MANAGUA – Lamenting that Nicaragua is “trapped” by the economic downturn of the “global capitalist” system, President Daniel Ortega last week announced a $66 million package of centavo-pinching measures that will help the impoverished country tighten its belt to counter the effects of the sluggish world economy.
Due to expected drops in tax collection and foreign aid this year, the Nicaraguan government estimates a $128 million gap in its 2009 budget. In an attempt to close that deficit and make sure the government is able to make payments on Nicaragua’s $1.3 billion internal debt, the socialist leader signed a decree last week to tighten public spending.
Though Ortega said the decree aims only to eliminate “bureaucratic” expenditures, the health and education sectors will face a combined $20 million in cuts in this year’s budget, which is still pending approval in the National Assembly.
Ortega, who has been an outspoken critic of the International Monetary Fund’s role in encouraging developing countries to reduce social spending during recessions, pointed out that his budget will still grow this year by 17 percent despite the cuts.
“No one can say that there will be no budget growth compared to last year. There will be growth,” Ortega said.
But economist Adolfo Acevedo said public works spending as a percentage of Nicaragua’s Gross Domestic Product (GDP) is decreasing. The announced cuts include $7 million from the education budget and $13 million from healthcare – a bitter pill to swallow in a country where both sectors are already dreadfully underfunded and some 350,000 and 500,000 kids are outside of the school system.
While the United States and European countries are boosting public spending to counter the downturn, Nicaragua is cutting back, said Acevedo.
Instead, the economist insists, “We should be increasing public spending.”
Ortega’s austerity measures, put into effect last week by presidential decree, puts a hiring freeze on government jobs for nine months, reduces public spending on goods and services by 20 percent, freezes vehicle purchases and cuts in half spending on travel budgets and office equipment.
The spending restrictions won’t apply to those working on infrastructure and projects that stimulate production.
Only those who make less than $1,000 a month will be eligible for pay increases. The decree also orders a range of frugal measures in public institutions such as limits on overtime hours, limits on parties and– even restrictions on the use of air conditioners in government offices, which can now only be used between 9 a.m. and 1 p.m. and at a temperature no less than 25 degrees Celsius.
“If we don’t implement a savings plan there’ll be nothing left for anyone,” Ortega said in a Jan. 20 speech.
Finance Minister Alberto Guevara says the plan is aimed at better using the “few resources we have” to make the government run more efficiently. He defended the government’s “revolutionary” commitment to public health and education by saying that “other governments” would have cut public spending by even more.
In order to cover the budget gap, Nicaragua’s Central Bank will also issue $30 million in treasury bonds. The Ortega administration has also announced its hopes of winning back the confidence of foreign donors, which have suspended aid in recent months due to concerns over abuse of political freedoms, human rights and electoral fraud allegations.
“To mitigate the domestic economic impact of the financial crisis and global economic deceleration, it’s necessary to have the backing of the greatest amount of foreign resources available,” said Vice-Minister of Foreign Cooperation Valdrack–Jaentschke.
Jaentschke didn’t elaborate on how the government will assuage the concerns of foreign donors. Ortega’s top economic advisor, Bayardo Arce, told the local press last week that the issue of the Nov. 9 election fraud – a key concern among foreign donors – is not open for discussion, “not even with historians.”
That comment, plus Ortega’s repeated insistence that foreign aid be “unconditional,” has raised serious doubts about the administration’s ability to convince foreign donors to start the cash flow again.
Ortega also announced last week that Nicaragua’s inflation rate will likely drop back into single digits this year even though economic growth is expected to slow toabout 2 percent. Inflation reached 16.88 percent in 2007 – the highest in Central America – and 13.77 percent in 2008, the second highest in Central America.
The International Monetary Fund (IMF), which is scheduled to visit in February to review its loan agreement with Nicaragua, has been pressuring the Ortega government to do more to reduce inflation.
Ortega has been a vocal critic of the IMF’s push to tighten government spending during recessions, but conceded that Nicaragua now needs the Fund’s help.
“We have no alternative. If we had one, we simply wouldn’t be working with the Fund,” he said.
Ortega said he is seeking $500 million from the Inter-American Development Bank and the Central American Bank for Economic Integration to improve infrastructure, build housing and stimulate production in the face of the downturn.
But economist Acevedo says offering more credit won’t cut it.
“They think by offering credit they’ll solve the problem. But businesses produce to sell their products and if there’s no market, what good is (production) credit?” he said.
The government, however, says that investing in production also invests in jobs and economic stimulation. Secretary of the Presidency Salvador Vanegas said the government this year will put three-quarters of the $479 million set aside for public spending towards infrastructure projects that will create jobs and stimulate production.
Among the projects are construction of 935 kilometers of highway, a 425-kilometer expansion of the electrical grid, and construction or repair of 147 elementary schools and 55 health centers. The projects will create an estimated 40,000 jobs, the government says.
The government will also reform the value-added tax so government-contracted firms working on public works projects won’t have to pay the tax But in order to reach even a modest economic growth rate of 3-4 percent, Acevedo said the government would need to spend an additional $200 million in public funding.
Ortega decreed his economic austerity measures last week as reports emerged that some export sectors in Nicaragua are already feeling the effects of the economic downturn.
Nicaragua’s Chamber of Fisheries reported that falling sales of lobster and shrimp exports to the United States and Europe have caused inventories to pile up – some $5 million of lobster and shrimp are sitting in storage in Nicaragua without buyers, according to industry sources.
Though Ortega’s plan didn’t address the demands of the fishing industry, which is asking the government to throw it a “lifesaver,” it does include measures to boost exports in other sectors.
According to Vice Minister of Commerce Veronica Rojas, Nicaragua will reform its norms to improve the traceability of Nicaraguan beef, which is expected to receive a boost from the forthcoming free-trade agreements with the European Union and Panama (NT, Jan. 23).
Rojas also said the government will seek “fair trade agreements” with Brazil, Russia, India and China, though officials gave few details.
Tightening the Belt
The financial sector will also need support in order to mitigate the effects of the economic downturn, according to Acevedo.
“Banks are seeing serious restrictions in deposits. Banks here work with lines of credit from North American banks and those lines of credit are disappearing,” he said.
The Central Bank has already announced it will provide an unspecified amount of credit to stop the bleeding in Nicaragua’s finance sector, a measure that Acevedo applauded. But offering credit alone won’t solve anything if no one has income to make purchases, he said.
“I don’t know if banks will lend to a depressed economy,” he said.
Finance Minister Guevara announced that the Nicaraguan Investment Financier will be in charge of managing credits to farmers while the government designs a long-awaited development bank.
Meanwhile, the government will pay its own internal debt payments while “encouraging a culture of payment at all levels,” Guevara said.
The government announced it will begin negotiating controversial debt payments between microfinanciers and indebted farmers in northern Nicaragua. Disagreements over high interest rates have caused violent protests along the Inter-American highway in recent months.
Jose Adan Aguerri, president of the country’s largest business chamber, COSEP, told local press that Ortega’s plan lacked detail and didn’t address the private sectors demand to lower the minimum wage.
The Ortega government has made several hikes to the minimum wage that have drawn fire from the private sector, including an 18 percent increase for some 105,000 public and private workers last September.
Opposition leaders also continue to demand that Ortega include Venezuelan aid in the budget and that he cut support for controversial neighborhood watch groups known as Councils of Citizen Power (CPCs), which critics say boost the Sandinista party’s power by undermining existing institutions.