Envío Digital
Central American University - UCA  
  Number 97 | Agosto 1989



A Setback to Reforms

Envío team

"The prices went through the roof again," said a young woman doing her weekly shopping in Managua's Roberto Huembes market. "I thought it was finally getting better."

In June, Nicaragua's painfully implemented austerity plan suffered a sharp setback. From a December high of 126%, the government brought inflation down to 12.3% in April and 15.5% in May. But June saw supermarket prices climb sharply and the official exchange rate soar from 8,300 córdobas to the dollar to 20,000—a whopping 140% devaluation. While this distressing setback is prompting fears among Nicaraguans that the economy is once again careening out of control, a closer look at the reasons for the devaluation shows that the government has not abandoned its commitment to carry out urgently needed economic reforms.

The government makes a deal

In March and April, as the planting season approached, pressures on the government to ease up on austerity mounted. In March, the government made what later proved to be an excessively favorable agreement with the country's coffee growers regarding extra payments for their coffee harvests—paying more than the harvest was worth, thus subsidizing a crop that was already quite profitable. In a dramatic meeting with hundreds of producers in Managua's Olof Palme convention center on April 19-20, the government made a series of concessions ranging from writing off 50% of some farmers' debts to easing up on credit and establishing a 15% interest rate ceiling on that credit over the next four months and setting a 20% ceiling for the remainder of this agricultural cycle.

Some of these concessions were unavoidable. Hurricane Joan cut heavily into the last basic grain harvest, and bankrupt small farmers needed extra help from the bank to get on their feet and plant the next cycle. Cotton planters and other growers were saying they would have to cut back on planting. But while some of these measures were clearly necessary to avoid recession, it appears that the payments to coffee growers in particular broke the bank.

The effects of this loosening up of the austerity package were not felt until the first days of June—when the damage became all too apparent. May and June are traditionally inflationary months in Nicaragua's agriculturally based economy. Food is scarce and the National Development Bank is paying out credit for planting. Yet this May-June, the bank was also issuing a large volume of credit due to the Olof Palme measures.

At the very same time, the government was paying the coffee producers the second installment on their harvests. Of the first installment of 78 billion córdobas paid in March-April, the National Development Bank estimates that producers only used 3 billion to repay their debts, meaning that a huge volume of córdobas were suddenly in circulation.

As a hedge against inflation, coffee growers bought dollars, which in turn pushed up the price of the dollar. As the black market dollar rose, people withdrew their money from savings accounts and bought dollars (the value of the dollar rose more than the interest rate depositors were receiving that month). As coffee producers and depositors scrambled to buy dollars, the black market price of the dollar soared. At that point, the government was forced to make the drastic June to bring the black market back under control and avoid giving a subsidized exchange rate.

Devaluation makes imports more costly, so any item dependent on imported inputs will begin to rise in price. In oil-importing Nicaragua, anything dependent on transport will have immediate price increases. Inflation began to take off in June, and was estimated at 62% for the month.

The government loses a gamble

In loosening up the austerity package, the government made a series of gambles that did not pay off. First, it gambled that the coffee growers would use their harvest payoffs to reinvest in the next cycle. Instead, a considerable number protected their profits by buying dollars. Second, the government had counted on a larger amount of immediate aid from Europe than in fact never materialized. This money would have been used to finance this expensive package to reactivate the economy. With sufficient funds, the government could also have sold dollars at critical moments to keep the price of the dollar down. Finally, the government gambled that inflation would be held down enough that the fixed interest rate paid to producers would not end up a costly subsidy. But since inflation will pass the 20% ceiling in June-July, the state will in fact be paying a subsidy.

Why did the government loosen the reins? Does this mean the economic reforms are a dead letter? Essentially, the government responded to intense political pressure from growers and to its own fears of recession, and miscalculated the extent of its giveaway. "We panicked," admitted one government official. "We're not going to make that mistake again."

There are in fact no clear examples for Nicaragua to follow in successfully stabilizing an economy where inflation has gone beyond 30,000% a year; it has to be a trial and error process. Economists point out that when a government is attempting to control hyperinflation, the economy is particularly sensitive and fragile. "It is hard to get an economy with so many distortions under control," explained analyst Richard Stahler-Sholk at the Central American research center called CRIES. "There are bound to be a few miscalculations along the way. The basic course of the economic reforms is still being followed."

Yet this was a costly miscalculation. In June, the government had to backpedal on its agreement regarding extra payments to the coffee growers in order to keep inflation under control. The remainder of the growers’ second payments was placed in a special bank account from which growers could only withdraw to cover production costs. More seriously, the National Development Bank slowed the credit flow to all producers at a crucial time during the agricultural cycle, in an effort to soak up the excess liquidity. While credit has now begun to flow again, many small and medium farmers felt the immediate effects of the excessive payoff to the coffee growers. Peasants interviewed in the Masaya zone said they were using hand-held instead of aerial fumigation, for example, to cut costs when they received less credit than expected.

"Clashing with the rich"

The nations' coffee growers met June 18 in Matagalpa to discuss their reaction to the new measures. Leaders of the rightwing business association COSEP tried to persuade the growers to leave CONCAFE, the board where representatives of the government, private growers and unions discuss coffee-related issues. COSEP also encouraged cotton planters, cattle raisers and others to stage similar walkouts from their respective commissions. Had it occurred, this would have meant a total breakdown of the concertation—the series of compromises the government made to private producers to reactivate the damaged economy.

But the nation's coffee growers were not inclined to walk out. "The majority of us are small and medium growers and COSEP doesn't offer us any solution to Nicaragua’s problems," said Porfirio Molina Palacios, a coffee grower and Democratic Conservative Party leader in Jinotega. "I don't know why the COSEP types are complaining; since last year the government has been giving them big concessions, in buying vehicles and agricultural implements at ridiculous prices." The majority of coffee growers preferred to negotiate a compromise with the government. In July the latter agreed to give coffee growers under a certain size their payments in full right away and to favor other coffee growers who were reinvesting. COSEP's attempt to pull private growers out of the national crop commissions provoked the strongest reaction against "unpatriotic" members of the private sector that has been seen here in years. On June 21, Agricultural Minister Jaime Wheelock announced the expropriation of the properties of three main COSEP leaders, Jaime Cuadra, Nicolás Bolaños and Arnoldo Alemán. While the lands were expropriated under a "public use" provision that means they will be compensated and thus are technically within the framework of the current agrarian reform law, it is clear that this was fundamentally a political move by the government. The expropriations do not seem to be part of a trend to expand the agrarian reform, which is now limited primarily to idle, abandoned or frontier lands (see "Land Reform," this issue.)

In a June 23 speech, President Ortega explained that the government's alliance with producers, large ones included, would continue, but that "we're not going to vacillate about the class interests that this revolution defends, which are the interests of the poor. And if that means we have to clash with the rich, with the people from COSEP and from the National Guard's paper [La Prensa], with the people who defend such interests, well then we're going to clash with them, we're going to put them in their place." He said that the COSEP producers back capitalism and the free market, but when it comes to economic issues, "they want the state to guarantee them everything.… They want a paternalistic state that solves all their problems, that guarantees they'll never lose anything."

The CONCAFE incident illustrates the pitfalls of administering a mixed economy where large-scale private growers still have economic space but not political control. What COSEP was trying to provoke was essentially a capital strike—an implicit threat to slow down or halt production if the government doesn’t give in to their demands. COSEP's move appears to be less a specific response to the coffee growers' problems than part of its own overall plan to destabilize the fragile economy and make political hay before the elections.

While June's events were more of a temporary setback than a scuttling of the economic reforms, they may have a costly political effect, with peasants and workers hard hit by the devaluations and suddenly restricted credit. To soften the blow, the government temporarily fixed the prices of basic grains. In June there were wage increases of 50% for teachers and health workers and 36% for the other workers covered by the state budget—but this does not keep up with inflation.

The effects of the payoffs to coffee growers together with COSEP's provocative actions have raised the tone of class struggle, which the government has carefully tried to keep under wraps during this year's overtures to the private sector. Sandinista unions are starting to demand an end to the concessions to big growers. Carlos Alberto Loásiga, leader of the Farm Workers Association (ATC) in Matagalpa-Jinotega, asserted that "while we make a double sacrifice, with our wages far too low, they [the big coffee growers] are very demanding, they insist on setting lots of conditions to improve their farms, even though many of them are just preparing to leave the country.” And what does Julio César Gómez, peasant leader of the Carlos Cruz Girón cooperative near Santa Teresa, think of the government's move to expropriate the COSEP leaders' lands? "It's the best thing it’s done in a long time."

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