Without a Political Accord, Economic Decline in Nicaragua Could Be 20 percent

A technical mission from the International Monetary Fund (IMF) is in Managua this week to meet with Daniel Ortega’s administration, along with business people, economists and labor leaders to evaluate the state of the country’s economy.

Facing the impossibility of hammering out a Stand By agreement with the Fund, the government will receive them with one objective in mind: securing the backing it urgently needs to push through economic reforms that are extremely unpopular.

These two laws, mentioned in the 2019 budget, are the Tax Agreement Law and the Social Security Law. At the same time, the government is also looking to find a way to stop the flow of funds out of the national bank, as people withdraw their money  – which has now passed US $1.3 billion and, if possible, do the same with its battered international reserves.

The problem is that the Executive branch does not have the legitimacy it would need to negotiate new laws, particularly economic laws that are demanding more sacrifices from citizens and the business sector.

In the face of this political limitation, the Executive’s strategy has centered on ensuring that the IMF offers it some kind of endorsement, that the regime’s functionaries could then present to the nation as a whole, whether as an attempt to negotiate with the private sector, or impose a new plan with its parliamentary majority it currently holds in the National Assembly. 

Economist Nestor Avendaño, president of the Consultants for Business Development (Copades) underscores that the IMF cannot take any measures — even if that only means offering advice to the country – when that country is, like Nicaragua, in the midst of such serious conflicts, and in a context in which the Government is even attempting to resolve the political problem that touched off a series of economic problems, but rather looking to force society to surrender due to hunger, fear or exhaustion.

Responding to the government’s expressed desire to elaborate a new program of macroeconomic adjustment and structural reform as it sought concessional financing a few months ago, Avendaño notes “the IMF said ‘no’ to Nicaragua until it resolved the political situation. At the annual meeting in Indonesia, I think our representatives received another similar response: ‘this can’t be done, given that there is no solution to the political problems’.” In any case, if the visit is for more than just talking among experts, it is very likely that the IMF will remind the Nicaraguan government of some of the suggestions it made during its last visit, which included seeking a broad consensus to discuss Social Security reforms, and a review of the electricity rates.

INSS:  An increasing deficit

The news that they are interested in reforming the LCT (ley) is explained by the decline in tax income, with a difference in more than 11 billion córdobas with respect to the initial budget proposal for 2018, and this is easily understood when we look at this year’s projected growth, which is a negative 4 percent.

It would seem that the regime understands that, from an economic point of view, 2018 is basically unsalvageable, and thus they are trying to reform the LCT so that is functions as a sort of lifesaver for 2019—as the proposed reforms would allow for at least the negative 1 percent growth that is predicted.  The problem is that the 2019 predictions are not at all pleasing.

Avendaño points out that just as there were blows to commerce, tourism and the hotel and restaurant industry in 2018, “in 2019 the first to be hit will be the construction and non-metallic mining sectors.  These will be virtually swept away. He adds that “the value added revenues from construction will easily fall by 76 percent in the coming year”, and will have a negative multiplying effect as a strong construction sector can drive the economy. “In this case, we are looking at construction sparking a decline of -9.7 percent in the GDP,” Avendaño added.

He went on to explain that the population as a whole would have less income, causing a negative growth of 11 percent in consumer spending.  “Combining that with the decline in construction gives us an overall negative growth of 20.7 percent for the coming year,” he warned, adding “this reminds me of 1979, the year Somoza left power, when the GDP fell by 26 percent.  This is a very critical situation”.

The other urgent matter is seeking a solution – or something close to one – to the deficit that keeps increasing in the Nicaraguan Institute of Social Security – it was almost 2.4 billion córdobas in 2017, and will have more than doubled to 5.5 billion córdobas by the end of this year, and is expected to soar to 8.6 billion córdobas by the end of 2019.  (1 USD = 32 Cordobas)

“The worsening of the INSS is due to a worsening of the national economy, with massive layoffs that increase unemployment and will undoubtedly affect the INSS’ financial situation, forcing it to implement reforms that may not be agreeable to many Nicaraguans,” according to economist Leonardo Labarca, researcher with the Institute for Strategic Studies and Public Policy (Ieepp).

At the IMF’s recent annual meeting in Bali, Fund authorities reiterated to Central Bank President Ovidio Reyes and Finance Minister Iván Acosta, that this international entity will not negotiate with the Nicaraguan government the disbursement to mitigate the economic crisis, as the causes of the crisis are political and not economic, and therefore the government must first seek solutions to the political crisis.