San José, Costa Rica, since 1956

Central Bank Aims for ‘Minimal Growth’ in ’09

MANAGUA – Nicaragua’s Central Bank  President Antenor Rosales has abandoned his original goal of 4.7 percent economic growth for Nicaragua in 2009, and is instead now hoping for “minimal economic growth” next year.

Still, economists say expected financing from Venezuela and $1.1 billion in Nicaragua’s Central Bank reserves should be “more than enough to manage” an anticipated economic slump next year.

Faced with double-digit inflation, falling commodity prices and foreign aid cuts from countries concerned about eroding political freedoms here, Rosales said Nicaragua will have to focus on “keeping credit flowing” in 2009 to keep the economy growing.

The government of President Daniel Ortega claims to have tripled credit to campesinos over the past two years, thanks largely to financing from Ortega’s oil-rich ally, Venezuela President Hugo Chávez.

But as oil prices fall, Venezuelan aid flow is expected to dwindle, which is why Nicaragua’s Central Bank should focus on redirecting credit from consumers to producers to “keep agriculture afloat,” says former government economist Francisco Mayorga.

Author of “Nicaragua 2010: The Future of the Economy,” Mayorga said in an e-mail that government policy next year should include a system of guarantees for climate risks and price stabilization for farmers.

“If they don’t do that, down the road we will not have the money to bail out our agriculture,” he said.

The economist predicts that investing in agriculture could pay off in “handsome dividends” in 2010 because trillions of dollars being invested now in farming subsidies in developed countries will eventually result in higher food and commodity prices.

Though Nicaragua’s exports reached a record $1.6 billion in 2008 – due to growing trade volumes and rising commodity prices – most gains achieved after four years of booming export growth were cancelled out by the rising oil bill of the most oil-dependent economy in Central America, according to Mayorga. Growth slowed in 2008 and Nicaragua saw double-digit inflation for the second year in a row.

At the end of 2007, the Central Bank projected 4.7 percent economic growth in 2008, but Rosales later adjusted that figure and said growth will likely be closer to 3 percent this year – down from 3.7 percent in 2007.

Driven by skyrocketing food and oil prices, Nicaragua’s accumulated inflation rate reached 14.04 percent in November. Rosales says thanks to a drop in oil and food prices, inflation is not expected to climb higher than 15 percent in 2008. Even though that’s down from last year’s 16.88 percent, it’s still expected to be one of the highest inflation rates in Latin America.

Mayorga predicts export income next year will drop by $120 million due to falling commodity prices, while a contraction in shortterm financing, dwindling tourism and remittances could translate into an additional loss of $240 million in Central Bank reserves.

The loss could be mitigated partially thanks to Venezuela, whose financing will help cut Nicaragua’s oil bill by 40 percent, or $260 million. And pending a positive report card early next year, the International Monetary Fund (IMF) is expected to provide $100 million in balance-of-payments support that will further boost the Central Bank’s $1.1 billion in reserves. That should be “more than enough to manage the situation,” Mayorga said.

Still, next year’s economic growth is not expected to be a source of bragging rights. “Economic growth could be virtually nil in spite of the alleviation of the oil bill,” Mayorga said.

Others are even less optimistic. Independent economists have calculated that next year’s growth could be between 1 and 1.6 percent, and some say it could be even less.

“I think it will be a success if we have any growth in 2009,” said Adolfo Acevedo, the economist for the umbrella nongovernmental group Coordinadora Civil.

Acevedo told The Nica Times that his impoverished country is already feeling the credit pinch – the Superintendence of Banks will implement a new policy in January that will suspend Nicaraguan credit cards for cardholders who fail to pay monthly minimum payments.

“Credit is already being restricted. I don’t see how we will keep it flowing,” he said. He said Nicaragua’s economy will hinge on global markets that determine prices for Nicaragua’s biggest exports, such as coffee and beef – the country’s “principal economic motors.”

Yet as 2008 winds down, a sharp drop in coffee prices already has Nicaraguan producers struggling to cover costs, while purchase orders for products made in Nicaragua’s free-trade zones have slumped, threatening to lead to more job cuts.

Though the Central Bank hasn’t released official employment statistics for 2008, Acevedo says as many as 19,000 jobs may have been lost this year.

More fallow land was put back into use by farmers this year, but the agriculture sector still wasn’t able to create enough jobs to meet growing labor-force demands. Campesinos continued migrating in large numbers to cities, or abroad to other Central American countries or the United States.

In 2009, economists say the outlook for the global economy will depend on whether government-funded financial rescue plans in the United States, Europe and Asia are effective in reactiving those economies. But in Nicaragua, Acevedo fears the IMF – which will reevaluate its program with Nicaragua next year – will push for tighter fiscal spending as it has done during times of economic turmoil.

That would restrict the Nicaraguan government’s ability to assuage economic woes with government spending, he said.

Adding to a cloudy economic forecast is the governmental crisis that unraveled here after the Nov. 9 mayoral elections, in which allegations that the ruling Sandinista Front rigged the polls unleashed weeks of violence, prompting foreign donors to suspend aid and the opposition to paralyze the National Assembly. Acevedo says the political uncertainty is giving investors cold feet, noting bank deposits have dropped by $118 million to $2.48 billion since October.

The international fallout after the electoral upheaval may land a big blow to government coffers. Nicaragua’s 2009 budget, which is yet to be approved, is set to receive about half of the $115 million originally promised in foreign budget support, and the fate of the $175 million U.S. Millennium Challenge Corporation (MCC) fund appears more precarious than ever.

Rosales told reporters at the Central Bank on Dec. 11 that Nicaraguans should “reflect deeply” on the aid cuts.

“Nicaraguans lose when resources are taken away like that,” said Rosales.

Meanwhile, four U.S. lawmakers have widened the call to punish the Ortega government by calling to suspend benefits under the Central American Free-Trade Agreement with the United States (CAFTA) to Nicaragua (NT, Dec. 19). Rosales said that move would harm Nicaraguan workers and entrepreneurs alike.

“We need CAFTA,” he said, “Nicaragua is one of the countries that have benefitted most from CAFTA. We’ve seen a rhythm of growth that we wouldn’t have achieved otherwise.”

Despite the worrisome scenario, Rosales hopes a drop in oil prices will help ease the global crisis and allow Nicaragua’s economy to keep growing.

But the falling oil prices also present a double-edged sword for Nicaragua, as it could affect Chávez’s ability to continue supplying the country with financial aid, which helped Nicaragua stay afloat this year.

Economists, meanwhile, are urging Nicaraguans to tighten their belts and brace for a tough year.

“I don’t know if anyone is capable of predicting how long a recession will last,” Acevedo said.


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