Envío Digital
Central American University - UCA  
  Number 446 | Septiembre 2018



What are the economic limits to Ortega’s political project?

Given the economic crisis in Nicaragua starting in April of this year, can Daniel Ortega stay in government until 2021, as he says he will? This economist shares his economic and political analysis of today’s situation bearing in mind that economics and politics go hand in glove.

Néstor Avendaño

In recent months, Nicaragua’s economy has been in a critical situation known as a slowdown, which means a lower rate of economic growth. Technically speaking economists differentiate a slowdown from a recession, which is when the Gross Domestic Product (GDP) shows relative negative variations in two consecutive quarters compared to the previous one. We started to observe a slight slowdown in May 2017, with the collapse of Venezuelan cooperation, but it worsened in the second quarter of this year (April to June). By the end of this September the GDP will again show negative growth, which is when we could talk about the country being in economic recession.

Nicaragua’s main economic
problem is financial instability

We’ve seen all kinds of economic problems in Nicaragua since April 2018: unemployment, falling consumption, a serious reduction in foreign and national investment, a sharp fall in tax collection and production… As a result, the budget has had to be drastically scaled back in several areas. While all these problems are related, I see the country’s financial instability as the main problem and the one that may cause the most negative short-term surprises. I also believe this aspect of the economic situation can give us the best insight into the economic limits of Daniel Ortega’s political project, if he intends to stay in power without early presidential elections.

In the 1980s, the revolution’s economic model was guaranteed by the printing of córdobas not backed by hard currency income. Given the high costs of the war, the economic plan was paid for with this economic variable of issuing money, although it caused acute inflation. In the last years of that decade we had an annual inflation rate of 33,548% which, according to my calculations, ranked us as the world’s fourth hyperinflation in the 20th century. However, our political problem in those years—the war—wasn’t resolved by taking the economy to this huge inflation but ultimately through political dialogue.

Using international reserves
to shore up a run on dollars

The different governments we’ve had between 1990 and April of this year have guaranteed the economic plan through constantly and permanently increasing the international reserves, which are kept in the vaults of the Central Bank of Nicaragua (BCN). Today these reserves are shrinking as, once again, the government is trying to resolve the existing political problem with economic measures. Although only political dialogue can resolve today’s economic problem, we don’t see the government as willing to dialogue. The same mistake is being made as in the 1980s, and by the very same politician. In my opinion, he should now be promoting political dialogue.

If our main economic problem today is the depletion of the international reserves administered by the BCN, let’s look at how this has come about. After April 12, for the first time in all these recent years, we began to see a decrease in deposits of foreign currency, mainly US dollars, in commercial banks. On that date the balance of those deposits in the country’s financial institutions was US$4.115 billion but by August 23 the balance was under US$3.373 billion, a reduction of $742 million. For the national economy, this loss would be similar to the impact from freezing goods and services production for 19 days throughout the country.

How did commercial banking
react to the withdrawal of deposits?

The banks couldn’t tell their clients that they didn’t have enough liquidity in dollars to confront a massive run on deposits because, although the official currency in Nicaragua is the córdoba, the economy is highly dollarized unofficially. In the marketplace, the dollar is the country’s most important currency.

The importance of financial dollarization in commercial banking is obvious for two reasons: 88% of bank loans are given in dollars, while 75% of bank deposits are also made in “greenbacks,” as they are often called. These two reasons for financial dollarization show us that commercial banking’s dollar deposits aren’t physically in the bank’s hands, but rather are financing the portfolio of loans the banks grant to consumers, producers and investors. The dollars clients deposited in the commercial banks have been lent to economic agents. That’s why a mega-outflow of deposits would bankrupt all the banks; they couldn’t respond to this run even by purchasing foreign currency at the Central Bank’s exchange desk.

In June of this year, I heard certain colleagues and political practitioners tell the population to “take your money out of the banks because they’re going to steal it!” I publicly advised against it because withdrawing all the deposits would bankrupt the banks, people wouldn’t get their money and all of us plus the country as a whole would lose. The call to withdraw deposits was politically motivated and had no economic foundation because it would create greater evils than those the population was already resenting with the political crisis. I believe that socially I did the right thing when I convinced people not to accelerate the run on the banks. Furthermore, I maintain from historical evidence that the “political hand” is closer to the Central Bank’s vaults than the commercial banks’ safes.

An accelerated run on deposits was already underway in May and, as the banks didn’t have enough dollars in their safes to give them to the depositors, they availed themselves of the free conversion of córdobas to dollars, the backbone of the national economic model, and went to BCN’s foreign exchange desk to buy dollars with córdobas. The BCN couldn’t refuse to sell them because of the commitment to free conversion, which also gives it the right to buy dollars from commercial banking. In May, all the banks were urgently demanding dollars from the BCN. The dollar deposit outflow had accelerated.

How many dollars has the BCN sold?

Between May 15, when the BCN began to sell its international reserve dollars to commercial banking, and August 24, the date of the latest data we have, the BCN had sold $482 million. In May it sold an average of $7 million a day to the banks. In June this figure rose to $11 million a day. In July it dropped to $6 million a day. And as of August 24, it was at $3.6 million a day. The deposit outflow has slowed but hasn’t stopped. So the problem is still there and it’s no longer any good telling people not to keep withdrawing their deposits. What’s needed is a political response to the country’s serious political crisis, in order to get past it and dissipate the widespread distrust that caused the outflow of foreign currency in the first place.

The BCN’s response has been in accordance with President Oretega’s guidelines. When I studied economics I learned that in the search for balance you can choose the path which, it seems to me, is the one the government is taking at the moment: it’s pursuing a process the French economist Leon Walras called tâtonnement: trial and error or groping in the dark. I see the monetary authority’s lead in today’s blind groping. I think the government is trying to resolve economic problems derived from the political crisis with desperate economic measures, which is a crass mistake given that the problem is political; I can’t describe it as anything else. All the tools of economy policy we economists have at hand are useless for a political problem such as the one we have today in Nicaragua. Furthermore, those groping measures are aggravating the economic problem, generating greater uncertainty and distrust.

Investment securities
for financial stabilization

To deal with the deposit outflow and accelerated sale of dollars forced on the BCN, the latter has taken a couple of measures of the groping-in-the-dark variety.

They first invented a law whereby the BCN creates investment securities for financial stabilization. I think this measure is doomed to failure. In brief, Leonardo Ovidio Reyes Ramírez, a highly respected career economist who is not only president of the Central Bank but also of its board of directors and of the Superintendence of Banks, said that this law invited all those with savings in the bank who distrusted the future of their deposits to withdraw their money and take it to the BCN where they would be sold investment securities issued in dollars but payable in córdobas, maintaining their value and with interest rates higher than those paid by the commercial banks. For example, it offered 8% annual interest for a one year term. But who’s going to hand over dollars to obtain córdobas with a value linked to the official exchange rate? When I heard about this measure, I wondered if the Central Bank’s purpose was to weaken the banks instead of strengthening them and create an interest-rate war in the financial system. Absolutely no commercial bank in Nicaragua offers 8% per year for a one-year term. The passive rate in Nicaragua is one of the lowest in Central America and the active rate, the one they charge borrowers, is one of the highest.

But, groping in the dark again, the BCN very quickly and very quietly corrected the law: the securities it will issue will be in dollars and payable in dollars at a lower interest rate. But, who would withdraw their deposits from the bank to take them to the BCN and obtain a security payable in dollars at 6.5% a year? While it sounds attractive on the face of it, I don’t think anyone would, because of the distrust in the BCN. It isn’t the BCN’s president, Ovidio Reyes, who’s generating this distrust, because the bank isn’t autonomous; it’s the politicians in power and, in this case, the Central Bank’s board of directors.

Contradictorily, those in the executive branch’s upper echelons publicly argue that the country is now “normal.” Saying that is not only disrespectful to Nicaraguans but generates even more distrust and distances the political solution from the political problem in which we are immersed.

Financial stabilization bonds

The law inferred that, in order to avoid distrust in the BCN, the Finance and Public Credit Ministry would support the purchase of these investment securities by issuing some financial stabilization bonds which it would give to the Central Bank. It seems as if one groping measure after another is being whipped out of a magician’s hat to surprise the public. Furthermore, because we haven’t been told what the BCN will do with these bonds, which would be BCN assets, I concluded that the Finance Ministry was capitalizing the Central Bank of Nicaragua!

As an economist, it was the first time I’ve seen anything like this, only possible in today’s Nicaragua: a Finance Ministry rescuing the country’s monetary authority when usually it’s the other way around! It’s the monetary authorities, the Central Banks, that come to the rescue of the Republic’s budget by buying bonds from the Finance Ministry. By means of these strange measures, the monetary authority has “infected” the national finance system with the dollar outflow.

I say infected because the Central Bank is taking the dollars it sells to the banks from the international reserves that it safeguards and administers; reserves that are and have been the pillar of Nicaragua’s economic model since the 1990s. These international reserves guarantee the country’s macroeconomic stability, which is recognized as the main asset, and main achievement, of President Ortega’s administration during all these years.

An amendment leading
to multiple exchange rates

Further evidence of groping in the dark with the economic policy occurred when, on August 9 of this year, the four members of the BCN’s board of directors approved amending the section of Article 5 regarding the Central Bank of Nicaragua’s Financial Regulations for Exchange Operations. It was published in La Gaceta (the Nicaraguan government’s official gazette) on August 24. The amendment eliminated the Central Bank’s commission for selling dollars, set at 1% of the value of the official exchange rate, but added that the percentage of this commission will now be defined by the BCN’s president. On Monday August 27, the day the amendment was made known to the public, the Central Bank had to confirm in two press releases that the monetary authority’s 1% commission for selling foreign currency would remain unaltered. It also, however, reconfirmed that all bank rates will be established by the BCN president and that it was maintaining the 5% annual sliding exchange rate policy, as decreed by the BCN’s board of directors.

BCN President Ovidio Reyes had to clarify these three things because the resolution published in La Gaceta that day caused an immediate $22 million fall in the balance of foreign currency deposits and a $131 million fall in the balance of local currency deposits. The BCN president had forgotten to publish the new rate together with the amendment.

This caused uncertainty among the economic agents: they feared that this percentage would be unstable as it officially recognized that there was still an outflow in dollar deposits, although it had slowed down. Any rate over 1% would unquestionably mean an increase in the price for financial entities buying foreign currency in the BCN and that increase would be transferred to the exchange rate for selling foreign currency on the financial market: the public would have to pay more córdobas for dollars. The population correctly understood that the córdoba would devalue. However, this would be directly seen in the financial market and indirectly in the black market without the official market being affected because the official exchange rate’s annual 5% slide would be maintained.

The result will be an increase in the gap between the official exchange rate and the exchange rate for selling dollars on both the financial market and the black market, a rise in production costs for goods and services and of the inflation rate for consumer prices and, consequently, deterioration in the public’s purchasing power. Economic and financial risks will thus be increased by having multiple exchange rates, which will drive away direct foreign investment. Relative prices will also rise, simply because only one person, the Central Bank’s president, would have the exclusive discretion to determine the gap between the official exchange rate and the exchange rate for selling dollars (including commission) not only in the BCN but also among the official, financial and black markets. Uncertainty in the exchange rate will remain as long as the resolution published in La Gaceta isn’t repealed, despite Ovidio Reyes’ clarifications.

By how much have the
international reserves fallen?

To get an idea of the current economic limits to President Ortega’s political project, we need to know by how much the BCN’s international dollar reserves have fallen and when they’ll run out.

The reserves began to fall on July 12 relative to their value on December 31, 2017. As of August 24, 2018, they had dropped by US$270 million, even though Nicaragua received from the Central American Bank for Economic Integration (CABEI) US$100 million of a total of US$200 million assigned to each Central American country to resolve foreign currency iliquidity problems due to the world economic recession of 2008-2009. All the Central American countries used this contingency credit line at the time except Nicaragua, which renewed it annually, because Venezuela was still providing an oil loan of approximately $560 million a year. Now in trouble and pressured by the commercial banks to sell dollars to deal with the run on foreign currency deposits, the BCN took $50 million from the CABEI loan in July and another $50 million in August to strengthen the international reserves, or rather cushion their severe drop: in other words, to avoid illiquidity. They used the CABEI loan to improve the image of the illiquidity crisis, but it still persists.

Despite the injection of that $100 million, the Central Bank had sold $482 million to commercial banks at the exchange table between May 15 and August 24 and in the course of the year the international reserves had also fallen by $270 million, while the balance of deposits in foreign currency had plummeted by $742 million between April 12 and August 23. We are, therefore, facing a crisis of Nicaragua’s entire financial system, which is headed by the Central Bank.

This crisis affects all entities that take deposits from the public, including the Central Bank, because it also holds foreign currency deposits that belong to the public and are theoretically untouchable by public servants. These include a percentage of all foreign currency deposits in the commercial banks and the Deposit Guarantee Fund (FOGADE) which, in the event of a bank going bankrupt, guarantees each depositor up to a maximum of US$10,000. Also deposited in the BCN are the dollars for placement of treasury bills issued in dollars. Therefore the macroeconomic problem caused by the deposits outflow resulting from a lack of confidence isn’t just a commercial bank problem; it’s also a problem for the BCN, in other words the entire system.

The Central Bank tries to pretend it isn’t infected with this problem, but it is because it has lost a significant chunk of the international reserves. Therefore, I believe my conclusion is correct: the Finance and Public Credit Ministry is capitalizing the Central Bank to get people to withdraw their money from the banks and take it to the Central Bank to buy investment securities, as Ovidio Reyes said.

Summary of the losses

As mentioned above, the Central Bank has lost US$270 million of reserves over the course of the year by selling US$482 million to the commercial banks that have had to deal with a US$742 million outflow of their foreign currency deposits. That means that right now the BCN only has a balance of US$2.487 billion in international reserves. In order to know if it has enough to continue selling dollars to the banks if their foreign currency deposits continue to suffer major withdrawals, the first thing we must identify is how much of that US$2.487 billion is the BCN not supposed to touch. Although we know they shouldn’t be touched, they could be touched silently. The day we hear that the Central Bank isn’t publishing the international reserves data we’ll know it’s touching what shouldn’t be touched.

I want to tell you a macroeconomic anecdote that’s relevant today. During Violeta Chamorro’s administration (1990-1997), I was adviser to Erwin Krüger, the foreign cooperation minister, on the complex task of reducing the external public debt. At that time, data about the Central Bank’s reserves weren’t published. One day, the late Antonio Lacayo, then minister for the presidency, called an emergency meeting of the economic Cabinet, also attended by representatives from commercial banking. Journalists waiting in front of the Central Bank were asking if the government was going to devalue the córdoba.

Lacayo told the bankers that the government had already spent the legal reserve in foreign currency they had deposited in the Central Bank. The amount of the required reserve is determined by multiplying the legal reserve rate by the balance in both foreign and local currency that the banks, by law, must deposit in the BCN to regulate liquidity in dollars and córdobas. The worried bankers snapped back that those funds belonged to the depositors. Lacayo calmed them by telling them that the BCN would give each bank a very short-term bond corresponding to the amount of the reserve each of them had put in, at a low rate of interest. He concluded by saying thank you very much and goodbye.

As he left the meeting, one of the bankers asked what they should tell the journalists waiting outside. Lacayo said without hesitation, “Tell them you have every confidence in the economic policy of Doña Violeta’s government, and that instead of making financial investments in the United States, you’re going to do it here in the Central Bank.” The minister gave a political answer in order to keep the depositors’ confidence, and it worked.

I mention this anecdote in order to give an example of the effectiveness of political answers, even if they are half-truths, to resolve economic problems caused by political problems. The element of trust should always enter into political discourse. It was there in the minister’s proposal. And it wasn’t really a lie, because the bankers were making a financial investment by buying a BCN bond, and they did so because they considered the government’s economic policy correct. The political problem at that time was that the US government had sanctioned the Nicaraguan government by suspending the US$100 million a year donation to guarantee macroeconomic stability because it hadn’t compensated the owners of properties confiscated by the revolution. History is repeating itself today with another profile and the above analogy shows us that political answers are needed to resolve economic problems derived from political crises.

How much of the international
reserves really can’t be touched?

Let’s get back to the actual availability of the Central Bank’s US$2.487 billion in gross international reserves. First of all, $644 million can’t be touched because it doesn’t belong to it. Neither can FOGADE’s $174 million because it belongs to the public. Then there’s the $32 million we owe the International Monetary Fund (IMF) from the last three-year economic program signed with it and concluded in December 2011. The BCN also holds CABEI’s $100 million earmarked for strengthening the reserves, not for spending, and finally there’s the $79 million the BCN obtained from issuing treasury bills payable in dollars, which belong to the investors who bought those papers.

Subtracting that total of US$1.029 billion from the US$2.487 billion in in the BCN’s vaults, leaves only $1.458 billion available, a balance that’s called the net adjusted international reserve, which acquired fame in the three-year economic programs signed between Nicaragua and the IMF in the nineties. But this $1,458 million can’t all be sold to the banks if they come asking for it to cover any continuing deposit outflow. It isn’t just a matter of balances but also of payments, because dollars are also needed to pay for other things.

The answer to the question of how much of those net adjusted reserves the BCN can actually sell to the commercial banks brings us closer to the answer to the initial political question about the economic limit to President Ortega’s project to stay in power.

Foreign debt service payments

Let’s start with the assumption that no more dollars will be deposited in the Central Bank for official foreign cooperation with the public sector. It’s quite a fair assumption because the international camp is not only cooled on further cooperation, but is in fact announcing severe political and financial sanctions on President Ortega’s government. I’ve even heard that the countries in the Organization of American States (OAS) might ask the Inter-American Development Bank (IDB) to suspend not only Nicaragua’s possibility of contracting new loans, but also disbursements on loans already contracted. I don’t know if this could be done since the contracts are already signed, so Nicaragua’s government might be able to sue the IDB internationally. I also don’t know if the IDB’s owners, which are the countries of the Americas from Canada to Argentina, have the political clout to cut off Nicaragua’s access to those funds. If they do, there’s a risk of Nicaragua’s main multilateral lender—the IDB—definitively suspending any disbursements to Nicaragua.

Assuming zero income in liquid foreign currency, the BCN has expenditures it has to comply with or honor with that $1.458 billion it has at its disposal. Approximately $420 million has to be reserved for payments of the external public debt’s interests and amortizations between September 2018 and December 2019 because the Central Bank can’t risk defaulting on these payments. This brings the international reserves’ autonomous availability or touchable balance down to $1.038 billion.

The import of goods and services
and the threat to the exchange rate

Another chunk has to come out of these reserves to import products the country needs such as oil and fuels, raw materials, consumer goods or machinery and equipment. The commercial banks, which are the BCN’s intermediary in meeting the foreign currency demand for imports, have to pay for those dollars in the BCN with the córdobas it gets from importers and if the BCN doesn’t sell dollars to them because it doesn’t have any, the córdoba would soon end up devalued, not on the official market but on the black market and the financial market for importing the country’s goods.

Up to now, the Central Bank has “fortunately” maintained exchange rate and consumer price index stability thanks to a firm restrictive monetary policy. In other words, when the BCN’s reserves began to decrease because it was selling dollars to commercial banks to cover deposit drains, the BCN had already been taking córdobas out of circulation by selling treasury bills in córdobas with value maintenance calculated daily. This promoted an increase in the cash reserve rate, while the international reserve rate was dropping to give more liquidity to the banks being buffeted by the outflow of foreign and local currency deposits.

The Central Bank decided to decrease the daily reserve rate from 12% to 10% and maintain the 15% biweekly rate, but reduce the term to weekly. It’s worth mentioning that the cash reserve rate on deposits in both currencies fluctuated between 18% and 19%. With these policies in open market and legal and cash reserve operations, the BCN has reduced the monetary base, i.e. both the printing of money and the local currency reserves. Moreover, during the course of the year up to August 23, it has also taken C$5.930 billion [equivalent to roughly US$187 million] out of the market.

Everyone in Nicaragua has already felt this massive withdrawal of córdobas from circulation. With increasingly less money circulating every day, the majority of the population is concentrating consumer spending on four things: food, medicines, fuel and pre-paying for minutes on their cell phones. Just between April 12 and August 23, the Central Bank reduced the national currency in circulation by C$5,510 million, so as to reduce the market demand for foreign currency and protect the position of the gross international reserves, which must equal at least 2.5 times the monetary base. This both guarantees macroeconomic stability, i.e. a stable exchange rate, and also ensures low inflationary pressure. Today there simply aren’t enough córdobas to buy dollars, so the exchange rate and the consumer price index are remaining stable.

I repeat that ensuring this stability means producing a result equal to 2.5 when dividing the gross international reserves available in the BCN by the monetary base, measuring both variables in córdobas or dollars. But today it’s equal to 2.9 thanks to the huge reduction of córdobas on the market. While that looks good at first glance, there’s no such thing as a free lunch in economics—there’s always an asset and a liability; all benefits come at a cost. In this case, the cost of maintaining this form of macroeconomic stability has thus far been the slowdown in economic growth, but it will very soon become economic recession, all due to the political crisis.

Exports and remittance income

The average monthly value of Nicaraguan imports is US$500 million, in other words about US$6 billion a year on imports under normal conditions. Part of that monthly amount is financed with inflows from exports and family remittances.

On average, we obtain US$200 million every month from exports and US$120 million from remittances, which is $180 million short of the amount needed to finance the $500 million in imports. The BCN would thus have to sell the banks $180 million of its reserves per month to ensure imports. It will almost certainly sell less than that, because it would otherwise have to continue sterilizing money from the market.

Bottom line: $639 million left to
cover the outflow of deposits
If, for the remainder of the year, it sells only US$100 million a month for imports—$400 million between September and December—it will reduce the international reserves’ autonomous availability or touchable balance down to $639 million. That, finally, is the maximum amount the BCN could sell to commercial banks to meet the outflow of deposits.

How long that $639 million lasts will depend on the speed of the deposit outflow. In the first four months of the political crisis, the average outflow was close to $6 million a day. Hopefully it will now be kept to a daily average of $3-4 million. Any increase in the decibels of political noise could accelerate the outflow, while a show of political will to find a political solution to the political crisis will slow it down.

The clock will stop in two to three months

Taking into account that the Central Bank sold $742 million to the banks to respond to the situation in just the four months between when the dollar outflow started in May and August 24, the fact that now, with all these precautions, it has only $639 million at its disposal means that the BCN will have to stop selling foreign currency to commercial banks as soon as mid-December if the average daily outflow in foreign currency continues at close to $6 million.

The Central Bank itself is clearly at risk, because it’s running out of dollars. Yes, it issues córdobas but the córdoba is a marginal currency that only controls 20% of the market. In Nicaragua, unofficial dollarization is excessive and almost all debts in the financial system are paid in dollars. In this situation, commercial banking would collapse in two months if someone came along urging people, as they did in June, to take out their deposits and the depositors did so—hopefully neither will! I don’t think this will happen, but political dialogue is imperative so as not to continue maximizing the economic and financial risk.

The downside of
a dollarized economy

In conclusion, based on all the above data, if the current political crisis remains stagnated, with no political solution, as it is today (August 28), the clock will stop in two to three months. That would be the minimal time scale, and in my opinion, a prudential time, for the government to finally give a political response to the national problem.

I believe this situation, as it is today, won’t last longer than that because our economy has a feature that for so many years governments, bankers, non-financial entrepreneurs and some high-income consumers considered a great economic boon: to be unofficially dollarized. Today, the alarming rates of financial dollarization have turned it into a severe risk. Previously it was thought that excessive unofficial dollarization had reduced risks by making financial results and some economic variables predictable, because the exchange rate was slowly creeping up since 1993 and since 2004 we all understood that the córdoba devalues by 5% a year.

With controlled inflation and a fixed exchange rate with a preannounced weekly slide, companies knew with certainty what the profit and loss balances would be at the end of the year. Everyone was calm because there was macroeconomic stability. There was so much tranquility that at a certain point in 2008 I said that President Ortega was the best pupil the IMF had ever had in Nicaragua. And it was true. Everyone was content with the monetary control, the responsible issuance of currency and the exchange rate’s annual slide, even when this didn’t correct the huge macroeconomic imbalance we’ve always had with the external sector, especially in the balance of commercial goods. Although everyone was calm, something was forgotten: the Central Bank doesn’t issue dollars, it only issues córdobas, and right now, at this time of political crisis, this is our Achilles’ heel.

From macroeconomic security
to economic chaos

Macroeconomic stability is now at risk and the government has opted for a groping in the dark process that contributes nothing to resolving the problem, in fact it makes it more acute. And it’s doing crazy things. After the supposed cool move (or craziness) of issuing investment securities, the BCN’s board of directors approved letting the Central Bank president define the commission charged for selling dollars to the banking entities, which prior to this announcement was set at 1%, and then failed to specify what that new commission will be. Furthermore, although the córdoba didn’t devalue on the official exchange market and continues with its annual 5% slide, it devalued on the financial market by the commercial banks charging the public a higher rate to buy dollars.

The resolution from the BCN’s board of directors published in La Gaceta, which I mentioned earlier, left the BCN’s president free to fix the bank’s commission rate for selling dollars to the banks. If it charges a higher commission, the commercial banks will increase the price of buying dollars on the financial market. As my colleague Adolfo Acevedo said, the de facto devaluation will occur in the financial market, in the commercial banks’ exchange rate for selling dollars to the public. We still don’t know how much it will be, that’ll depend on the BCN’s president.

In addition to the significant deposit outflow it triggered, if the exchange rate for selling dollars goes up that decree will also impact our economy’s relative prices—production costs. All prices will rise because buying a dollar will cost more córdobas. The decree has given the BCN president a discretional power capable of altering the relative prices of our economy, which is insane. With two exchange rates—official and financial—creating exchange chaos, what’ll happen in the real market, the black market that operates on the street, is that the price of the dollar will rise. When the decree came out, I publicly told BCN President Reyes that he was putting Nicaragua at risk because the IMF could declare us to be a country practicing multiple exchange rates and that would scare off even more direct foreign investment, already scarce thanks to the political problem.

From increasing international
reserves to increasing public debt

If the sustained increase in the Central Bank’s international reserves was what underpinned the economic model from the 1990s on, including during President Ortega’s 11 years in government, the new variable underpinning the national economic model today, now that those reserves aren’t growing, is internal public debt. The government has opted to reduce instability by placing the country in an explosive situation of internal public debt. It is seeking to resolve the political problem through the bonds to strengthen financial solidity, which the Ministry of Finance will issue, plus the investment securities announced by the Central Bank. But in addition to not resolving the problem, the bonds will create increasingly more public debt.

Nicaragua’s external public debt will be almost 44% of the GDP, while the internal public debt is already close to 10% of the GDP. Together those two debts represent 54% of the GDP. And if we add the debt with Venezuela, which until now is registered as an external private debt, the total public debt could easily exceed 80% of the GDP. In the future, Nicaragua could again become a heavily indebted country in production terms, like it was in the nineties. But rescue initiatives for heavily indebted poor countries no longer exist.

Other differences between
the eighties and now

Some people ask if the government’s intention with these measures, and its attitude of not wanting to dialogue to find a political solution, is to make things as tense and chaotic as we experienced in the 1980s. The big difference between what happened then and what’s happening now is that in the current conflict there’s no war because only one side is armed, and the part that isn’t armed is the one that could accelerate this process. Evidently the marches and street demonstrations can put pressure on President Ortega. Although they aren’t decisive, they do show the public’s rejection of the government’s policy and, above all, they are proof that in the main this is a peaceful, unarmed force.

Financial pressure could be potent in the face of this evident civic-mindedness and in support of such a peaceful force. The reason it hasn’t worked in Venezuela is that that country produces oil, which it’s selling, and has commercial and financial relationships with the US, China and other countries.

On the other hand, pressure via international laws that could be applied to Nicaragua’s government and public servants could be decisive in bringing the government to the political dialogue table in the last quarter of the year. It can already be seen that the international political forces are aligning to respond to Nicaragua and this could cause a strong political and economic shake-up in the country.

Early elections won’t bring
immediate economic recovery

However, we shouldn’t think that announcing early elections would bring about immediate economic improvement. I’ll explain in an analogy: Let’s suppose a recently-divorced couple met in the street… Would they be able to smile at each other and say hi right away? I don’t think so. In economics, right away is 18 months. And would this divorced couple be able to greet each other warmly if they met in the street in the medium term? I still don’t think so. The medium term in economics is three years. But I do think it could be possible for them to shake hands in the long term, which in economics is as much as 7 or more years. That’s how I see the recovery from the damage that has been done to our economy. The problem is one of trust and trust isn’t regained easily or quickly. It isn’t enough just to reestablish the economic numbers that appeared before April 18 to say we’re now back to normal.

Better economic numbers don’t mean the economy has recovered. It will basically recover only with the reestablishment of trust between the government and all the country’s economic agents: consumers, producers, investors and the international community. If this trust isn’t created, the economy won’t recover in either the short or the medium term. It’s only possible in the long term, when several years have passed.

Reestablishing economic trust is a political task. “Normality” won’t come with just a different government, elected with transparency and national and international supervision. It takes time. It could easily take at least five years for us to really start moving forward again economically.

International cooperation
will want to wait and see

Nor should we have grand illusions that a wealth of international cooperation is going to flood into Nicaragua to build a new country. I don’t think we’ll have significant international financial assistance: international economic policies are making money scarcer and more expensive on the international financial market, and nobody’s going to donate us copious resources. If the loans are maintained, their annual amounts will be similar to those we have today. In that aspect, I don’t see the likelihood that “everything will be better” with a new government.

In an international setting with scarce and expensive money, will Nicaragua go begging? We don’t think the world’s going to come here with lots of aid just because we’re on the road to democracy, the rule of law, institutional strengthening, better governance… No, they already know us; they know who we are… I think the rest of the world will say: ‘Let’s wait and see how the new Nicaragua settles down, let’s see if Nicaraguans come to an agreement so we can cooperate with them.’ What I do believe is that there will be some humanitarian aid, because we’ve had a terrible crisis that we’ve faced peacefully.

As for access to a new IMF program for macroeconomic adjustment and structural reform, let’s recall that President Violeta Chamorro came into government in April 1990, after a war, and it took until June 1994 for the IMF to come check us out. The IMF never goes to a country that doesn’t have political calm. It might come for a visit to gather economic statistics but not to establish an agreement. Look what happened to Iván Acosta, the current finance and public credit minister, who went to Washington in mid-August to visit the IMF and World Bank looking for external financial resources. According to the national press, he was told to first solve the political problem.

Dialogue until we
see the white smoke

We’re coming very close to the economic limits of President Ortega’s political project. Nicaragua’s authorities have to understand that a political solution is needed. If it were up to me, if I was in the Central Bank, I wouldn’t take any economic measures; the only thing I’d do would be to call the politicians and tell them: Sit down to dialogue and find a political solution. Do like they do when electing a pope: don’t get up until we see white smoke….

And what is that solution? Release from the prisons all the political prisoners captured during this crisis, get all the hooded paramilitaries off the streets, start applying justice to those who have killed our young people, and move the elections forward. Only once an answer to these demands is found can we consider what the Central Bank might do. Then and only then. We don’t need economic policy solutions; we need political solutions so there is economic tranquility. No economic policy will give us tranquility in a setting as dramatic as the one we have today.

Néstor Avendaño is a Nicaraguan economist and president of Business Development Consultants (COPADES).

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