Envío Digital
Central American University - UCA  
  Number 121 | Agosto 1991



Economic Stabilization--Stop Inflation, and Then What?

Nitlápan-Envío team

Presidential Minister Antonio Lacayo announced the government's sweeping economic plan on March 3 as "monetary stabilization at any cost today, economic reactivation tomorrow." While obvious that hyperinflation is an economic evil that the government's new plan has successfully stopped in its first 100 days, it remains to be seen how, or even whether, that achievement will guarantee economic reactivation. The plan has deepened the national recession in industry, commerce and agricultural production, and the link between monetary success and a way out of the recession appears to have been lost.

The economy has suffered a Pinochet-style adjustment with the destruction of urban productive capacity and supply as a whole, high unemployment levels, abrupt changes in consumption patterns and increased urban poverty. But unlike Chile, there is no national productive counterbalance to the stabilization program's monetarism. Nicaragua cannot expect miracles like the quadrupling of foreign exchange generated by agroexports or the foreign and national investments in new internationally competitive industries that Chile enjoyed. The truth is that the Lacayo Plan lacks a productive strategy capable of filling the void that will be left when the flow of foreign funds dries up.

The program's impact on the urban economy has been a deep recession in small and medium industrial sectors and the informal sector as a whole and the concentration of wealth in a few large industries and informal sector businesses. Small and medium sectors are being pushed out of the economic forum by big business and industry.

The effect on the rural economy is similar. The maxi-devaluation as well as the credit policies create conditions that promote large landowners' investments and profits at the cost of the peasant economy. The crisis in the peasant economy, in which prices of basic grains and other crops grown for domestic consumption are very depressed, will force more and more small farmers to look for wage labor. This will drive down wages in the agricultural sector, providing abundant cheap labor for the rural bourgeoisie. Those wages, just over a dollar a day, are already the lowest in Central America.

The Lacayo Plan: State intervention in the market

The failure of UNO's first economic stabilization plan, widely lauded in electoral campaign propaganda as the magic recipe for stopping inflation in 100 days (see envío August-September 1990), obliged the government, one year later, to change its economic path. The most significant differences between the Mayorga Plan, as it was known, and the new Lacayo Plan are the key role of state institutions in regulating the market to hold down inflation and an intense publicity campaign to generate support for the plan. The state's role contrasts with UNO's initial economic discourse, which emphasized the ideology of a market free of all state intervention as the basis for the future success of the government's economic policy.

The government is now directly intervening in the market by using foreign resources to stock the state-owned supermarket chain with low-priced imported basic consumer goods, making it a strong competitor with the urban informal sector, which has traditionally played the leading role in supplying those products. In addition, the government lowered selective consumer taxes on imports, making them much more competitive. Protective tariffs on imports have dropped from 80% at the beginning of 1990 to 20% in 1991, causing a deep recession in national industrial production (see box on urban economy).

Other "deflationary" measures include lowering or freezing the cost of basic public services and tax reductions on the so-called fiscal industries—petroleum, cigarettes, rum, beer and soft drinks. Rates for basic public services like electricity and water were frozen at the new rate set after the maxi-devaluation. Urban public transit tariffs were even lowered after the initial price adjustment following the devaluation. As a whole, the state controls 25 key prices of the 53 goods and services that make up the basic market basket.

The regulation of market basket prices has allowed the government to defend the salary freeze against the union movement's demands. It argues that the economic plan is "neutral" in income distribution terms because the state guarantees both the buying power of the workers' wages and the profits of the business sector. The government has also used the privatization of the state sector as a negotiating point to neutralize the unions, offering property to the workers in return for a suspension of wage demands. In negotiations with the government, both the Sandinista Workers Union (CST) and the Farm Workers' Association (ATC) have prioritized fighting for ownership of a significant portion of state sector industries and land, in order to form what they call the Area of Workers Property (APT), over wage and job demands.

The government has accompanied its measures with a propaganda blitz to convince the population that it will not devalue the currency again or give in to salary demands and will intervene to assure that controlled prices do not rise. As part of this campaign, the government initially imposed strict limits on access to statistical information about the national economy, particularly regarding the survey and methodology used to determine the consumer price index. This information monopoly gave the government the freedom to transmit an image of relative economic stability and thus win the population's active or passive support for the plan.

This new approach to controlling inflation is more similar to the Sandinista government's anti-inflationary strategy than to UNO's own Mayorga Plan, which was based on the premise that stabilization was linked to freeing up the market and providing unrestricted access to information. As with the Sandinista plan, the Lacayo Plan gave the economy a "shock treatment" through a maxi-devaluation of the córdoba. This drastically reduced the real value of the currency in consumers' hands, provoking an acute contraction of money in circulation and instantly stopping inflation.

The rhetoric accompanying the Lacayo Plan coincides with the Sandinista plan in its attack on price speculation and its focus on the need for national unity around the plan as the only alternative for the country's economic salvation. Former Sandinista Planning Minister Alejandro Martínez Cuenca expressed his full support of the new plan's design, his only concern being the amount of foreign resources available to sustain it.

In synthesis, the "orthodox" free market recipe promoted by the Mayorga Plan in UNO's first year gave way to the Lacayo Plan's "heterodox" version, based on state intervention to regulate crucial prices as well as on reaching agreements with the Sandinista leadership.

Nevertheless, there is some continuity between UNO's two plans. The control of monetary sources of inflation and an agroexport bias in the price structure continue to be key elements of the Lacayo Plan. Both are embedded in monetarist orthodoxy and faith in the magic of the market for solving economic problems.

Controlling monetary sources of inflation essentially consists of ceasing to issue unbacked currency to finance the fiscal and national bank system deficits. The strategy for stopping this flow of "dirty water," as Lacayo calls unbacked currency emissions, is similar to both the Mayorga Plan and all previous plans.

First, public spending has been cut once again, above all through the impact of the maxi-devaluation on public sector salaries. In addition, the government has aggressively promoted the voluntary resignation of state employees through the Occupational Conversion Plan. (Employees receive a one-time payment of approximately $2,000 in return for resigning their post and agreeing not to take a job in the public sector for four years.) This program reduces the size of the public sector, including the key institutions providing health and education services.

Second, the government has once again imposed severe restrictions on bank credit. The primary restrictions this time are new legal requirements for eligibility and increasingly higher interest rates (the highest in Central America). At the same time the state banks have carried out an intense advertising campaign to make savings accounts attractive through very short-term high-return savings plans—also a mechanism used in previous plans. The goal is twofold: to decrease liquidity and recover their capacity as financial intermediaries.

Contracting public spending and bank credit is aimed at "deflating" the domestic market. To try to compensate for the recessive impact of these measures on national production, the government has modified the price structure to give a major boost to exports. The March 3 maxi-devaluation intended, as did all previous devaluations, to lower labor costs and increase the córdoba price of exports. The Sandinista government had increased the profitability of exports in this same way in the past few years.

The agroexport bias of the Lacayo Plan and all previous economic programs responds to the vision shared by the International Monetary Fund (IMF) and World Bank of the most appropriate development model for Central America and the Caribbean. For Nicaragua, this means that the pillar of economic reactivation must be the traditional agroexport sector, supported by diversification toward other nontraditional agricultural exports, foreign investment in free trade industrial plants and renewed emphasis on fishing, lumber and mining, primarily Atlantic Coast activities. The prerequisite for this reactivation is privatizing the state-owned agroexport sector and opening up to foreign investment. This, in turn, means offering cheap labor under advantageous and stable conditions to attract foreign capital and entice nationals abroad to repatriate their own.

The key difference, according to Lacayo, between this plan's possibilities for success and the failure of all previous plans is that this time the government has the foreign resources to support it. These resources are what Lacayo calls "clean water" and come primarily from US financial assistance. Government officials are optimistic about the plan's results, since they say there is enough "clean water" this year to finance the fiscal deficit, bank credits and imports.

The relative success of the first 100 days

The government declared the stabilization plan a success upon achieving—for the first time in many years—a 6.7% negative inflation rate in May, according to its own figures. Independent of the intense national debate about the government's manipulation of statistics, the fact is that inflation has slowed since the March devaluation (see Table 1).

Nevertheless, the sudden deceleration of inflation in May was only possible due to the government's direct intervention in controlling key food and fuel prices, forced by strong inflationary pressures in April. The government had expected inflation to drop to 5%, but it actually reached four times that, according to the government's own figures.

April's inflationary pressures were caused both by seasonal fluctuations in food production and by the economy's existing production and distribution structures. This structure is expressed in Table 2, which divides the prices of goods and services into three groups: competitive, private non-competitive and state non-competitive.

Competitive prices correspond to goods and services produced and marketed by a large number of small producers and/or merchants, while both state and private non-competitive prices correspond to those produced by a limited group of relatively large enterprises, or oligopolies. Competitive products include tortillas, beans, cheese, plantains, tomatoes, bread and the like, while non-competitive products include eggs, milk, beef and soap, and services such as electricity and water. Under "state non-competitive," the table includes products that the government supplies through imports or food aid, such as chicken, oil, rice and whole milk.

The table demonstrates that the prices of products in the state non-competitive group have increased least, and show the largest drop from April to June. That means that the state is sacrificing its enterprises' profitability and using foreign resources to lower prices.

Prices in the private non-competitive category shot up in April almost the same amount as the maxi-devaluation, even though the private sector's labor costs decreased appreciably. This shows that the private oligopolies' initial reaction was to take advantage of the devaluation to increase profits. The recession, however, and the state marketing chain's massive importation of products forced them to lower their prices. For example, the price of a bar of soap in April went up exactly 400%, the same as the devaluation. By June, the price had dropped to 300% of its price before the devaluation.

Competitive prices were affected by seasonal fluctuations in the agricultural cycle; the prices of perishable products like onions, tomatoes and plantains traditionally increase during this time of year due to scarcity. This price rise for perishables was enough to affect the figure for competitive goods as a whole. If we remove perishables, the increase in competitive prices was only 255% by June. These prices were forced down at the cost of de-capitalizing thousands of productive and commercial family units (see box on urban economy).

Contrary to official discourse about the Lacayo Plan's "distributive neutrality," the relative control of inflation and the state's direct intervention in market basket prices have not stopped the accelerated deterioration of salaries. Wages have remained virtually frozen since an adjustment immediately following the maxi-devaluation, and their buying power, measured by their ability to cover the cost of the market basket, dropped more than 20% between February and the first week of June, according to official figures (See Table 3).

The immediate effect of this reduction in wage workers' buying power has been the restructuring of consumption toward "super-basic" foods and services, thus drastically decreasing workers' living standard.

Still financing a deficit

Fiscal Deficit. The cost of the state's method of regulating prices has been a substantial increase in the transfer of resources from the central government to its enterprises, such as the state supermarket chain and basic service institutions such as the Energy Institute (INE). Table 4 shows that such transfers now represent almost 40% of government spending, totaling more than $13 million in May.

The high cost of this policy is one of the determinant causes of the increase in the fiscal deficit after the March 3 measures. A principal objective of the stabilization plan was precisely to reduce the deficit to zero and make the state apparatus self-financing. In addition to the high costs of price regulation, this has not been possible because the government has suffered a significant drop in fiscal income. Table 5 shows that government income in May covered barely two-thirds of its spending.

The drop in fiscal income results from the contraction of economic activity provoked by the stabilization package itself, since government income depends fundamentally on indirect taxes on consumption and production. In 1990, income from these taxes represented almost half of the government's total income. Additionally, in its eagerness to "deflate" the economy, the government eliminated the tax on petroleum derivatives, which alone represented 10% of last year's fiscal income.

The elimination of the fuel tax and reduction of import duties on a large number of goods has redistributed resources in favor of middle-income sectors to the detriment of public finances and basic public health and education services. The most obvious signs of deterioration in these services have been the severe shortage of medicines and medical instruments in the country's network of hospitals and health centers and the lack of supplies and even minimal maintenance of the national education system.

The government has been obliged to use a considerable portion of US aid to finance this increased fiscal deficit. Foreign donations have completely financed the average monthly deficit of approximately $12 million.

Key financing has come from the state's sale of petroleum purchased and imported with resources donated by the US Agency for International Development (AID). These "petro-córdobas" represent more than 60% of the total resource donations used to finance the fiscal deficit. In addition, US food aid donated through PL-480 has been decisive in supplying the state supermarket chain with basic foods, and the funds generated from their sale has also been used to finance the deficit. The Sandinista government also used this mechanism with Soviet petroleum and food aid from Eastern and Western Europe.

Finally, AID funds are financing the Occupational Conversion Plan, aimed at reducing the size of the state sector. The Sandinista government had to depend on its own resources to compensate those laid off during its stabilization efforts. The current program offers $2,000 to public employees to entice them to "voluntarily" resign from their jobs. Given that the average public employee salary in May was $75, the offer is appealing, and has so far been accepted by 9,000 workers out of a total goal of 20,000. While the relative success of this program has cut the state's salary budget, it is seriously affecting the capacity of the state apparatus to provide services. The most qualified workers are generally those who most rapidly accept the plan because they have other employment possibilities. The result has been a serious decline in the quality of public services, especially in key institutions such as health.

To sum up, the government is using foreign resources to subsidize the prices of key products and basic services and to compensate for the fall in fiscal income caused by the recessive effects of the stabilization policy itself. It is also using these resources to finance cutbacks in the state apparatus. It was thus able to avoid printing unbacked currency to finance the national budget. Consequently, while unable to eliminate the fiscal deficit, the government has been able to "sterilize" this monetary source of inflation with "clean water," or US financing.

Financial Deficit. The other monetary source of inflation that the Lacayo Plan proposed eliminating was the financial deficit. During the plan's first 60 days, the government severely restricted Central Bank financing to the state banking system, whose credits are vital for agricultural, industrial and commercial activities. In March and April, the Central Bank actually received more resources from the state banking system for debt payments than it gave out as new credits, as shown in Table 6.

This negative flow of resources is explained by the government's agricultural financing policies, encompassing more than 70% of bank activities. The state banking system traditionally recovers agroexport credits at this time of year and at the same time initiates new loans for basic grain cultivation, agroexports and cattle. This year, while credit repayment was normal, new credits remained contracted until May. In other words, the government opted to restrict the delivery of loans for the new planting cycle while the shock effect of the stabilization measures took hold. Restrictions began to loosen in May, and the government turned again to foreign resources to finance financial transfers from the Central Bank to the state bank system.

The decision to restrict credit at this crucial time during the agricultural cycle had a very high and unnecessary cost for the country. According to official statistics from the first two weeks of June, the agricultural area prepared with bank financing is a little more than half of what it was at the same time last year. This will mean a recession in basic foods production, with the consequent de-capitalization and unemployment of peasant farmers. It also means that dependence on US food aid will increase, while the country could be self-sufficient in food with the appropriate support.

Agricultural credit has also contracted because of new legal requirements and the decision to index the value of loans to the dollar. Both factors have particularly affected peasant farmers' access to credit; they have problems demonstrating land ownership (many do not have legal titles) and fear running the risk that yet another maxi-devaluation will leave them in even greater debt to the bank.

Meanwhile, the government offered very high interest rates on deposits to encourage businesses and the population to put their money in the national banking system. This policy enabled the banks to double their fixed-term deposits and increase the amount of money in checking accounts more than 20% in the first two months of the plan. This both decreased the amount of money in circulation and reduced the banking system's demand for credit from the Central Bank.

The combination of contracting credit and attracting savings allowed the government to limit the amount of currency in circulation, supporting the "shock" effect of the other measures. As mentioned, this contraction has played havoc with agricultural production, particularly of basic grains. Once the goal of reducing liquidity was met, the flow of credit from the Central Bank to the national banks and from there to producers was turned back on to prevent an even greater recession in national production. The foreign resources backing these credits also came from AID funds.

The government maintains that it has sufficient foreign resources to finance its economic plan for 1991. Official calculations are based on a trade deficit (exports minus imports) of approximately $427 million, while the amount of guaranteed foreign aid to support the plan totals $433 million. This margin is already tight and could be complicated further by the acute dependence on imports that the government has promoted through its anti-inflationary policies, as discussed above. For example, between January and April, an average of $76 million per month was spent on imports. If this rate continues, import spending would total $915 million for the year, much higher than the government's estimated $778 million.

The end of special treatment

Two-thirds of the limited foreign resources available for Nicaragua's stabilization plan come from the United States. Of the remaining third, half comes from Europe, mainly Italy and the Scandinavian countries, and half from Taiwan. Three-fourths of Nicaragua's pending debts with the World Bank and Inter-American Development Bank were paid with US donations, and the rest with donations from Sweden and Holland. The payment of these debts means Nicaragua is again eligible for credit from both institutions.

The US government's reasoning for assigning resources in this manner is to support Nicaragua's reinsertion in 1992 into the "normal" process followed by third world countries to gain access to foreign aid, thus abandoning the "exceptional" treatment awarded Nicaragua because of its post-war political and economic situation. This "normalization" means that the Nicaraguan government will receive aid only insofar as it subjects itself to the IMF and World Bank economic policy guidelines, just as the vast majority of poor third world countries have had to do since the beginning of the 1980s.

Nicaragua's reinsertion into the international credit system also means that the government will no longer receive the same amount of concessionary aid from the US; aid will decrease and be tied to specific projects instead of backing the economic plan as a whole. The negative impact of such a decline in aid can only be compensated for by the country's rapid and vigorous economic reactivation.

Reactivation or recession?

Ironically, the impact of the economic stabilization plan itself is hindering Nicaragua's future possibilities for economic reactivation and deepening its dependence on foreign aid. The cost of this kind of stabilization is the denationalizing of the economy, whose urban and rural productive sectors cannot compete with the avalanche of imported manufactured goods and food donations. Nor will their accelerated rate of de-capitalization and bankruptcy be counterbalanced by the hoped-for rapid growth of foreign and national investment to develop the export sector. The result is greater unemployment—already officially 45% of the economically active population—and, thus, an increase in crime, delinquency and migration to the US.

Reactivating the export sector is not a simple task. Problems relate to both structural factors affecting traditional agroexports and Nicaragua's lack of "attractiveness" for foreign investment in free trade zone industries and natural resources. The structural factors include, on the one hand, falling international prices for cotton and sugar since the 1980s and, on the other, the slow return on coffee and cattle investments, which require at least five years to show tangible results. Of Nicaragua's main exports, the only exception to these structural disincentives is fishing, whose high prices and rapid returns attract investment.

Nicaragua is unattractive to foreign investors mainly because of its relatively strong union movement and Sandinista control of the police and army. Both factors make Nicaragua less "competitive" than other countries in the region, which also offer cheap labor to investors but with minimal union strength and a repressive apparatus at the service of business capital.

The concentration of capital

The economic recession is affecting different social and productive sectors to varying degrees, causing the accelerated concentration of capital at the expense of the urban and rural popular economy. The kind of stabilization plan to which the Nicaraguan economy has been subjected is actually generating a far-reaching structural adjustment. It is thus wrong to believe that "stabilization" can be supported as something "neutral," benefiting a national interest to stop inflation.

In the city, small merchants have suffered a hard blow due to the contraction of consumer buying power and the accelerated growth of the big commercial business sector, favored by credits and government contracts. Artisans and small industries have been affected most by the recession in manufacturing, since they no longer have even minimal working capital to produce and cannot compete with the flood of imported products. These two popular sectors employ more than half of the urban population, which has no other employment alternatives in the short or medium term.

In the countryside, the increasing concentration of agricultural land, credit and product marketing favors the agroexport bourgeoisie, especially cattle ranchers and coffee producers. Peasant farmers benefited by the agrarian reform are in debt and, like other peasants, face severe credit restrictions. The situation is more difficult for those in the Pacific and dry interior zones because of their heavy dependence on credit, while in the rainier mountainous areas of the agricultural frontier, there is some reactivation of peasant production due to the return of farmers displaced by the war.

Finally, salaried workers in both the countryside and the cities have not only lost buying power but have also suffered a significant reduction in the number of jobs available. The recession has hit particularly hard in the northern Pacific regions because of a contraction in cotton, and in Managua because of cutbacks in the public sector and the contraction of the manufacturing industry.

The Urban Economy

Industrial Sector

Presidential minister Antonio Lacayo has declared the economic plan a success in reactivating national industry, but, tellingly, he always uses the same examples. It is true that production has increased in some industries–-oil, soft drinks, cigarettes, beer and rum–-but these represent only a dozen or so large factories, while the recession has deepened in the industrial sector as a whole. The following table shows, that despite Lacayo’s showcase examples, production is down even in large industry–-the sector with the greatest cushion against the Lacayo Plan’s effects.

The table indicates not only a major slump in large industry since the economic measures were introduced, but also that, prior to the measures, large industry had actually grown 4.8% over 1990 levels for the same period.

The economic plan has had very unequal effects on industry. While capital concentrates in large factories, small and medium shops, which together employ far more workers than large industry, have suffered a serious blow. As the table below illustrates, the smaller the plant, the greater the economic measures’ impact.

This recession in small and medium industry has high social costs in terms of growing unemployment. In addition, the elimination of the products those shops manufacture will exercise inflationary pressure on the economy in general once the state stops intervening in the market by importing foreign goods to hold prices down.

The Urban Informal Sector

The Urban Informal Sector is divided into three sub-sectors–-commerce, services and production–-and two strata–-the well-off and the poor. For statistical purposes, the productive sector, the smallest of the three, is included above under “Urban Industry,” but general information here about the informal sector as a whole also applies to these small producers. The well-off strata is that which operates with between $1,000 and $6,000 in capital, while the poor strata refers to those with less than $1,000.

The immediate effect of the Lacayo Plan on the Urban Informal Sector has been to tighten the vise even more than the Sandinista adjustment did in June 1988. In its first two months, that economic package caused a 26% drop in the informal sector’s purchasing power for the basic market basket. The Lacayo Plan, in its same initial period, has reduced buying power by almost double that–-46%. And, unlike under the Sandinista Plan, the better-off strata have been hurt equally or even slightly more than the low-income informal sectors. Though micro-enterprises found refuge in diversification after previous economic adjustments (see envío March 191), surveys now show a growing tendency to abandon secondary activities and, in some cases, even the primary one. For the first time in almost a decade, working in the urban informal sector is no longer more attractive than employment in the formal sector.

The commercial segment of the urban informal sector has been affected most by the stabilization plan. The four main reasons are: 1) the closing of the yellow-brick road to Honduras due to the córdoba devaluation; 2) the resurrection of formal channels for public commerce through the state’s price controls for goods in its supermarket chain, ENABAS (the state-run Nicaraguan Basic Foods Enterprise), and its imports and donations to supply the most basic consumer products; 3) the new role of big importers, financed primarily with AID funds, in marketing less-basic goods included in the 53-product market basket; and 4) the inability of the poorer strata of the population, due to unemployment and contracted buying power, to purchase any other than the most basic products.

The small Urban Informal Sector, 80% of this sector as a whole, employs more than half of the urban population. Between February and April, underemployment levels increased from 77% to 87.5% in well-off micro-enterprises and from 51.5% to 64% in low-income businesses. In practice, the informal sector as a whole has spontaneously undertaken a new survival strategy to avoid decapitalizing or giving up an activity altogether, which has been to decrease both the quality and quantity of family consumption in favor of reinvesting part of the business’ income.

Older survival strategies–-emigration, primarily to the US, and family remittances from abroad–-are on the rise as well. In the 1980s, some 400,000 people, 15% of Nicaragua’s Economically Active Population, left; of those, 80% went to the US. Current studies show that one out of every three Managua families now receives remittances from abroad, totaling an estimated $60 to $80 million annually; the majority go to female-headed households. The only other real alternative left by the stabilization plan is theft and general social decomposition.

The informal sector is going bankrupt; the significant portion of the population it represents is eating less and cannot turn to the formal sector for work because there is none. Neither UNO nor the FSLN has taken up its interests. If the government continues reactivating the urban economy only for a minority, it will be setting an economic and social time bomb in these popular sectors.

The Rural Economy

In the agricultural sector, the immediate effect of the Lacayo Plan has been to transfer resources to the large agroexport sector, especially cotton and coffee, by revaluing their sales prices and partially pardoning their debts. Small producers, meanwhile, who had sold their products before the maxi-devaluation, found themselves in even greater debt. By modifying the relative price structure, the economic measures restored or increased the competitiveness of exports while lowering the prices and profitability of basic grains. The government opted to guarantee food products through grain imports and donations rather than promote domestic production.

Also to promote exports, credit has been disproportionately issued to large producers at the expense of small and medium farmers. So far this year, more than 75% of agricultural credits have gone to large export producers.

Agroexports, however, will not grow at the same rate as in previous years. The reactivation of coffee, whose profitability jumped 133% over the previous agricultural cycle but requires several years to result in better harvests, will not compensate for the relative stagnation of sugar cane, sesame and particularly cotton in the short run. The March 3 devaluation was not enough to make cotton sufficiently profitable, barring significant increases in yield or technological changes that cannot take place in the short term. While the governments is counting on an area of 100,000 acres in cotton, producers are planning to sow only 50,000 acres this year, less than half that of last year.

The biggest problem for the peasant sector–-with its pending debts from the last agricultural cycle and significant levels of decapitalization–-is its lack of liquidity, possibly even more serious than last year, due to greater credit restrictions. As a result, a smaller area will be planted in basic grains in the Pacific and dry and semi-humid central restrictions. Yields will also decrease as peasants are forced to give up imported inputs. In addition, cheap imports and the probable disappearance of ENABAS as grains purchaser and price regulator will likely push prices and, hence, profitability down even further for these products. With the exception of beans, whose profitability increased 27% over the 1989-90 agricultural cycle, the profitability of all basic grains has fallen: corn, 27%; sorghum, 4%; mechanized rice, 42%; and traditionally-sown rice, 22%.

In sum, the 1991-92 agricultural cycle could enter an even deeper recession than the 90-91 cycle, since the increasing crisis in a large part of peasant production for domestic consumption will not be compensated for by sufficient growth in the export sector. This overall tendency could, however, be reversed with a particularly good rainy season or a significant increase in basic grains production in the agricultural frontier.

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