’ salaries, leaving the workers’ contribution at 6.5%.

But those changes weren’t enough, as is being demonstrated now, barely four years later. With the insolvency imminent, the two measures the IMF mission mentioned on its recent visit to Nicaragua are again on the table: increase the retirement age from 60 to 65 and further increase the number of contribution weeks.

…but we’re stuck with that for the time being


As both measures are very unpopular and municipal elections are coming up in November, the government hastened to calm down public opinion within a week of Delgado’s alert. INSS president Roberto López assured that there will be no changes in either the retirement age or the number of contribution weeks. The declaration he read in a solemn voice the afternoon of May 10 blamed all his institution’s problems on the “pillaging” of its finances during the three governments preceding Ortega’s since 1990. It didn’t take long, however, for people to realize he hadn’t mentioned any alternative solution. All that’s being offered, presumably at least until after November, is to cut costs here and there. So far, the INSS clinics have begun to reduce the medicines they were providing retirees suffering chronic illnesses.

An inclusive dialogue


In his speech to the IMF representative, President Ortega recognized that the 2013 reform was “a first step; we’re clear it wasn’t the long-term solution.” He even pledged to take whatever steps are necessary: “Of course we are going to assume our responsibility to continue guarantying social security to the Nicaraguan people.”

In a country like Nicaragua, with so much of the working population not paying in to social security, and even much of the formal employment low-paid and short-term, increasing the retirement age and further upping the number of contribution weeks would significantly reduce the institution’s expenses, but would also make Nica¬ragua’s social security system even more elitist than it now is. As things stand after the 2013 doubling of the weeks needed, very few of those paying in will retire with full benefits.

Nicaragua is not without its social security experts, and ever since the IMF’s warnings they have been reflecting arduously and sensibly on the roots of the INSS crisis, contributing information publicly and proposing solutions. They all concur that an issue of such importance requires a more inclusive dialogue than the current “tripartite model” involving only the government, the upper echelons of business in the Superior Council of Private Enterprise (COSEP) and—seemingly to a lesser extent—the labor unions close to the government.

Where will the money come from?


If the government decides to transfer to the national budget an important number of pensions that shouldn’t be assumed by INSS finances, where will it get the money, particularly as it is already cutting some of the social programs it previously financed with the now collapsed Venezuelan cooperation (cloud two). And then there’s the fast-approaching third cloud: approval of the Nica Act, which would reduce Nicaragua’s sources of income even more.

Delgado offered several alternatives that would provide a “fiscal cushion” against all three clouds amounting to some $220 million, equivalent to 1.6% of this year’s projected gross domestic product (GDP): “In first place would be elimination of fiscal exonerations and exemptions” equivalent to 0.6% of the estimated GDP. He stressed that he wasn’t referring only to exemptions to Nicaragua’s 15% value-added tax such as those on numerous luxury products: “One could also think about some business tax exonerations that make no clear economic sense right now, that aren’t critical to attract capital.”

The IMF has encouraged reducing Nicaragua’s high level of tax breaks for years, as have most of Nicaragua’s independent economists and tax experts, although the GDP percentage Delgado referred to is less than 10% of the total exonerations and exemptions, which are equivalent to 7% of the GDP and amounted to US$850 million in 2015. It would appear the IMF wants to do it gradually, breaking through COSEP’s absolute opposition in past years but without endangering the government-business alliance.

To complete his proposed $220 million cushion, Delgado also repeated another suggestion made previously: targeting the government’s subsidies better, particularly on electricity bills, as the IMF argues that they indiscriminately benefit sectors able to pay the full rate for their energy consumption. He also recommended improving the tax collec¬tion’s administrative efficiency.

The COSEP model


The question is, will big business accept any cutting of their tax exonerations? This month more and more voices have been demanding that the COSEP business elite—the govern¬ment’s only real interlocutors—start behaving responsibly. This would involve reviewing not only their unjustifiable exonerations, but also the whole corporative “COSEP model” that legitimizes the Ortega-Murillo govern¬ment’s authoritarianism.
Their model’s motto is “Making the economy grow, we’re making democracy grow.” But while it’s true that the economy is growing, it’s only benefitting a few and democracy is certainly not growing.

In early May, Nicaraguan journalist and media director Carlos Fernando Chamorro released a text pointing out the grave risks Nicaragua runs if it maintains this model, which endorses “an authoritarian government without democracy, transparency or accountability.” He argues that after over 10 years of running the country, it has developed into “a closed, exclusionary system of direct intermediation in which the upper echelon of the private sector appears as a single actor representing the rest of society in negotiating economic issues with the government, and the agreements are then converted into laws endorsed by a parliament that has no deliberating power because it is totally subjugated to the Executive.”

“This is the serious part”


Auxiliary bishop of Managua Silvio Báez added his opinion to the debate in an interview with the conservative daily newspaper La Prensa: “The business sector is dialoguing with someone who possesses not only [political] power but also a large part of the country’s business power. What we have is two business groups hammering out agreements. For me, this is the serious part. It wouldn’t be quite so serious if the current government were not also seeking economic profits, if it didn’t have its own businesses, if it didn’t decide so many financial investments in all fields, if it weren’t also an economic power. The problem is that they are two joint economic powers, and one of them also has the political power to decide arbitrarily and absolutely, vertically, from the top to the lowest sector of society and in all areas.”

In a communique that was their only reaction to the debate, the presidents of the 26 business chambers under the COSEP umbrella denounced what they called a “smear campaign” to turn them into a “factor of confrontation.” It’s pathetic that the business elite have chosen to attack such serious statements by two respected people who recognize their powerful role and thus their share of responsibility in the current situation.

The Nica Act is on the go


While that debate is still ongoing, the Nica Act has again begun to move through the US House of Representatives. The slightly revamped bill, whose original version was submitted last September with the sponsorship of 10 congresspeople, is now sponsored by 25, 10 of them Democrats. It passed its first and easiest test on May 24, when it was unanimously approved by the 9 legislators who make up the House Subcommittee on the Western Hemisphere, 8 of whom are also its sponsors.

Its next stop is the Foreign Relations Committee, with 47 legislators. Once it has cleared that hurdle it will move to the House floor for plenary debate and passage, which could happen in one of two ways: either by majority vote or if two-thirds of the 435 representatives present no objections. Various analysts, both in Washington and in Managua, say things could go more slowly in the Senate, which has its own approval path.

Although Ortega and his inner circle insist that the country will continue to move forward with or without the Nica Act, his business allies seem very worried. It was learned that CEO Advisors—a financial planning company in Miami run by Nicaraguan banker Roberto Argüello, who has lived there for decades—hired Arthur Esto¬pinan to lobby in favor of “softening” the bill, which Argüello considers dire, with potentially “devastating” consequences for our country. Estopinan, who heads what he calls a “one-stop” company for all needs in Washington from government relations and political consulting to business development and spent 27 years as a senior adviser to Cuban-American Congresswoman Ileana Ros-Lehtinen, the Nica Act’s primary promoter. He is not a lone wolf in this endeavor, as Ortega has his own lobbyists working actively in Washington.

Not the first new legislation to affect Nicaragua


As this countdown continues, President Trump has already signed separate legislation that will also affect Nicaragua economically both directly and indirectly. According to the website of LatinAmericaGoesGlobal, the deepest cut in the US$1-trillion appropriations bill passed by the US Congress to keep the federal government open until September and signed by Trump on May 5 was a $95-million drop in the multi-year budget for Central America’s overall assistance package. But Nicaragua was also separately targeted by a provision in the Act stating that none of the funds appropriated “may be made available for assistance [to a country that] has recognized the independence of, or has established diplomatic relations with, the Russian occupied Georgian territories of Abkhazia and South Ossetia/Tskhinvali.” Nicaragua is one of four countries currently recognizing those two breakaway territories on the border between Russia and Georgia. The other three are Russia, obviously, Venezuela and the small Micronesian island of Nauru.

In mid-2008, Russia joined the separatist forces of Abkhazia and South Ossetia in a brief war with Georgia, which itself broke away from the disintegrating USSR in 1991. After forcing Georgia’s troops to withdraw from the two territories, Russia recog¬nized them both as independent states, while Georgia—and Trump’s new US legislation—still consider them Georgian territories occupied by Russia. Their separatist leaders both say they have maintained “warm relations” with Nicaragua after Ortega followed Russia’s lead in recognizing them in September 2008 in a heated speech in which he also denounced the harassment the USSR had suffered from the “hegemonic powers.”

Trump’s cuts to the region for FY2018


In addition to the general cuts to Central America and that specific restriction on Nicaragua in this short-term spending bill, Trump is asking for a 38.9% reduction in US development aid to the Western Hemisphere from all aid sources for FY 2018. While it’s unlikely to be approved exactly as presented, the bill would eliminate all development assistance (DA) programs (ranging from education, agriculture, and economic development to democracy), even to Honduras and Nicaragua, the region’s two poorest countries. All that would be left are some funds allocated under Global Health and what are called Economic Support Funds (or ESF), which tend to have more political objectives. The slashes to those categories in Central America would range between 27.8% (Honduras) and 36.1% (Guatemala). Nicaragua, however, will reportedly only receive 2% of the bilateral aid it received from Washington in 2016, a drop from US$41 million to only US$200,000, presumably because of the punitive political provision mentioned above.

The proposal would also cut Central America’s Regional Development Fund by 74.8%, including the zeroing out of USAID’s regional Global Health funds. The Caribbean countries would fare even worse, with the Caribbean Development Program also zeroed out and some individual countries suffering overall cuts with higher percentages than most Central American countries. Only Haiti would be cut by only 16%.

Although these cuts affect all Latin American and Caribbean countries to a greater or lesser degree, Nicaraguan analysts of Washington’s mood see the drastic ones against our country as a clear sign that the relations with our main trade partner are ever less “cordial.”

Ros-Lehtinen: “We want real reforms, not dishonest words”


The Nica Act is unarguably the densest cloud bearing down on us from Washington. There’s a generalized consensus both there and in Nicaragua that the agreements the Ortega government signed with Organization of American States Secretary General Luis Almagro three months after Almagro sent Ortega a still-unpublished report on Nicaragua’s deteriorated electoral system last October were aimed at ceding as little as possible to discourage passage of the Nica Act.

Seven months after Ortega received that report and four months after the first of a series of indeed minimal agreements were published, the Nica Act is still moving forward. US Congresswoman Ros-Lehtinen said in an exclusive interview published in La Prensa’s Sunday magazine supplement on May 7 that she believes Ortega signed the OAS agreement “because he’s afraid” of the Nica Act, adding that the agreement “isn’t enough.” She said the OAS “can discharge its functions as it deems necessary,” but that’s “not going to stop the Nica Act” because the legislation seeks “real reforms, not dishonest words.” Her disparagement of the agreement’s lack of seriousness seemed to include the OAS as much as Daniel Ortega.

An imprecise agreement


The January 20 document signed with Almagro containing the results of three months of “constructive” conversations and the memorandum of understanding that followed on February 28 are both indeed imprecise at best with respect to the deadlines for straightening out Nicaragua’s collapsed and corrupted electoral system over the agreement’s three-year life. The most concrete item is the OAS commitment to send an observation mission for our November 5 municipal elections.

The OAS delegation headed by Almagro’s chief of cabinet that came in late May was precisely to nail down the design of that mission in greater detail. Its members planned to meet with the government, the diplomatic corps and representatives of political parties and social organizations. The central point of the five-day visit was to specify how the electoral observation mission would function and be financed.

Plan presented and resources requested


The electoral branch’s formal call for the municipal elections on May 5 had raised hackles because it made no reference to electoral observation in the activities calendar or to the regulations that will govern it. But once in Managua the OAS delegation presented its own observation plan to the government.

It will be implemented by two groups, the first of which will come on August 10 and then tour the country from the first week of September to observe how the electoral process is developing in Nicaragua’s 153 municipalities. The second group, made up of 120 people, will arrive on November 1, five days before the elections, with 40 members covering each of the country’s three largest cities—Managua, Matagalpa and León.

The delegation also met for two hours with the diplomatic corps, in which it laid out its plan to the ambassadors and requested financing for both it and the ambitious three-year project in which the OAS hopes to address 14 strategic issues to fix the demolished electoral system. The Ortega-OAS agreement established that the OAS would be responsible for raising those funds.

No official information has been forthcoming from either the OAS or the government, but diplomatic sources revealed that the OAS asked for US$8 million to cover the two tasks. The same sources report that the government upped that by another US$10 million “to upgrade the infrastructure” of the Supreme Electoral Council (CSE), which is one of the least transparent and most inefficient branches of government, but also the one most privileged with national budget resources.

What will they be able to observe?


By the time even the first of the two observer groups arrives in August, the 15 Departmental Electoral Councils, 2 Regional Electoral Councils in the Autonomous Caribbean Regions and 153 Municipal Electoral Councils will already have been constituted.

Each of these structures is headed by three members, chosen anew for each election from lists submitted by the legally-recognized political parties, with only one member from a given party permitted among the three. The CSE, which is in Ortega’s firm grip, will appoint the three for the Departmental and Regional Electoral Councils, which will in turn appoint the three for each of the Municipal Electoral Councils, and those structures will then choose the three for each of the more than 14,000 voting tables that will function around the country. Since only the FSLN and possibly the Constitutionalist Liberal Party (PLC) have enough members, much less literate ones, to fill all those posts, many seats will surely be occupied by what are secretly FSLN members.

The presidents of all those structures will also have already been chosen by the time the OAS arrives. According to the electoral law reformed in January 2000 in line with the pact between Ortega and then-President Arnoldo Alemán, the PLC’s eternal political boss, all these presidencies are split evenly between the governing party and the runner-up party in the latest elections. As it happens, this time around that “second force” is none other than the corrupt and discredited PLC, the FSLN’s old partner in creating today’s bipartite political system. This is because the PLC, with 15% of the vote, came in second to the FSLN (72.5%) in last year’s general elections after the real contender, the alliance headed by the Independent Liberal Party (PLI), was eliminated in a crude maneuver by the Ortega-controlled Supreme Court and an estimated 70% of the electorate stayed home.

It is in these electoral structures that the electoral frauds have been implemented in the past two municipal elections of 2008 and 2012. Will the OAS remind its new mission that after the 2011 general elections, when it was last permitted to observe, it proposed among many other reforms that the voting tables be made up of citizens elected at random and not by party affiliation?

Will the OAS observation serve for anything?


Two new political parties have just been granted legal status by the CSE: Citizens for Liberty (CxL), made up of one sector of the Liberals previously in the now-proscribed PLI; and the evangelical Democratic Restoration Party (PRD). Both parties’ leaders say the OAS observers’ presence in these elections will make a difference. They declared that their decision to run municipal candidates was based exclusively on this, which they claim will guarantee the absence of fraud.

Dionisio Palacios, former director of the ID-voter card registration system in the CSE, underscored the unreliability of any electoral structure “headed by two parties that are political partners and have no counterweight.” And José Dávila, former Nicaraguan ambassador to Germany, called the OAS plan to do a rapid count to get the best possible idea of the results in the three cities with the most voters “a forensic report on an already consummated fraud.”

Roberto Courtney, director of Ética y Transparencia, the national observation organization founded in 1996 and now a member of Panorama Electoral, a recently formed national observation consortium that will observe these elections without CSE accreditation, has a more pragmatic vision. He believes that no matter where it goes, the OAS mission will always be able to observe something of the enormous electoral system failings we’re suffering today. He stresses that the two new political parties participating and the voters who turn out will do so because “it’s better to force the government to rob you than to go give it your wallet.” Without naming names, he was critiquing the Broad Front for Democracy (FAD), formed by the parties and individuals from the alliance prevented from running last year that took a different path than the CxL. The FAD’s stance is that since the OAS observers can’t guarantee anything, running in the elections only legitimizes the foretold fraud.

Why did the OAS leave so abruptly?


The OAS delegation unexpectedly left the country three days ahead of schedule, abruptly canceling meetings planned way ahead of time with political and social opposition representatives. They hurriedly emailed these representatives adducing “reasons of force majeure beyond the mission’s control,” and promising to provide an “institutional” response to their rushed departure later on. It’s still not clear whether the reason was the resources issue, the House approval of the Nica Act in those same days or something else.

In the absence of other clues, we’re left to ponder their curious departure based on those emails. If it was due to “force majeure,” it must have been unanticipated and very serious. And if it was “beyond the mission’s control,” that suggests that the cause might have been in its counterpart: the government. Could the agreement between Ortega and the OAS have broken down? Would Ortega really want to dynamite the bridge the OAS so generously extended him?

We know nothing more and no one’s saying anything.

Looking at ourselves in Venezuela’s mirror


In the debate about the “COSEP model,” Carlos Fernando Chamorro wondered: “How much would it cost Nicaragua to reestablish the democratic institutions, which have been taken over by authoritarianism? Could the transition be made peacefully through elections, or will we have to go through the hell of Nicolás Maduro’s Venezuela?”

From the other side of the street, Gerardo Baltodano, the president of FUNIDES, a national economic analysis think tank, implicitly raised the same issue with the government in the presentation of its first report of the year: “The Nica Act isn’t positive for Nicaragua; it doesn’t bring us any benefit. But it is a reflection of our institutional weakness. When we hinder dissenting political expressions and healthy political competition, when we impede the strengthening of stable political parties and civil organizations, when we want to control the media so they don’t offer opinions or visions of reality that differ from ours, we are encouraging those Nicaraguan individuals and groups that feel politically excluded to seek ears and aid outside of our borders, as has happened throughout Nicaragua’s history.”

Like Chamorro, this businessman alluded to the Venezuelan example as a lesson in what not to do: “It no longer works to regulate or control free expression in these times. Nor is it fitting to question democracy and the independence of the branches of State. If we can build on these consensuses, we can build an admirable country. If we weaken them, we only have to look at Venezuela to understand how far we can fall.”

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