Envío Digital
Central American University - UCA  
  Number 453 | Abril 2019



“Even with the best agreements, the economy won’t recover until 2023

This economist, an analyst, of economic intelligence and foreign aid issues shares facts and his reflections about the serious economic crisis Nicaragua is experiencing.

José Vélez Morgan

I don’t bring good news and probably with what I’ll share I’ll add to the perception that things are much worse than we imagine in Nicaragua. I’ll reflect on a couple of figures we’d heard before April 2018, and summarize the facts and figures from April to December of that year. From there, I’ll offer a projection until roughly 2023, showing that if in December 2018 everything seemed bad in Nicaragua’s economy as a result of the political crisis, it’s actually from then on that the economy has been getting worse.

Pre-2018 falsehoods

Before April 2018, we were told every day that everything was going well in our national economy, despite having the lowest Gross Domestic Product (GDP) in Central America. While our GDP was US$13 billion, Guatemala’s was US$75 billion. Nicaragua only contributed 7% to the whole region’s GDP, even though it is its largest country.

We had particularly been hearing the same lie about our per-capita GDP, not just recently but for decades—during four consecutive governments. By 2017 it was supposedly US$2,190. Per-capita GDP is established by dividing the country’s GDP by its number of inhabitants, which is by definition an artificial statistic because that mathematical amount isn’t distributed equally among all the people. But in our case, it’s not only artificial, it’s untrue, because it’s based on the assertion that we have 6.2 million inhabitants, which itself can’t be true. The last census was conducted in this country in 1995, over two decades ago. Something that was called a census was done during the Bolaños administration, but even technicians who conducted it didn’t acknowledge its validity because a high percentage of forms were lost and many of those turned in weren’t filled out correctly.

So Nicaragua’s per-capita GDP figure is based on applying a growth rate of 1.2% to the 1995 numbers. But that rate is similar to Norway or Sweden, while Nicaragua is known to have one of the highest teenage pregnancy rates in Latin America. Something isn’t true: either the growth rate or the teenage pregnancy statistics, and I know which one I don’t trust. I believe our population is many more than only 6.2 million Nicaraguans, one of the poorest countries in the world, so I don’t know what our real GDP per capita is.

And after April 2018?
A chain of negative events

That’s the general situation before April, in which we were operating with statistics like this one that don’t reflect reality. So what happened between April and December 2018? A chain of negative effects in the economy brought us to this exceedingly difficult situation we’re in today.

1. Capital flight. Politics is very complicated, but economies have an unfailing logic and everything in them works in a chain reaction. The first thing that happened to Nicaragua’s economy when the sociopolitical unrest exploded was that people who had money in the country’s banks transferred it abroad. Capital flight began early on and hasn’t stopped. I figure that won’t change, so 40% of all deposits will have left the country by the end of this coming June. No financial system can withstand this percentage.

And it wasn’t only the big guys who got their money out. People with US$8-10,000 in savings also transferred it to an account in Costa Rica or the United States, where they have relatives. This serious capital flight follows no other reason than lack of trust in the country’s politics and economy and the need to protect their own savings in a safer place. I believe this phenomenon will be with us for the next ten years, because any client is welcomed in the international market and the conditions some foreign banks give their savers are much better than those given here. As it is, we already had the most expensive banks in Central America and the highest interest rates before April. A lot of money that left will never return.

2. Banks stop giving loans. When a bank no longer has liquidity, the first measure it takes is to stop giving out credit. And when that happens, people may still be able to buy milk or bread in the grocery store, but they can’t buy a house or a car or a motorcycle. The decrease in the sales of such major assets happens immediately, and the economy immediately starts to feel it. Even though the prices of those assets tend to drop, they aren’t being bought. And there’s an increase in defaulters who can’t pay back the loans they received previously to purchase their house or car. And when the bank repossesses these assets, they still have to continue paying a percentage of their debt. That’s how housing bubbles start…

3. Many businesses close. We live in a market that has officially been in a recession since 2018, where there’s deflation and no credits. These tragedies were accompanied by the closing of many businesses.

4. Unemployment. The bankruptcies and business closures were necessarily accompanied by mass layoffs and major unemployment. Some say that those laid off aren’t unemployed because they can insert themselves into the informal economy, but Nicaragua’s informal economy was already so widespread before the crisis that twenty people are now “inserted” selling nacatamales on the same street corner.

Playing fast and loose
with the Basel accords?

After the recent world economic crisis of 2009, bankers from around the world met in Basel, Switzerland, and decided to share precise and true information about how their banks were functioning so the international financial system wouldn’t be shaken by any more surprises like the one that had just happened. Given that all banks in the world system are related one way or another, they realized it was essential to share information about their own assets values and credit risks. Over the years new accords were agreed to: Basel I, Basel II, Basel III…. The purpose of having all banks in the world sharing their information is to avoid having a bank hide information, such as, for example, that 8% of its clients are defaulting on loans. As they are permanently modifying this agreement they reached, they now know if any bank has crossed the red line and is facing a greater default level than it should. Every bank should have the same information so they all have the same capacity to react. This coordination is now a characteristic of the whole global financial system, allowing the banks to give their investors more precise information.

The Basel agreements also establish certain control and compliance terms. Banks are asked to increase alert levels after certain periods, be it 60, 90 or 120 days, regarding client debt arrears. In Nicaragua, after a month of crisis involving the riots in April, when the capital flight started and the number of clients defaulting was increasing, the Superintendence of Banks sent a memorandum to the country’s banks allowing them to be flexible with the risk and compliance policies established in Basel to avoid panic. Thus began the “restructuring” of thousands of debts. This previously strange term to many families is now becoming a household word. The softening of the international norms means that nobody knows exactly what the banks’ real situation is because the statistics we know have become “flexible.” We’ll find out soon enough. Some day they will have to tell the truth.

A glut of repossessed
houses and vehicles

What are the banks going to do with all the houses and vehicles people couldn’t pay for? You know the situation is complicated when a bank repossesses a house that couldn’t be paid for if it doesn’t have anyone to sell it to because it isn’t providing loans for anyone to buy it. In an economy where everything is normal, the bank ends up winning with defaulters. They even make a profit because they take the house away from the debtor who has already been paying on it, and know they’ll find someone to sell it to.

With today’s lack of liquidity, however, the banks can’t provide loans to potential buyers. So what do they do with so many houses and vehicles? That’s the question all the banks in Nicaragua are asking themselves these days.

Foreign Aid: Yet another black
hole in the national economy

In Nicaragua, we’ve always lived off of foreign aid projects. Many Nicaraguans have worked in different foreign aid institutions and/or in specific projects. In the past decade, the current government has predominantly received two different types of foreign aid: the traditional aid from multilateral financial institutions and Venezuela’s cooperation.

On January 11, 2007, the day after President Ortega took office, he integrated Nicaragua into the Bolivarian Alliance for the peoples of our America (ALBA), a decision that had and will continue having consequences for Nicaraguan citizens. The core of the aid that immediately began to flow back then was the oil agreement: we were buying oil from Venezuela with a preferential payment arrangement. Half was to be paid in cash in 90 days and the other half was a loan to be paid in 25 years. It stayed in Nicaragua as financial aid and to be used for development and social projects.

In addition to this new Venezuelan aid, Nicaragua continued to receive multilateral aid over these same years, mainly from the World Bank and the Inter-American Development Bank (IDB).

The World Bank has cooperated with Nicaragua for many years on a land census and titling project and has also invested in many health and education projects. It had projects in the country’s 66 poorest municipalities, most of them to eradicate infant malnutrition and guarantee food security in the Caribbean Coast region. It has also financed projects to build highways and rural roads. The World Bank’s aid is 70% credit and the rest is donation.

The IDB aid has been for transportation, rural roads, highways to join the Caribbean and Pacific sides of the country and rural areas far from cities. It has also funded electric projects, clean energy projects so the country doesn’t have to depend on energy produced with fossil fuels. The IDB has also provided aid to fund private sector loans, especially for micro, small and medium size businesses.

Venezuelan cooperation was earmarked for several projects. One of them was called “reestablishment of state workers’ rights,” something that sounds important but simply consisted of giving out a monthly “solidarity bonus” of 500 córdobas to each public service worker. Some was also used to subsidize public transportation in Managua and electricity for those with low consumption levels, and to fund social programs such as Plan Roof, Zero Usury and Zero Hunger.

What do we have to show for this aid?

As you can imagine, billions of dollars circulate through these are two styles of aid. What does the country have to show for it? From the multilateral side there are highways, bridges, schools and the like. And we also have the taxes people pay for the fuel they use to travel on the roads. Transportation infrastructure generates taxes that are used to pay off the loans in this aid model.

It’s less clear from the Venezuelan aid-as-subsidy model. What can a state worker buy with that solidarity bonus that has averaged about $20? Coca-Cola, beer and cigarettes for example, which also generate taxes, though less than vehicle fuel. And gratitude to the State for the help represented by the social programs.

The Venezuelan aid began after we entered ALBA. Since then we’ve spent many years wondering how much money the country was getting from the oil the State was selling to Petronic, the State’s own network of gas stations, above the cash it was paying back to Venezuela in 90 days. Today we have figures from the Central Bank, published under pressure from international institutions.

Washington and the IDB alert about
the shady use of Venezuelan aid

The first alert about our government’s use of the Venezuelan aid came from the US State Department back in 2012, set off by Hillary Clinton, Barack Obama’s secretary of state at the time. The second red light came from the IDB’s board of executivd directors three years later when they stated that they had evidence that Venezuelan aid funds were not being managed in a transparent way. Why would it matter to the US State Department and the IDB that the Venezuelan aid wasn’t being used transparently? They started asking why the Nicaraguan government wasn’t using any of the significant amount of money it was receiving from Venezuelan aid to improve rural areas.

In the US it’s pretty hard to get away with tax evasion. Remember Al Capone: he didn’t fall for all his major felonies; he fell for evading taxes. Squandering tax income is also frowned on. Several years ago, the US government started questioning the lack of transparency in Nicaragua’s use of the funds from Venezuelan oil aid. Back then, even before the April uprising, the US Treasury Department began to prepare sanctions for lack of transparency and for corruption in the use of those funds.

How much do these Venezuelan funds being questioned for lack of transparency amount to? According to Central Bank figures, in 2008 it was US$457 million, and it increased annually, reaching US$729 million in 2012. It then gradually began to decrease, totaling US$248 million in 2016 and IS$102 million in 2017. The first semester of 2018 the Central Bank only registered US$9.2 million of Venezuelan aid. The Central Bank’s tally of the total Bolivarian aid rounded out at about US$4 billion.

From an alert bout corruption
to passage of the Nica Act…

While the Venezuelan aid was decreasing, the Nica Act began threatening as of 2016. It underwent annual changes during different periods in Congress until it was finally approved by both houses and signed into law in December 2018, and came into effect automatically with that approval. That law is a sanction aimed at cutting off the flow of multilateral aid to Nicaragua. The original message was: If you have resources and don’t use them transparently, multilateral resources stop coming. Other sanctions were added to this law in 2018 for other reasons: human rights violations and lack of democracy. This is why both the US Treasury Department and the US State Department worked on the Nica Act. And they both are working on its execution.

If everything we saw happening to our national economy from April to December 2018 was really bad as a consequence of the political crisis, it has only gotten worse since December, because the Nica Act forbids international lending institutions such as the World Bank and the IDB from giving technical and financial assistance to the Nicaraguan government. For example, the IDB had an important project in the country to eradicate malaria, especially in the Caribbean region, that is now closed so Nicaragua will no longer be able to get on the list of countries that have eradicated malaria in 2020. Three months ago there were already 10,000 cases of malaria and some have died.

...and from its passage to
immediate blocking of loans

The government had public investment projects financed by the World Bank and the IDB to the tune of US$1.724 billion. Both institutions had been waiting tosee what was going to happen with the Nica Act. Since it was passed in December, they haven’t disbursed another cent to Nicaragua. The Nica Act is a law, a prohibition. Any US official knows this and knows there are consequences if there’s no compliance.

Starting now, the US State Department and Treasury Department will be enforcing this law. The Treasury has given the directors of the World Bank, IDB and International Monetary Fund (IMF) the go ahead to start applying it immediately. They now have 180 days to report what exactly was blocked and what isn’t going to be executed. Meanwhile, the State Department also has 180 days to report on how human rights and democracy issues are evolving in Nicaragua.

In some parts of the country, we may still see for some time the execution of cooperation projects not linked to the Nica Act sanctions, such as those from the German Bank KfW. In time, though, they will also be suspended as the US uses its rights and influences to increase pressure. Large new IDB projects are suspended, but if a project to build 48 miles of a road had already built 20 miles and the contractor still has funds for 4 more miles, they may build them, but that’s as far as the construction will go. Or if a national construction company won a bid for a water and sewage project and has received those funds, it may use them to finish the project.

Not only the World Bank and the IDB have left Nicaragua with the Nica Act. The IMF has also left, and that’s even more dangerous for the country’s economy, as it is also banned from giving technical and financial assistance to Nicaragua.

The Nica Act is the worst thing the government could have imagined. It takes away all its capacity to have a public investment budget, and it take away the IMF, with which they had a good relationship. The IMF was like the “rich cousin”: If you behave and follow all its advice, it will be your guarantor when it comes to issuing bonds or asking for a loan, and in an emergency will even deposit money in an account for the well-behaved government.

No more information on
the international reserves

We can’t forget that the capital flight has also weakened the Central Bank’s dollar reserves. There’s no longer any Central Bank publication to tell us how much its foreign currency reserves have dropped. Because we don’t know how much is still there, we also don’t know how it’s going to influence the real value of the córdoba, or if there are enough to pay debts, etc., etc. In Argentina, during a recent financial crisis as great as ours, the IMF injected US$5.7 billion so it could survive the crisis. Here we won’t get that injection.

The Central Bank’s last report was on December 31, 2018. Since then everything has been shrouded in uncertainty. But economic information isn’t only given by figures. Uncertainty is also information. If the Central Bank doesn’t want us to know how the foreign currency reserves are doing, I can be sure that if the last figure was US$2.2 billion in reserves, that amount is now less.

That sum guaranteed two and a half months of financial stability for imports and paying debts. And it’s been over three months since that last official figure. So if tomorrow we’re told that our reserves have gone into the red, the IMF, designed as a lifesaver for countries in crisis, won’t—can’t—come to our rescue. I don’t know what’s worse, having lost practically all of the Venezuelan aid, having lost the multilateral aid for public investment or having lost the IMF, our financial lifesaver. What I do know is that this extremely serious situation is what has made the government decide to sit down at the negotiation table.

An under-financed national budget
and bonds no one wants to buy

We also know that the 2019 national budget used to pay the salaries of 235,000 state workers isn’t being financed. A large part of the national budget comes from the taxes we pay, but tax revenue is decreasing with unemployment, closed businesses and less consumption.

Another part of the budget is financed by the sale of government bonds. If the government doesn’t have money to cover its budget, which can happen in any country of the world for normal reasons, it sells bonds to cover the deficit.

Nicaragua’s government has been offering bonds on the international market for months, but nobody’s buying them. Why? In November 2018 we received information that went by relatively unnoticed: the three big credit rating agencies—Moody’s, Fitch Rating and Standard & Poor, which tell investors if they should the bonds from a country or not and what risks they should keep an eye on—gave Nicaragua in a very negative rating. Even before April 2018, the three agencies rated Nicaragua as a risky country, but no more so than Greece and Costa Rica, which were placed in the same group. We weren’t next to Sweden or Norway, but our placing indicated that there were opportunities and investors could take the risk because interest rates were very good. In November 2018 all three agencies gave us new risk and conflict ratings that placed us in the same group as Iran, Pakistan and Lebanon.

If a government can’t finance its budget and no multilateral institution can give it credit, who’s going to buy bonds from it? The government decided to target Europe, so in November it issued bonds in Euros and at an 8.25% interest rate. It must have seemed very attractive to any European, being in its own currency and with a great interest rate. However, investors consult with their bank and in this case the bank told them: No, it’s best to invest in another country. Nobody’s buying these bonds because nobody believes our government will be able to make good on them when they come due.

The country and its government had lost all trust, and that was even before the analysts from the three rating agencies had included the effects of the Nica Act in their analysis of Nicaragua, because it wasn’t approved until the following month. When they do their next technical assessment, we’ll be down next to Mozambique and Venezuela.

Our own government’s
“sanctions” hit everyone

Now that we’ve seen the sanctions imposed on the government, let’s take a look at the sanctions the Ortega government has imposed on the economic sectors and on all of its citizens. I call them sanctions because the tax reforms and the Social Security reform the government imposed in January are sanctions on all of society. The private sector calculated even before April that two people in a household had to be employed to be able to cover the basic market basket. Now, with the new tax increase on a large number of products, three people would have to be employed. But, what family in the country today has three family members working?

The government sanctions also punish Nicaragua’s exports, which represent about US$5 billion. Half of thoze exports are produced by transnational maquilas (sweatshop assembly plants) that import raw materials and re-export them as manufactured products, mainly textiles. The other half is produced by national businesses that export raw materials, i.e. with no value added, especially from the agriculture and livestock sector. Today both these large sectors of the exporting economy are suffering from the government’s sanctions.

Each of these sectors has a specific sanction placed upon it. The Social Security reform affects everyone, but especially the free trade zones. The company’s contribution as employer went up quite a bit [since as “free-trade” manufactures they pay no tariffs for their imports and exports, making wages virtually their only major in-country expense]. With this increase in wage-related costs, the maquilas are looking at the change in the conditions that made them chose Nicaragua, and considering moving to another country with lower costs. They will gradually leave. In Ecuador, factories have been expanding the past two months to produce the Levi’s jeans currently being sewn in Nicaragua.

The sanction the government imposed on the agriculture and livestock sector is, above all, the tax reform. It eliminates exonerations for land leases, agro-chemicals, fertilizers, etc. Everything farmers use has become very expensive. Each year, when the new agricultural cycle begins in April, farmers calculate their production costs per hectare of land. What happened this year? Farmers aren’t getting any loans because the banks aren’t offering any and, worse yet, they’re faced with more taxes through the tax reform and will probably have to deal with a lot of holdups in paperwork to avoid some taxes… if possible. Many are deciding not to plant. That means more unemployment. The agriculture and livestock sector warned the government that with the tax reform the agricultural cycle is in danger, and of course that will also mean fewer taxes collected.

From bad to worse wherever we look

Whatever issue we examine in the economy takes us to a worse situation. There will be more unemployment with the free trade zones moving their money out. And there will be more unemployment with farmers who won’t be planting.

Some growers may plant to meet commitments they may already have with regular buyers. For example, someone who sells a set amount of peanuts to a regular client will plant to satisfy its contract with this client. But, no coffee grower will go to the international market to sell coffee having to say that it’s more expensive because taxes have gone up in Nicaragua… Who’s going to buy that coffee?

If our government has requested at the negotiation table that the international community be asked to lift the sanctions the US has imposed and Europe is threatening to impose, it should first lift the sanctions imposed on the country with the Social Security and tax reforms, because they too have the effect of economic sanctions.

Why haven’t we seen a major
devaluation of the córdoba?

Some ask why in the middle of this crisis there has been no devaluation of our currency, why the price of the dollar hasn’t varied much. The market price of any product, including the dollar, depends on the demand for it. Let’s think about why anybody in Nicaragua would want dollars today.

The first reason for buying dollars is to import goods to later sell in Nicaragua. But we’ve already talked about the collapse of imports, anywhere from small or large vehicles to all the myriad products we consume in the country but don’t produce here. A number of import companies have already closed up shop in Nicaragua.

Another reason to buy dollars is for savings. In Nicaragua people save their money in dollars. But, who can afford to save money these days? Most people are eating their savings. Everyone who had savings in dollars took them out of the country, the massive unemployment keeps people from buying imported goods and the lack of loans limits purchases. The price of the dollar isn’t rising because there’s neither the capacity nor any reason to buy them. It’s the only reason I can find.

One more serious problem:
The sanctions on Venezuela

Up to now we’ve mentioned everything we know. Now, I’d like you to lie back on a couch, and I’ll act as a psychiatrist and say to you: You all have problems, they’re this and this, but my responsibility is to tell you these aren’t the only ones. There’s another more serious problem, and it has to do with the US sanctions on Venezuela.

The US Treasury Department’s sanctions this January against PDVSA, Venezuela’s state oil company, more recently expanded to Venezuelan finances, sanctioning Venezuela’s Economic and Social Development Bank (Bandes) in March. The US has in fact sanctioned the whole ALBA system, the companies and finances in all ALBA countries (Bolivia, Cuba, Ecuador, Uruguay and Nicaragua), which surely also affects many other companies that have financial relations with ALBA throughout Latin America.

During these last years the US has been applying sanctions on Venezuelan officials included on the “Clinton list.” I don’t believe that any of those on that list ever imagined the US government would apply a sanction directly to PDVSA because it has 500 gas stations and 3 refineries in 30 US states through its company CITGO, and sanctioning PDVSA would affect oil prices in the US. For reasons of their own, a number of US oil companies backed Wash¬ington’s decision to sanction PDVSA.

With this sanction all the money that comes in from Venezuelan oil sales around the world will be available for the self-proclaimed “President in charge,” Juan Guaidó, who has been recognized by the US and 50 other governments as Venezuela’s legitimate President. As a consequence, hundreds of Venezuelan oil tankers are circling around in the oceans today not knowing where to sell the oil.

The sanctions on Venezuela could have
more effect than the Odebrecht scandal

The sanctions on Bandes affect the whole financial system linked to the Venezuelan government’s businesses. If the bribery scandal of Odebrecht, Brazil’s construction giant, invaded all of Latin America and could still mean the heads of government officials and business executives throughout the continent, what is coming with the Bandes sanctions could probably reverberate until 2024, until all the funds are tracked down that relate directly or indirectly to Bandes and other Venezuelan state banks—Banco Bicen¬tenario del Pueblo, de la Clase Obrera, Banco Universal, Banco de Venezuela—and beyond, with Banco Prodem in Bolivia and Bandes in Uruguay. The sanctions against PDVSA and Bandes are going to drag down banks all around Latin America and very probably, many other banks around the world.

In Nicaragua the sanctions against PDVSA hit Albanisa, PDVSA’s associate, and all the in the Albanisa consortium companies our government created and financed with Venezuelan aid resources. These companies executed a large number of public investment projects financed by the World Bank and the IDB because they always got foreseeable results in the biddings. Since there will be no more bidding for such public contracts because the World Bank and the IDB—the major public investment financing agencies—are out of the picture, Albanisa companies have no reason to continue existing, even though they are still moving resources…

Through the PDVSA and Bandes sanctions, Bancorp, the bank created by the Ortega government in 2014 to manage the reported US$4 billion of Venezuelan cooperation resources, was also sanctioned. That’s a hefty sum, twice as much as the Central Bank claimed to have in its reserves in December, and equivalent to the total amount of the national financial system’s deposits before the capital flight. It is known that for several years most of it was managed with virtually no transparency by the private or semi-public Albanisa companies.

Where’s the US$2.5 billion Bancorp
had before it was sold to the State?

In February, the US Treasury Department announced that Bancorp was sanctioned. At that time it had an accounting record of about IS$2.5 billion of that US$4 billion in Venezuelan resources as a trust fund. On March 7, the government sold Bancorp to the State of Nicaragua for the córdoba equivalent of IS$23 million paid in the bonds the same State had issued. The operation was conduced de facto, automatically and in very streamlined fashion. Operating de facto is a characteristic of our government, which in the case of Bancorp as in many others is because there was “no time to lose.” An operation to evade the sanctions? The bank was given a new name: the National Bank.

Where is the US$2.5 billion that was stashed in Bancorp? I doubt a sum that size is physically in the bank’s vault. The only way to access that enormous sum of money is to do so physically, because as soon as that money enters the international financial system’s labyrinth, those accounts will automatically be blocked. We don’t know where that money is. But we do know banks will be sanctioned worldwide.

The US doesn’t just sanction;
it then follows the money

Those who sanctioned Bandes plan to follow the money trail to all banks related to Bandes and the money of all its associates, naturally including Bancorp. When the Treasury Department applies a sanction it’s because it can execute it and already knows where all the financial currents to be sanctioned flow before it’s applied. What are the chances the Nicaraguan government could efficiently and effectively evade the sanctions by selling Bancorp to the Nicaraguan State and turning it into the National Bank? It seems like a 12-year old’s mischief…

The US sanction will follow all the banks linked to Bandes and all those in the world where Bandes had money or relations. Can you imagine the number of banks that will be investigated and sanctioned? When the law against Bandes was issued, all US banks were already prepared to call for emergency sessions about risks and compliance to see if any official of of any government deposited or transferred money out of Venezuela, through a dummy company without using their own name… What is known is that any such official will have to pay a fine for being linked to those clients. There’s a bank in Nicaragua that has recently been annulling accounts and asking their depositors to withdraw their money. But no bank can escape the fine. The financial system is going after all of them.

What is the new National Bank’s future?

What role awaits the new National Bank, created by the speedy sale of Bancorp? The law that created it grants it the characteristics of a commercial bank. One can deposit money in it (though I can’t imagine anyone wanting to deposit their money there…) and it can grant loans (I also can’t imagine it doing so…). So, why or for what was this National Bank created?

There is a reason and I also have a hypothesis. The reason, which we all know, is, in diplomatic lingo, to “soothe the inconveniences the US sanctions might cause.” As for the hypothesis, I found it in the financial literature. At the end of the 19th century the “Panic of 1890” hit Argentina. This social-political crisis deriving from a depression and a financial crisis sparked the “revolution of the park,” bringing about the President’s resignation with Vice President Carlos Pellegrini taking over the government. All this caused a banking problem of international dimensions. When Pellegrini saw that Argentine banks were going broke, he founded the Bank of the Nation, which still exists to this day. The new bank started to absorb all the private banks that were collapsing.

And that is my hypothesis, although I don’t know if any of the government’s advisers read that history. Let’s remember that our government has most of the information about how our banks are doing, the banking crisis that exists today and our financial system’s weakness. With that real information it has on the banks, which it isn’t giving out to the citizens, it can perfectly well sit back and wait to see which bank falls first without violating the Basel accords. Then with the same speed with which it absorbed Bancorp it can swallow the private banks in Nicaragua, one by one. My most optimistic hypothesis is that the National Bank will seize the portfolios in default and the properties given in guarantee for credits that couldn’t get paid, and with this it will have a huge amount of assets of all kinds of goods.

Are remittances a compensation?

Some say that in this very negative panorama, the economy is improving a bit with the family remittances, which they say have increased given the number of people who have gone into exile, fleeing to save their lives or seeking opportunities in other countries. But, the figures we have don’t back this idea. Remittances from our immigrants during 2018 were US$1.5 billion, only US$118 million more than in 2017. This increase is equivalent to about 30,000 minimum wages over thirteen months. But, do those 30,000 minimum wages make up for the 300,000 salaries lost in the economy due to unemployment? There’s no way to make up for the loss of income in the economy due to massive unemployment with the increase of remittances.

The other risk remittances are facing today has to do with the effects the financial sanctions have on Venezuela and, by rebound, on Nicaragua. Those sanctions affect the correspondent relationship that exists between banks. The national banks are losing foreign correspondent banks for being contaminated by the sanctions against Albanisa and Bancorp. We know, for example, that Wells Fargo and Bank of America are withdrawing their correspondent relations from Nicaraguan banks. How can Nicaraguans send money to their families if no banks in Nicaragua can receive it because they’re contaminated with sanctions?

Next is the energy crisis

And now for another problem in this panorama. Nicaragua now has to pay up front for every barrel of oil it buys. Before it only had to pay 50% of the oil bought from Venezuela after 90 days, and not even all of that was paid in cash; it was also ñaid in kind, with food and above all cattle on the hoof, overvalued cows… until PDVSA claimed it wasn’t fair. Now there are practically no oil imports from Venezuela and we’re buying oil from the US, the country that applied the Nica Act, which has sanctioned several of our officials as well as Albanisa and its bank…

What’s the problem in the panorama? A high percentage of electricity in Nicaragua is generated by oil derivatives: bunker. Now, given the lack of foreign currency, the energy crisis is next…As soon as we can’t pay for the oil, we will start turning lights off…or, more likely, they’ll be turned off. Our government doesn’t control the whole energy market. The energy distributor isn’t paying the generators on time, but they need foreign currency to buy and pay for the oil within the market’s deadlines.

The government’s decision-making
is only digging the hole deeper

All economies are built on decision-making. If we focus on the decisions made by the economic actors when the April crisis erupted, we see clients deciding to take their money out of the banks for fear of losing it. The banks’ decision to not give out loans is also based on need. They’re losing liquidity and have a significant default, which probably isn’t recoverable. The decision companies made to lay people off is based on obligation.

And the government? It decided to impose two reforms to collect more taxes, to make money, but in the middle of a crisis both reforms are authentic sanctions. Why did the government do this? Because it’s getting into a more and more complicated situation and is used to taking more and more measures to get out of the hole it’s in. But its measures are just digging the hole deeper.

Clearly it did cut back on expenses, but it was a limited cutback. Why didn’t it lay off more state workers? Because they are its social base. Based on the number of companies that emerged to execute the millions om Venezuelan aid, I estimate that 70,000 people worked for those companies, or maybe more. If in 2008 we had some 183,000 state workers and that number rose to more than 253,000, those additional people were hired to work in the companies created with the Venezuelan aid. Why not lay off all those people so they go back to what they were doing before Nicaragua entered ALBA? They aren’t doing it for political reasons. It’s clear that all the economic actors decided out of fear, need, obligation, responsibility. And the government did it for political reasons. When a government’s decisions are political, economists have nothing to do there…

Let’s end with a projection, then, one that links everything to what’s happening in the political scene. Let’s suppose the parties at the negotiation table reach a good agreement. Will our economic crisis get better? Will the clients who took their savings out of the banks bring those dollars back? Will the banks start giving out loans despite the amount of defaulters and without liquidity? Is the US going to lift the sanctions? Will the companies that closed down reopen and hire those people back? Who knows… This crisis is so huge that even if we see all the innocent kids freed, all the rights reinstated with the best of intentions, all those exiled returning singing, and early and transparent elections announced, we won’t begin to see the economy starting to recover until 2023.

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