Economic Forecasting in an Election Year

Nestor Avendaño, a Ph.D. in economics who has worked in the past five governments, shared with envío his assessment of the national economy and his forecast for this last year of the Liberal administration, a very uncertain electoral year.

Néstor Avendaño

What will the next government inherit?

What economic panorama do we foresee for 2001? It’s a predictable picture, but not a very pretty one. Although we economists are not soothsayers, we have this reputation because we analyze macroeconomic trends that result from public decisions made 12-18 months earlier. It is thus relatively easy for us to predict some future economic situations.
Nicaragua’s political world is always infinitely more dynamic than its economic one, a tendency so accentuated this year that I feel the political factor utterly outweighs the economic one for the first time since I became an economist. Politicians usually blame us for the economic problems, but this year we economists have earned the right to hold them responsible for this critical economic situation.

The picture for 2001 is so unattractive that I would consider it a major achievement if we repeated last year’s macroeconomic results, and they were none too good. To have a 4% optimum growth, to keep inflation at 10%, to keep the international reserves from falling by more than US$50 million would be a big success. But those indices from 2000 could get worse this year. I think the Gross Domestic Product (GDP) will grow no more than 3%, that inflation will climb to 12-14%, and that the international reserves will drop between a minimum of US$50-100 million and a maximum of US$200 million. The most palpable problem for the population will continue to be unemployment, which will be similar to last year: 25% of the economically active population openly unemployed and a similar percentage underemployed. Nearly half a million Nicaraguans are unable to work or earn any income.

Unfinished business no. 1:
Good governance

The Liberal government will finish its term at the start of next year with a lengthy list of unfinished business. The main item is governance. Some months ago, Enrique Bolaños, at the time Vice President of the Republic and today the presidential candidate of the Constitutionalist Liberal Party (PLC), was asked what governance was, and he responded that he didn’t know. It is shocking that a top-level governmental leader could give such an answer. Governance is the state’s capacity to resolve all economic and social problems in a transparent, just and equitable manner with the participation of civil society. Making progress in governance is part of this government’s unfinished business.

One major step toward good governance would be to tolerate no more acts of corruption. Corruption has already done excessive damage to the poor and the honest people of Nicaragua, and has seriously damaged Nicaragua’s name on the international stage. Corruption abounds everywhere, not only in the public sector but in the private one as well. We have seen continuous corruption cases in this government, among them the lucrative payoffs and the "mega-salaries" awarded to some public officials who are busy building their personal fortunes by further impoverishing the people. Luis Durán, the Technical Secretary of the Presidency and coordinator of the Poverty Reduction Strategy, receives US$23,000 a month. Other high officials receive similar salaries.

Such high salaries constitute a social crime in a country like Nicaragua. I worked as a public official for 26 years in five different governments and in different posts that ranged from analyst to vice minister, and I have never heard of such mega-salaries as the ones paid to an elite stratum in this government. I think the Inter-American Development Bank (IDB) needs to be called on the carpet for having authorized such remunerations because the one who gives is as responsible as the one who takes.

In a country with good governance, where democracy is strengthened and the laws respected, both the employer and the employee who consent to these huge salaries would be brought before a tribunal to respond for a social crime. Not in Nicaragua. The head of a daily newspaper expressed it this way: "Luis Durán is mega-relaxed, because they can’t accuse him of anything." It is a serious problem for Nicaragua: to be legally hobbled and feel socially powerless to do anything to prevent or punish this type of crime. It happens because there is no governance. In a country in which the laws are respected, the courts do their job and the economy thrives for this reason, the most profitable profession is that of a businessperson. But in a poor country like Nicaragua, where the laws are scoffed at, the most profitable profession is clearly that of politician.

A second step toward good governance is to reduce or even eliminate political appointments in public institutions, in which the interests of the governing party are continually confused with those of the government and those of the state. It is highly questionable that so many ministers of state or presidents of state entities are at the same time members of the governing party’s leadership body. It is incredible to see the president of the Central Bank of Nicaragua gathering signatures on the streets of Managua for a petition backing his party, which is of course the governing party. Does it not show a lack of seriousness for someone who is show responsible for managing the country’s monetary policy to dedicate his time to such party tasks? Which interests will such a person put first: those of the nation or those of his party? The Central Bank has registered losses of nearly US$ 50 million a year over the four years that this man has been in charge. Nonetheless, he not only busies himself gathering signatures, but also justifies his astronomical salary, which is an injustice in the face of the nation’s poverty, on the grounds of professional prestige.

A third step toward good governance is to facilitate greater participation by political groups and parties in elections. In other words, respect political pluralism to strengthen democracy. It is a national and international demand that the government has chosen to ignore.

Unfinished business no. 2:
Transparent resource use

In the macroeconomic field, the current government’s most important unfinished business is the transparent use of the national budget. The budget that the legislators approved for 2001 has the greatest recorded deficit since measures were introduced to achieve macroeconomic stability in 1990. The central government has a US$470 million deficit in 2001, equivalent to 18% of the year’s expected GDP. In Guatemala, if the national budget has a deficit amounting to 2-3% of the GDP, it cannot be presented, and this despite the fact that Guatemala has now edged Nicaragua out as the second poorest country in Latin America and the Caribbean, with Haiti permanently in first place.

Why does the budget for 2001 have such a huge deficit? Could it be that in its last year of administration, an election year, the government has inflated the project portfolio with public investments to pull votes for the PLC? Or could the deficit simply reflect the discretionary abandon that has characterized this government and that is being maintained until the end so as to expedite and cover up acts of corruption?
International aid is financing only 80% of this large deficit. The rest will supposedly be financed with the national resources resulting from the privatization of two public utilities: electricity (ENEL) and telecommunications (ENITEL). But will the government be able to sell the electricity generating units and the remaining 40% of ENITEL’s stock in an electoral year so full of uncertainties? A few days ago, former comptroller general Agustín Jarquín, one of the FSLN’s vice presidential possibilities, declared that if the FSLN comes to power and the Spanish company Unión Fenosa—which already owns part of ENITEL—continues charging the population dollarized rates, the FSLN would consider nationalizing the utility again. Unión Fenosa immediately announced that it is freezing its investments for 2001 and will wait for greater political and macroeconomic stability. It would have been more appropriate and less worrying to declare that the government would monitor the correct application of the rates.

It also needs to be remembered that in a country as poor, as indebted and with as many corruption cases as ours, international aid always drops in an electoral year. International cooperation is reserved for the first three months of a new government, the famous "first hundred days," so that the population will see that the government it elected has international support, because this contributes to stability. The aid is also shrinking because this is the last year of extraordinary assistance for post-Mitch reconstruction. After 2001, the hurricane argument will not help the Nicaraguan government in its aid requests. International aid will not exceed US$ 400 million this year, and will largely be tied to public investment projects. Meanwhile, Nicaragua will only receive the ridiculous amount of US$ 90 million in hard cash from the IDB and the World Bank to support the balance of payments.

Entry into HIPC

The good news for the year’s economic panorama is our foreign debt relief. In December of last year, Nicaragua finally gained entry into the HIPC initiative, reaching what is known as the "decision point." February 28 of this year was the expiration date of the foreign debt payment moratorium granted us following Mitch. For the 27 months since the hurricane, Nicaragua has not paid a cent to the Club of Paris. As of March 1, it has started to pay again, but now in the framework of the HIPC initiative. How much debt relief will this mean? In January and February, the last two months of the moratorium, we saved US$25 million. Then, because we had made it to the decision point, the Club of Paris automatically pardoned 80% of the contractual interest and principal payments Nicaragua owed to its member nations in accord with the HIPC parameters—in other words, US$ 50 million. Nicaragua also expects that, with financing from the wealthy countries, the international financing institutions—mainly the World Bank and the IDB—will offer us relief similar to that of the Club of Paris, but so far only US$35 million has been guaranteed. In sum, then, Nicaragua will pay US$150 million in debt service in 2001 instead of US$260 million, for a total debt relief of US$110 million.

Why was Nicaragua accepted into HIPC’s decision point? Did the World Bank, the IDB and the International Monetary Fund (IMF) agree because it fulfilled all the conditions that they had established? Not at all. Nicaragua has failed to comply with essential commitments in the structural adjustment conditionality matrixes. One eloquent example is that it derailed the monetary policy by bailing out the two banks that went under in 2000. The bankruptcy of Interbank and its rescue by the Central Bank cost Nicaragua—or, better said, Nicaraguan taxpayers—US$87 million. There is not yet an exact calculation in the Banco del Café bankruptcy and rescue case, but it is expected to have cost us another US$50 million. It is noteworthy that no one went to jail in the Interbank case, which was much more costly, whereas the president of the Banco del Café’s board is still behind bars, clearly demonstrating that jail is reserved for those who do not enjoy PLC and FSLN backing.

Among the macroeconomic conditionalities that Nicaragua was supposed to meet in 2000 was a US$ 45 million increase in the international reserves over the 1999 level. Not only did the reserves not grow in 2000, they actually dropped by US$140 million due to the bank failures. Another important failure to comply with the structural reforms is the Civil Service bill, which is still gathering dust on the National Assembly shelf. Making that bill into law is fundamental to any effort to legally address social crimes such as the indemnifications and mega-salaries that are swelling the fortunes of certain public officials.

I think there were two reasons why, after six and a half years of failing to meet the imposed conditions, Nicaragua was finally allowed into the HIPC. The first is that we were financially unable to honor our foreign debt obligations in 2001. The World Bank and IDB coffers have been closed to Nicaragua since July 1999, except for the months of June and August 2000, when they facilitated us around US$ 26 million, but they were then shut again as a result of the Interbank crisis. By March 1, 2001, when we had to start paying on the Club of Paris debt again, the country’s macroeconomic situation was truly alarming. In the first two months of 2001, without the failure of any more banks, the reserves had dropped by another US$ 86 million, an amount similar to the reduction seen during the Interbank bailout. Then, at the beginning of March, the media announced a crisis in two more banks—the privately owned Banco Mercantile and the state’s BANIC—both of which hold a large part of the coffee growers’ debts.

With the reserves in such a dicey state, I think the second reason Nicaragua was admitted to the decision point is that donors were unwilling to passively watch the country’s macroeconomic stability and normalcy go down the tube. It has cost them more than it has us in purely financial terms to achieve that stability, and assigning resources to re-establish it would cost them more than accepting us into the HIPC, even without having met the required conditions.

Another, more global viewpoint also influences the donors. Only 5 of the world’s 41 countries classified as very poor and deeply indebted have been benefited by the HIPC initiative for having met the established entry conditions. None of the other 36 has met the parameters yet; like Nicaragua, they are progressing very slowly. Worried about the HIPC’s bad image, the donors thought that giving the green light to some of these countries would help recoup the initiative’s prestige. That is why Nicaragua and 14 other countries like it were let into the HIPC without having completed the structural reforms or met the macroeconomic adjustment conditionalities.

The countries that entered the HIPC before 2000 were faster at complying, among them Bolivia and Honduras, both of which are very poor. They got there before many others and without exhausting themselves nearly so much as we have in the process. Nicaragua now has a three-year period in which to reach HIPC’s culmination point. This requires us to be faster and meet more conditionalities, but I doubt that we will be able to quicken our step and comply on time.

How will we finance new debt?

To analyze where we are, we have to keep in mind that our debt is still growing, despite receiving some foreign debt relief. Nicaragua’s exports have not exceeded US$620 million between 1997 and 2000, while the foreign debt grew an annual average of US$ 200 million in those same years. In other words, the new debt is growing faster than the value of our exports, which should be a cause for alarm.

Nicaragua will get US$ 400 million in external aid for 2001, and will save US$ 110 million due to the debt relief. But the payouts will be far greater; the external gap totals US$ 1.4 billion. How will the other nearly US$ 900 million be financed? The major life raft comes in the form of family remittances, which are estimated to total some US$ 600 million net for 2001. And the other US$ 300 million? The government is hoping to sell ENITEL, but as mentioned before, that hope has probably been scuttled for this year. Is there any chance of strong direct foreign investment this year? Not likely. All the construction we have been seeing in Nicaragua, particularly in Managua, will not maintain last year’s pace. In 1999, direct foreign investment in Nicaragua totaled US$300 million. In 2000, largely due to the uncertainty generated by the municipal elections, that investment fell to US$150 million. This year, due to the national elections, I estimate that it won’t even reach US$ 50 million, and even that will fundamentally be the remnants of the hotel, restaurant and gas station constructions started in the last couple of years.
If a gap remains after all this, how will it be financed? Surely with the Central Bank’s international reserves. Given this, it is easy to forecast a fall in international reserves for 2001. If ENEL and ENITEL are not privatized, the fall could hit some US$ 200 million. For many reasons, we can predict a rather uneasy macroeconomic year without having to be soothsayers.

How do we grow?

Nicaragua’s annual production is worth US$ 2.5 billion, which represents only 4% of Central America’s GDP. That is just how insignificant we are in the regional market. National production is going through a major crisis and the GDP will probably not grow more than 3% for 2001. What will be the driving force behind that economic growth? Given that this is the last year of post-Mitch reconstruction, it will largely be commerce and public construction, and to a lesser degree agriculture, which is not only not growing, but is frankly deteriorating.

Nicaragua’s challenge is to transform a deteriorating agricultural economy into an agroindustrial economy. There’s no need to go around setting up fancy seminars to discover what industry Nicaragua needs. We know we have to strengthen what we already know how to do, which fundamentally translates into increasing agricultural yields. It does not mean looking into new and unknown activities in the industrial sector. Nicaragua lacks industry; any of our industrial plants would fall over if you gave it the tiniest shove. Nicaragua isn’t ready to compete internationally. The subsidies that our chicken and sugar industries receive through temporary protective duties, for example, are so high that if they were withdrawn, those industries would disappear from the market, because these privileges allow them to maintain a great level of productive inefficiency. The challenge is not to move into new agricultural categories, but rather to overcome this inefficiency and raise our pathetically low yields in the categories we are in already. How it is possible that our coffee and basic grain yields are half of those in El Salvador, particularly if we have better quality land than the Salvadorans?
Instead of cutting ever further into the agricultural frontier, we have to increase the yields in the areas already cultivated. Instead of persisting in exporting raw materials, which condemns us to eternal poverty, we have to begin exporting products with more value added, as any first-year economics student could tell you. We can’t sit idly by watching the trees from our forests be shipped out through our Caribbean ports to the Dominican Republic as unprocessed trunks instead of as furniture that could compete in the international market—like the products the Dominicans make with our wood. If we don’t change our way of thinking we’ll never stop being poor. Only by changing our mentality and employing bold agroindustrial policies will we exceed our shameful US$ 600 million in annual exports and begin to reap some rewards from the new free trade agreements.

We can also predict major demand-side restrictions for 2001. With the uncertainty triggered by the current electoral scenario obliging a "countdown logic" for decision making, I would consider it a success if national private investment were to remain at current levels. All national companies that have relations with the government will be protected during this year, responding to official consumption and investments. But the domestic demand of the other companies that produce for national consumption will not grow. In the best of cases, national consumption and investment will stagnate after falling nearly 7% last year.

What are the effects of money laundering on the national economy? There’s no way to respond. No country’s economy records illegal activities in its national books. Contraband, which is also a form of money laundering, is everywhere to be seen in Nicaragua, and it is obvious that money associated with drug trafficking is being laundered here. But it needs to be kept in mind that the money coming in from these activities also goes back out. We don’t know how much net income is generated by this activity. The same thing happens with capital flight, which is an illicit activity when done without prior authorization, because we cannot keep books on the amount. The only clue to any of this is a line called "Errors and Omissions" in our balance of payments, which shows a positive balance of approximately US$300 million a year. But we cannot calculate what exactly it consists of or how much entered and left the country to produce this net balance.

Unfinished business no. 3:
Cutting public spending

The next government will have to deal with a great imbalance in public spending. Nicaragua’s public spending currently represents 52% of the GDP, which means that the public sector spends 52 cents of each dollar’s worth of goods and services produced in Nicaragua. It also means that the spending weight of the private sector, the proclaimed motor force of economic growth, is only 48 cents of every dollar. Then comes the issue of what portion of those 48 cents is for consumption and what is put into investment. Nicaragua’s private sector, of course, spends more on consumption than on investment.
So cutting public spending is more unfinished business. Except for slashing military spending, Violeta Chamorro’s administration contributed little to this downward adjustment. Instead, it passed that thankless task on to Arnoldo Alemán’s government. But Hurricane Mitch, which suddenly shot public investment back up to 12% of the GDP after it had been cut to 7%, saved him. The current government has admittedly cut public sector employment, but the savings from these cuts have not been felt because they were more than absorbed by the astronomical salaries and other privileges of the governmental elite. The next government will have to come to grips with a severe public spending adjustment, cutting it to around 35% of the GDP. We can only hope that the first cuts will be to the high public sector salaries, so that the savings can be distributed more equitably through social spending.

To understand how to reassign the country’s scarce resources to favor the social sector, it is useful to classify public spending from the national budget according to three major columns: priority social spending that benefits the population, non-discretionary spending and non-priority discretionary spending. I believe that the latter category, which is handled from the offices of the high government executives, consumes alarming amounts of national resources. With respect to production volumes, Nicaragua was better off during the Somoza period, while in terms of macro- economic stability, we are better off today than during the Sandinista period. Our most serious problem today is the distribution of income, which is more inequitable than in either of those periods. Of all Nicaraguan households, 80% receive a combined total of barely 33% of the national income, while the other 20% receive 67%, of which a privileged 1% receives over 25% of the total. Even if the economy grows, our society, our nation will remain very poor if such unequal income distribution is maintained.

This being an election year means extra expenditures. The elections will cost some US$ 35 million, and there is not yet enough financing to cover them. The Supreme Electoral Council is expecting US$10-12 million in aid from the international community, but the rest? A Nicaraguan’s vote works out to be the most costly in the world: over US$16, compared to an average US$ 5-6 per vote in other countries. Why are our elections so expensive? Largely because of the style of those who govern, who want everything new for each occasion. This November’s elections will surely require the purchase of new computer equipment, new vehicles to transport election workers and a new, even more modern and pricey printer for the ballots than the one used in the municipal elections.
There is talk today of dollarizing as a way to improve things. In reality, our economy is already very dollarized, at least unofficially. Some 70% of the deposits in banks are in dollars; 80% of the credits the banks give out are in dollars; and almost all the economy’s prices are dollarized, except salaries, the legal reserves and checking account deposits. Very little is left to officially dollarize, but it still won’t happen right away because the Central Bank doesn’t have the US$180 million it would need to buy up the córdobas circulating in the economy.

Anti-poor monetary policy vs.
poverty reduction strategy

A central point in forecasting how the economic year will go is the monetary policy, which will have the same characteristics in 2001 as in previous years. Our monetary policy is anti-poor because of the skew of its central objective: to keep the inflation rate low and stable. The monetary mass has shrunk even more with the bank bailouts, and when there is a monetary contraction, which involves restricted liquidity in the market of both córdobas and dollars, the productive cycle is negatively influenced, economic transactions are obstructed and the population’s income levels are thus immediately affected. Naturally, those who suffer most are those who have least—the poor. The novelty here is the paradox in what we find today; the government is maintaining an anti-poor monetary policy at the same time that it has promised the international agencies that it will adopt a poverty reduction strategy. Right now Nicaragua is in discussions with the IMF about a document that has replaced the Enhanced Structural Adjustment Facility. We no longer refer to the ESAF, but rather to the PRGF (Poverty Reduction Growth Facility). The leaders of the G-7 countries, who proposed the PRGF in 1999, have established an ongoing evaluation of the impact of the structural adjustment measures on the poor as part of the strategy. The change from the ESAF to the PRGF is partly down to this.
To comply with this condition, a National Economic and Social Planning Commission (CONPES) was set up, which involves the participation of government, business and consumer representatives, NGOs, churches, social and economic research institutions, the universities and the donors. But instead of being institutionally strengthened, it is being weakened. The crisis that ended up in a new public transport stoppage in March was proof: President Alemán unilaterally announced that he was doing away with subsidies and the transport sector’s tax reduction and was granting a minimal wage increase. In so doing, he ignored CONPES, the debates of the National Minimum Wage Commission, the National Transport Commission and even the legislative body, the only one with the constitutional power to increase and reduce taxes. The unilateral manner in which the executive often acts is another sign of the lack of good governance in the country.

Will the real IMF please stand up

The fact that the IMF has taken the PRGF on board as a substitute for the ESAF is a sign of its recent, rapid and rather suspect transmutation from a restrictive monetarist institution to a humanist one concerned about poverty. In a debate a year ago with the IMF representative in Nicaragua about the foreign debt, I noted that the fight against poverty is a long-term problem and that the IMF is not an institution that specializes in the long term. He denied that, insisting that it indeed was. When I asked him for an example of the IMF’s long-term concerns, he answered "ESAF." "But ESAF is only a three-year plan," I politely protested, to which he confidently responded that "three years is long term."
My argument is that the IMF does not have the capacity to assess poverty in a country like Nicaragua; it lacks the necessary cumulative know-how to evaluate our poverty. I tip my hat to its expertise in monetary policy, but it has nothing to teach us about fighting our poverty, because no institution that transmutes so rapidly can perform its new role adequately. Why doesn’t the IMF take advantage of the experiences of the other United Nations agencies that daily do battle with poverty, such as the UNDP, PAHO, WHO, UNICEF, and UNESCO. I think that, despite the fact that it is transmuting and now administering the PRGF, the IMF will always be more concerned about the reduction of the international reserves, and will never give the same importance to reducing illiteracy, school dropout rates, overcrowded households…
How will the next government get along with the IMF? The IMF dominates those who govern us; they go down on their knees before this institution because they need its hard cash loans to administer the macro-economy. What negotiating capacity do our governors have with the IMF? From my experience in different governments, I think that the current one has had the least margin for negotiation of all.

Society must also change its attitude toward the Monetary Fund. If the IMF asks for transparency from the government, we have the right to ask for transparency from the IMF when it formulates the conditionality matrixes that it unilaterally imposes on us, without countenancing alternatives. Why are its visits and its documents always so cloaked in secrecy? Why not demand, as a nation and a civil society, that they come out from the shadows in which they hold their discussions with the government? The IMF technical missions come to Nicaragua as if they were clandestine groups and leave the same way. It is embarrassing to report that the letter of intent for Nicaragua approved by the IMF director in December 2000 was published in English in Washington and has not yet been published in Spanish in Nicaragua. Why? Because, as an official of the Central Bank of Nicaragua declared, "it hasn’t been translated."
The IMF has changed its strategy: ESAF is history. The conditionalities now being included in the PRGF are different. In the first ESAF, in 1994, the IMF rolled out its heavy guns. In the second ESAF, in mid-1997, it sent in ambulances. What will this third ESAF, now called PRGF, bring? Caskets, perhaps? The first ESAF was brutal as they were testing out their artillery. They soon realized that the adjustment had very tough results, that poverty and crime were spiraling out of control, and that a social protection net needed to be created. That’s when they sent in the ambulances— that is, the social protection nets. So what new idea are they planning to try out on us next? Who will build the bridge between the poverty reduction strategy drafted by the World Bank and the program administered by the IMF? Who will be able to discuss a monetary policy and a fiscal policy favorable to the poor with the IMF? Will the new PRGF be an ESAF with more social spending tacked on, as would appear to be the case?
When the G-7 member countries determined that the governments and national societies had to design poverty-fighting strategies, I thought that finally the new PRGF and Poverty Reduction Strategy Paper (PRSP) would not come from Washington written in English, but rather from Managua written in Spanish. But what did our government do? It contracted experts who work in Washington to come write the PRSP in Managua. So what do we have? A PRSP written in Managua—in English, of course—then sent to the IDB, the World Bank and the IMF for approval, and then translated into Spanish. Now, with financial support from the UNDP and the British government, the Nicaraguan government has set up a virtual-reality discussion with civil society so it can say that this extremely important document was amply consulted. Will Nicaraguans accept this simulated consultation? The document’s coordinator, a public servant, is earning US$23,000 a month, financed by the country’s foreign debt, to write up how we should go about fighting poverty. Is this what Nicaragua and the Nicaraguan people deserve?

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