Envío Digital
Central American University - UCA  
  Number 95 | Junio 1989



Inflation Drops, Planting Begins

Envío team

May is planting time in Nicaragua, and the government has been doing all it can to ensure that as much planting as possible takes place. With the unstable economic situation many producers have been pessimistic about the economic viability of planting at all. In addition, the anti-inflationary measures taken by the government in January, which have been very successful in the short term, have brought with them the inevitable recessionary effects. Now, faced with a tentatively controlled inflation and a deepening recession, the government is walking a fine line between the two.

January's economic measures were clearly aimed at curbing hyperinflation. And they are working. By cutting the budget by 20% (including a 30% slash in the Defense Ministry and layoffs of over 12,000 state workers and 30,000 planned by the end of the year), restricting credit and limiting the money supply, monthly inflation rates have dropped from 120% in December to 12.3% in April. The measures were accompanied by a call for national concertation (see last month's envío)—a move for unified action by the government and private producers.

The decline of the inflation rate is dramatic: 90% in January, 45% in February, 20% in March and 12.3% in April, according to government statistics. Severe anti-inflation measures, however, have their costs; principally, falling demand leading to recession, all the more likely in an economy weakened by war. Recognizing this danger, and given the short-term success of their anti-inflation measures, the government now feels it can take a few steps to brake the recession.

Accord with producers

After a two-day meeting with producers from all agricultural sectors of Nicaragua, President Daniel Ortega announced on April 20 a series of changes in credit and other economic policies to counter the recessionary tendencies of January's measures. Many producers, both large and small, were faced with largely unpayable debts from last year's harvest due to tight credit policies and high interest rates, and in not a few cases because their crops had been wiped out by Hurricane Joan. Export producers (chief among them coffee, cattle and cotton), with last year's unpayable debts and a lack of liquidity, hesitated to take out loans at similar high interest rates pegged to an inflation which last year reached over 20,000%. Basic grains producers faced the added problem of trying to sell produce to a depressed domestic market where merchants and consumers do not have money to buy. The recession—the slowing down of the economy because of a lack of circulating cash—threatened to slow agricultural production, the heart of Nicaragua's economy, almost to a halt.

Ortega responded directly to the producers' needs and demands with the following measures:

1) a guaranteed ceiling of 20% on monthly interest rates for general agricultural credits, to be set for four-month periods; the first (May-August) set at 15%;
2) 12% monthly interest rate for basic grains producers (beans, rice, corn);
3) reduction of certain import taxes and related costs;
4) restructuring of last year's debts with 50% forgiven outright and the other 50% payable over five years;
5) special subsidies to cotton producers;
6) production incentives to coffee and cattle;
7) a guarantee that ENABAS (the state's grain trade dealer) will buy all basic grains on the open market at guaranteed, profitable prices; and
8) a change in certain credit policies to allow producers more stability in their loans.

The guaranteed interest rates, far lower than the previous six months, offer producers an assurance that they will be able to pay back loans they take out during the planting period to buy necessary inputs. The even lower interest rates for basic grains producers encourage the planting of these crucial domestically-consumed products. The restructuring of last year's unpayable debts, while obviously incurring great losses for the banking system, which will recover neither the interest nor the principal, acknowledges that most producers simply would not have been able to repay the loans in any case.

ENABAS' guarantee to buy all basic grains on the open market reflects the needs of producers to have a reliable and profitable market. In the early 1980s all basic grains producers were forced to sell to the government, but at below market prices, with much of the savings passed on to consumers in the rationing system. Private merchants bought the grains on the black market at much higher prices, creating a two-tiered price structure. In 1988, on the other hand, ENABAS only bought one-sixth of all corn harvested. Many basic grains producers found it difficult to sell their produce because of the tight money supply. Thus, this year's commitment to buy all basic grains offered to ENABAS on the open market and at fair prices offers producers more certainty than they had last year. One obvious contradiction is that if ENABAS buys at high prices, it will probably have to pass those prices on to consumers, where purchasing power has already dropped drastically. Even with expected lower costs and lower profit margin at ENABAS, the problem remains to be addressed in the coming months.

Within three weeks of the announcement of all these measures, producers reported renewed optimism about planting. The National Development Bank reported in early May that over 90% of projected basic grains credit had already been requested. Ministry of Agriculture (MIDINRA) workers in the Masaya area noted that cooperative members welcomed the new policies and are anxious to begin planting.

Adjustments made two weeks later

On May 3, Vice President Sergio Ramírez announced that public spending was reduced by 36.2% in April, more than projected, and that increased savings (from 19 billion córdobas to 37.5 billion córdobas), given the high interest rates on short-term savings accounts, meant that no new money would need to be printed. He also announced adjustments to the April 20 measures:

1) Interest rates for producers were lowered from 15% to 14%, and for basic grains from 12% to 11%. Long-term interest rates for coffee rehabilitation and cattle herd improvement were set at 7%
2) Diesel prices were lowered (that is, they will not increase when exchange rates change, as they had been doing), and lubricant prices were lowered by 30%
3) Other benefits for producers include a 15% cut in irrigation charges and a further reduction of port service costs

Between the two sets of economic measures, the ability of producers to viably plan their 1989 planting season increased considerably. The lower long-term interest rates for coffee rehabilitation should allow coffee producers to improve their per-cre yield over time. Even the small producers, primarily in basic grains, can look forward to a potentially profitable harvest in 1989.

Ortega's trip to Europe

One of the first questions asked after the April announcement of the new credit policies was, "Where will the money come from to finance the credit?" Jaime Wheelock, head of MIDINRA, stated openly in an April 22 interview with Barricada that "we are looking for resources. This program requires about $40 million, and depends on the success of the president's trip to Europe and the coming months."

The measures taken by the Nicaraguan government since February 1988 to reduce inflation and stabilize the economy have been far more severe than many IMF measures, without the international financial backing usually provided. Ortega's crucial efforts to seek funding for production credits come after four months of severe governmental budget cuts that illustrate the government's commitment to pay the necessary costs to stabilize the economy. If international aid does not come through, the government will be forced to print more money in order to back the production loans. Printing money that has no financial backing spurs inflation because with more cash in the market, prices go up and the value of the córdoba goes down.

One goal of the measures taken during the last year is to create an economy based on real prices rather than subsidies. The creation of a single foreign exchange rate has contributed to that. Just before the February 1988 monetary change, producers were faced with three vastly different exchange rates; a 70:1 official rate at which producers paid for imports and were paid for exports; a 20,000:1 parallel rate (the rate at which the bank changes for individuals) at which they bought various other supplies; and a 45,000:1 black market rate at which they had to buy anything they could only find in the black market. Thus, producers could rarely calculate their real costs, let alone their profits.

The new policy begun in January of this year maintains the official rate just slightly below the parallel rate, and the lack of bills in circulation has kept the black market rate down. All this means that producers now can estimate their costs in more real terms. Prices are now more in line with the rest of Central America, and the gradual currency devaluations help to maintain this alignment.

The exchange rate continues to rise, but the government is now making the devaluations of the córdoba more frequently and less drastically. Earlier "shock" changes have been replaced by a "crawling peg" by which the exchange rate moves steadily, by very small amounts. This helps to stabilize the economy somewhat, permitting people to plan ahead, knowing that there will be no radical devaluation of the córdoba. With the earlier "shock" changes, speculators profited grandly, holding on to merchandise and then boosting the prices up when the devaluation took place.

The devaluations of the córdoba should be greater than inflation. This way, exporters earn more for their products and buy fewer imports because of the higher costs. Nicaragua currently earns from exports only one third of its import costs, so a policy to discourage nonessential imports is crucial.

Will the Inflation Rate Continue to Fall?

Nicaragua's inflation traditionally varies from month to month depending on the agricultural cycle. Thus, while the latest figures for lowered inflation are quite encouraging, especially since the April figure of 12.3% was lower than the same period last year, government officials have been clear that inflation will likely rise in the coming months in rhythm with the agricultural cycle.

The revised credit policy, even if backed by $40 million in aid from Europe, will likely also contribute to inflation because of the increased cash in circulation. Since mid-April the black market rate for dollars, which had remained relatively at a par with the parallel rate, jumped ahead with the release of bills into the market. The expected inflation, however, will probably not reach earlier levels.

Industry Hit Hard by Recession

Nicaragua has never had a large industrial sector, and with the collapse of the Central American Common Market in the 70's, the already small sector suffered a serious setback. From a peak of $110 million exported in 1976, only $20 million was exported in 1988.

Particularly after April's measures aimed at stimulating agricultural producers, it became even clearer that domestic industry is suffering the brunt of the recession. With less money in circulation, consumers are unable to buy many products. All areas have been hit hard—meat and dairy consumption are way down, as are clothing, construction materials and so on. From the great shortages in the early 1980s, consumers are now faced with the often more frustrating situation of having no money to buy consumer goods that currently abound.

Industry has already taken certain measures to save itself. A weeklong national fair sponsored by the Sandinista Worker's Federation was held in Managua the last week in April. At the fair, nationally produced goods such as clothes, shoes, dairy products, meat, coffee and furniture were sold at cost, often at half their normal market price. The organizers reported that the fair was such a success, with 3 billion córdobas worth of products sold, that they plan a second one in June. Factories and production cooperatives were able to sell products that otherwise would have rotted in warehouses, thus reducing their recessionary losses.

The Ministry of Economy, Industry and Commerce announced in April that it plans to export $32 million to the Central America market, an increase of 50% over 1988. The increase will come primarily from the export of nontraditional agroexport products. In addition, a small aluminum company will begin exporting to Costa Rica, and seafood processing companies on the Atlantic Coast plan to export $20 million worth of products, a 25% increase over last year. The People's Industrial Corporation (COIP), a state-run marketing organization, held a seminar with its members to discuss low-cost exporting strategies. Both organizations acknowledged the need for long-term industrial development policies.

These spontaneous efforts by the government and industry itself to confront the recession do not address some of the long-term problems and credit issues. Luis Carrión Cruz, Minister of Economy, Industry and Commerce, explained in a May 3 Barricada interview some of the problems industry faces. He argued that while industry, because of its high quantity of imported inputs and lower profitability, necessarily suffers more in the recession, it must not be ignored totally or it will simply disappear. And while Nicaraguan industry will never have the exporting capability of agriculture, domestic consumption of nationally produced products saves $500 million annually in the cost of importing similar products, and employs over 60,000 people. Carrión also announced that President Ortega will meet with industrial leaders to hear their needs and ideas, much as he did with agricultural producers, on his return from Europe.

Concertation: A Pandora's box?

Ortega's April meeting with producers and the ensuing credit policy changes are one more step in the national policy of concertation, as private agricultural producers join with the government to rebuild the economy. This new opening, however, has stimulated demands by other economic sectors, currently industry and artisan production, to have their needs addressed by the government as well. Unions and consumers are also likely to press for policies that respond to their interests. As each sector makes its demands, the government is faced with the risk of developing policies that simply grease the squeakiest wheel, rather than developing a comprehensive long-term program.

With the government giving credit that is not yet backed by production, if the crucial international funding does not materialize, the economy will drift once again towards inflation. Given the many outside forces that continue to influence the Nicaraguan economy for better or worse—international market fluctuations, revitalization of the Central American Common Market, foreign aid, continued US military aggression and the economic embargo—the economic situation is bound to fluctuate to some degree despite government stabilization efforts. Government planners have to carefully develop policies to avoid a pendulum effect between inflation and recession, as workers, peasants, industry and agriculture each make their demands. The government's ability to juggle competing interests and forge a national unity around the economy calls for great level-headedness and rationality. Without such determination, conflicting interests within concertation could bring a return to hyperinflation—and open a Pandora's box of divisions.

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