Recession in 2002, Growth in 2003?

The IMF program for Nicaragua has very weak foundations. The political morass in which the country is stuck is only increasing the feeling of uncertainty, but we still have no development plan, just the promise of more adjustments.

Néstor Avendaño

Nicaragua’s economic performance fell in the third quarter of 2002 for the third successive period in the year. Although the figures for the final quarter have yet to be released, we already know that this is not just a simple economic deceleration, despite the interpretation of certain public officials that the fall reflects a lower, but still positive growth rate. Since March this year, we have actually been witnessing negative economic growth again.

A brief summary of
the economic activities

Nicaragua’s economic weakness is obvious, even to a non-economist. With the coffee crisis, agriculture stopped acting as the driving force of national economic growth; the areas sown with both export crops and basic grains shrank during the last agricultural cycle. Despite that, the maize yield increased due to the use of certified seeds through the Pound for Pound Program and the bean yield did the same thanks to good climatic conditions during the first round of planting (May and June).

The industrial slaughter of cattle has decreased because the United States and Puerto Rico—Nicaragua’s main buyers—are getting cheaper beef from Australia and New Zealand, while exports of cattle on the hoof to Mexico, Guatemala and Honduras have also fallen. The slaughter of chickens has dropped slightly as well, although egg production has shown sizable growth.

Fishing production is also down due to the closed season on lobsters imposed in May and the lower prices for cultivated shrimps due to an international market glut from Vietnam, China and Brazil. A drop has also been observed in the catch of scale fish since the second quarter of the year due to limited financing, which has reduced the number of fishing boats in operation. The increase in the catch of sea shrimps is the year’s only exception in this category.

There has been a general slowing in the growth of industrial manufacturing, with the processing of pasteurized milk, coffee, vegetable oil and chicken feed preventing the figures from falling further. While beer production has increased, there has been a slight reduction in soft drink production and a marked one in rum production. The petroleum price hikes have influenced the reduced production of premium gasoline, while the maquiladora garment assembly plants in the tax-free export zones are experiencing a drop in orders from abroad.

Gold extraction has grown noticeably with the social stability achieved in the country’s Mining Triangle and the rise in international gold prices. Construction has contracted due to reduced foreign financing for public investment and a low level of private investment, which in recent months has concentrated on residential construction, encouraging a slight increase in the production of cement and extraction of quarry stone.

Domestic commerce and transport have been affected by the increased unemployment and consequent lack of income circulating among the population, in turn explained by the drops in both agricultural and industrial production and the reduced importation of raw materials and consumer goods.

The generation of government services has also tended to shrink—with 147 job posts lost in the health sector alone—despite the creation of 550 jobs in education and 90 in public administration. The only real growth in services was in the provision of electricity and drinking water thanks to real investments in these sectors, and in banking activities thanks to the exaggerated interest rates (originally 18% and 20%) on bonds issued by the Central Bank in 2001, in which the banks invested heavily. The dollar-indexed bonds, known as CENIs, were issued to cover defaults resulting from two major bank collapses due to fraudulent activities in that and the previous year.

Overall growth in 2002:
Zero...and possibly worse

Nicaragua’s Central Bank calculates a quarterly version of the Monthly Economic Activity Index, which includes 37 indicators covering 11 economic activities that comprise 93% of the gross domestic product (GDP). This series reflects the following quarterly behavior for 2002 relative to the quarter immediately preceding it: a 9.5% drop in the first quarter; a 14.3% drop in the second quarter; and a further drop of 2.4% in the third quarter. Looking at the year-on-year variation by quarter, Nicaraguan production showed a drop of 1.5% in the third quarter of 2002 compared to the same period in 2001.

Despite these negative figures, the IMF accepts the government’s claim that the economy will have grown by 1% this year. I think that, optimistically speaking, we might achieve zero growth, but it could be negative if Nicaragua does not extricate itself quickly from the political chaos in which it has been embroiled since the beginning of the year.

The GDP has unarguably experienced negative growth, and according to strict interpretation, two consecutive quarterly negative production rates constitute an economic recession. It could thus be stated that Nicaragua has been going through an economic recession since March 2002.

Yet even in the face of the productive sector’s current conditions, public officials predict—and the IMF again concurs—that the Nicaragua economy will grow by 3% next year. Which sectors will bring this about? What foreign demand will feed it, if both the United States and the European Union are even thinking of reducing their interest rates due to the long economic trough they themselves are passing through? And where is the domestic demand that will achieve it if unemployment is higher and inflation lower? How can it possibly be done, if the IMF is insisting that the government increase the tax burden by 1% of the GDP in the middle of next year and if investors are being scared off by the current political battles?

Examining key points of the IMF program

The IMF thinks that high economic growth with low inflation next year can be achieved through a prudent and transparent fiscal policy that includes spending more on the fight against poverty, gradually reducing the domestic public debt and “strengthening” the Central Bank’s official reserves.

To the contrary, I personally believe that the IMF’s new proposal for Nicaragua for the coming three years will benefit the financial sector to the detriment of the productive sector. Even supposing that the country really does attain 3% growth, the projected production increase—equivalent to US$75 million—would go straight to the banks as returns on their investment in the Central Bank’s bonds.

A few months ago, the Argentine archbishop Jorge Bergoglio said, “Some believe that we have to pray to the [International Monetary] Fund to send us money so we can get out of this crisis. But that’s not true. We won’t get out of anything that way. We’ll just get ourselves further in debt.” I think the same words are valid for Nicaragua. Let’s look at why.

What is the IMF view on our medium-term economic growth? It calculates that the economy will grow by 1% in 2002, 3% in 2003, 4.5% in 2004 and 5% in 2005. But in projecting this future growth, it is not looking at sectoral sources or concentration. These growth rates are apparently forced so that Nicaragua can meet the Millennium Summit target assumed by UN member countries to reduce the number of people living on under a dollar by half between 1998 and 2015. But if this is to happen, the government urgently needs to stop theorizing about economic growth and development and start “facilitating” the design and execution of a portfolio for private sector investment, especially geared to small and medium agricultural and manufacturing businesses.

The IMF is also demanding a second phase of tax reforms. Without a pro-productive policy and strategy, the government will increase the tax burden by 1% of the annual GDP in mid-2003. Increasing taxes still more in the middle of a recession is a fiscal irresponsibility that will only deepen the recession. The government would be better advised to increase revenue by reducing tax evasion, particularly among the big contributors and highest-income levels, and alter the tax structure’s regressive nature by reducing the weight of indirect taxes, as they have a greater effect on the poor.

The IMF is demanding fiscal adjustment. It wants to see the fiscal deficit and the Central Bank’s losses reduced from 9.2% of the GDP in 2002 to 6.3% in 2003, in part by broadening the tax base and eliminating both the zero sales tax rate on some purchases and the import exonerations. Another method it is urging is to restrict primary spending (without paying taxes) to 35% of the GDP, with the option of reducing it even further if the tax income target is not met. In this budgetary scenario, spending on the fight against poverty and the contractual national debt servicing burden respectively represent 35% and 37% of total government expenditure. Payment on the government debt is imposed over and above attention to the country’s poorest sectors, as the IMF wishes.

An unbearable, intolerable debt

A crucial point of the IMF program is to increase the international reserves, but on what basis will this be done? The government has pledged to pull together US$185 million in 2003: $78 million in freely-convertible liquid aid provided mainly by the IDB, the World Bank and Taiwan; $41 million from privatizing public companies, particularly the state’s shares in the telecommunications company; and $66 million from the fiscal adjustment and the recovery of assets belonging to the collapsed banks. With part of it, the Central Bank will build back up its international reserves by $30 million and reduce by $70 million the domestic debt consisting of the CENI bonds held by the banks.

Nicaragua’s macroeconomic stability depends upon the foreign debt and the state reserves, with the structural reform goals very dependent on mutual cooperation between the National Assembly and the Presidency and fulfillment of the IMF-established macroeconomic goals. But there is no sign of state encouragement to promote the needed diversification of the national export base and an increase in export volume, despite the fact that exports constitute the genuine structural basis on which to build official international reserves.

There is also the matter of payment of the central government’s foreign debt. The contracted interest and amortization payments on that debt in 2003 is $415 million, which is 67% of the government’s projected ordinary income for the coming year. Even subtracting the interim relief provided by the Highly Indebted Poor Countries Initiative (HIPC), which the government programmed into the budget and amounts to writing off $98 million in foreign debt payments, the government debt service burden is still 51% of ordinary income. This burden is neither bearable nor tolerable in budgetary terms for a very poor and highly indebted country such as Nicaragua.

In September of this year, the IMF and the government set the sum of $221 million as relief on foreign debt payments for 2003. To ensure transparent public resource management, this relief, known as interim HIPC relief, should be identified in the budget as both income and as expenditure for the fight to reduce poverty. The civil society organizations that sit on the National Economic and Social Planning Council (CONPES) could call on government authorities to display the appropriate transparency in this case and promote discussion on a possible “sovereign” restructuring strategy for the domestic public debt as well.

The government and banks
must negotiate the domestic debt

Payment of the Nicaraguan Central Bank’s domestic debt growing out of the issuance of CENIs depends on recovering the assets of the banks that crashed. Even excluding the CENIs, however, the Central Bank’s current short-term debt resulting from the issuing of securities is equivalent to 90% of the official international reserves. The country’s monetary authority is therefore technically bankrupt.

Worse yet, paying back that debt does not mean that the commercial banks will rapidly increase the credit resources available to the business sector to support production and greater economic growth, as the President of the Republic has stated. Rather, it implies a serious drop in the reserves and the risk of losing the free convertibility of the córdoba against the dollar, which could in turn mean losing control of córdoba devaluation.

To find a realistic way out of this problem, the government and domestic creditors—in this case the local private banking sector—should negotiate the reduction of the high CENI interest rates, which while reduced to 7.41% in May of this year, had shot back up to 14.16% by the end of November. They should also draw up a realistic payment program according to the availability of budgetary resources. This should be done without diverting international community aid earmarked for reducing poverty, which in 2001 affected 2.4 million Nicaraguans, or almost half of our compatriots. But the government aim is simply to standardize the terms of this debt to make it more attractive to investors. If this is the case, transparency must be obligatory because financial operations with privileged information constitute an act of corruption.

The details of these key points of the IMF program help demonstrate the lack of consistency in the underpinnings of the new three-year economic agreement the IMF signed with the government in December 2002. It seems that this new Poverty Reduction and Growth Facility (PRGF) program is nothing more than the old Extended Structural Adjustment Facility (ESAF) program dressed up with a little more social spending.

Difficult questions to answer

Doubts about the growth for 2003 come from three points of the economic program for 2003 that are based only on hypotheses and that raise questions difficult to answer. The first hypothesis is that Nicaragua will receive $78 million in aid in liquid resources to support its balance of payments. The problem is that the money is not released automatically once the agreement with the IMF is signed but rather only if the government fulfills the program’s goals, which are mainly structural reforms requiring mutual collaboration between the National Assembly and the executive branch. The touchy question thus is: will this collaboration materialize? So far, there are absolutely no signs of this indispensable harmony.

The second crucial hypothesis is that Nicaragua’s Central Bank will obtain approximately $66 million from the sale of the assets of the collapsed banks. Will this be possible given that many of these assets are mortgaged coffee farms in the north of the country, where there is already serious social instability due to the coffee crisis?
And third, the government aspires to receive $41 million from the privatization process—mainly of its 60% of the shares in the telecommunications company ENITEL—in the full knowledge that the other 40% privatized in 2001 is currently in a state of legal limbo. How will this situation be resolved?
If just one of these hypotheses is not fulfilled, the whole economic program will collapse. But under the assumption that the resources will be forthcoming, the IMF conditions within the economic program include increasing the Central Bank’s international reserves by $30 million; paying $70 million to local bankers on their investment in the CENIs; and of course putting what is left of the $185 million toward the foreign debt service, estimated at $117 million after the HIPC initiative’s interim relief. Given all this, I forecast that Nicaragua’s economic growth will be around 1% rather than the announced 3%.

And the development plan?

It seems that the IMF technical mission that negotiated with the Nicaraguan officials avoided or ignored the country’s political situation when establishing these goals. It also appears that the government officials had little experience in handling such discussions, probably because they have not been in public administration for very long.

To move forward, I believe that in addition to eliminating the party-based influence that affected government institutions during the previous administration, those public institutions related to administration of the economy, particularly the Central Bank and the Ministry of Development, Industry and Trade, must also recover their technical quality. The technicians and public officials, especially those from the Ministry of Finance and the Nicaraguan Central Bank, who are representing us in these “secret” dialogues with the IMF must also recognize that we won’t achieve growth in our domestic market without equitable income distribution, that the IMF’s macroeconomic vigilance is not enough to resolve the problem of poverty and that Nicaragua desperately needs a development plan after 15 consecutive years on the economic adjustment path.

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