Caribbean & Central America - February 2024

On 12 January the Nicaraguan government led by President Daniel Ortega seized the assets of CISA Exportadora, the largest buyer of the country’s coffee, after its parent company, Netherlands-headquartered Mercon Coffee Group, declared bankruptcy the previous month and plunged the vital sector into crisis.

Coffee is Nicaragua’s fifth-largest export, bringing in US$607m in 2023, according to figures from the ministry of development, industry & trade (Mific). There are some 44,000 coffee growers, around 500 of which are large producers and the rest are small farmers, and the sector employs around 330,000 people, equivalent to 15% of the labour market, according to research compiled by Spain’s agriculture ministry (MAPA) in July 2022. CISA Exportadora was the largest marketer of Nicaraguan coffee, buying grains directly from farmers and selling it on the international market. The company’s extensive involvement in the sector included 130 coffee collection centres serving a network of more than 6,000 coffee producers built up over more than 70 years of operations in Nicaragua.

As a result of its economic importance, the government has stepped in to try and make CISA Exportadora fulfil its financial and commercial commitments, according to a statement posted on state mouthpiece el19digital, with the local media reporting that it is taking action against the company for US$30m in alleged debts. However lawyers acting on behalf of CISA Exportadora and Mercon Coffee Group have questioned the validity of its claim, according to reports by Bloomberg Tax, and said that they are in “sensitive dialogue” with Nicaraguan officials over the seizure of assets.

The issues began in December, when CISA Exportadora abruptly announced that it was suspending operations in Nicaragua. Parent company Mercon then declared bankruptcy in the US in order to protect its assets, with a letter from CEO Oscar Sevilla claiming that “the business no longer has the necessary financing to continue its operations”. This caused concern among many coffee farmers who had contracts with CISA, which also provided technical and financial support to growers through its Mercapital arm. The closure of Mercapital left farmers without cash to cover the costs of this harvest season, including wages for workers, as bankruptcy was declared with the harvest in full swing, the worst time for growers to face any sort of disruption.

Coffee growers also face further issues because other buyers are refusing to purchase from former CISA clients, arguing that their coffee belongs to the company because it had already paid them for it. This may force growers to sell at local markets for lower prices to raise the cash to pay workers and keep harvesting, leading to lower incomes for this coffee year. Dozens of growers are aiming to organise a committee to defend their interests, according to a report in local media outlet Confidencial published on 9 December. The aim is to attempt to influence the bankruptcy process and make sure “that they do nothing behind our backs,” said one grower.

In a follow up article published 18 January, growers told Confidencial that their biggest issue was finding buyers for their coffee. In addition, as things stand many have still not been able to secure new sources of funding due to issues surrounding the aforementioned agreements with CISA. Many will go bankrupt themselves if a solution is not found, one told Confidencial. Some also criticise the Ortega government for making the situation worse, detailing how proposed solutions, such as exporting coffee to China thanks to a recently signed trade deal [EB-23-10], are not realistic. The Chinese market would only absorb a tiny proportion of Nicaragua’s coffee production, according to the report. 

The Mercon bankruptcy is the latest blow to a sector that has had to deal with many headwinds in recent years, some of which are structural, and others caused by global events. For example, the price of coffee is known for its volatility, which makes it hard for growers to budget and plan ahead, while in recent years the prices of agricultural inputs such as fertiliser has increased, due in part to the Russian invasion of Ukraine. Then there is the growing impact of climate change, which has caused erratic weather patterns that have impacted yields and made pests and disease more prevalent.

Many of these factors are also affecting coffee growers in other parts of Central America, raising concerns about the future viability of the vital cash crop. However Nicaragua’s coffee sector is now facing an existential threat due to the Mercon bankruptcy. There is little to suggest that a speedy solution will be found, and a continued legal stalemate could force many of the producers affected to leave the business. This would badly affect the economy due to the importance of coffee exports, and increase poverty in affected communities.

FTA with China takes effect

Nicaragua’s minister of development, industry & trade (MIFIC), Jesús Bermúdez, has said that under a new free trade agreement (FTA) with China, which took effect on 1 January, Nicaragua has the capacity to quintuple exports to China within five years, from US$200m currently to US$1bn within that period. Speaking to state-owned TV channel TN8, Bermúdez said that China’s exports to Nicaragua are worth some US$1.3bn currently, an amount which he said could rise to US$2bn within ten years. The two countries established relations in late 2021 following Nicaragua’s severing of ties with Taiwan and signed the FTA in August 2023.

IMF praises Nicaragua’s economic resilience 

On 19 January the International Monetary Fund (IMF) published a statement on its latest consultation with Nicaragua, highlighting the country’s economic resilience despite multiple shocks.

The IMF sets out how economic growth was steady in 2022 and is forecast to hit 4% in 2023, while inflation is declining and the central government has a small surplus. The current account balance will record a surplus of around 4% of GDP in 2023 due to support from remittances, which it said would contribute around 28% of GDP, double the contribution that they made in 2021. Officials also praised “prudent macroeconomic policies” which have allowed for the accumulation of significant international reserves of US$5bn by the end of October last year.

Looking ahead, the IMF forecasts that economic growth will slow slightly to 3.5% in 2024, with a similar forecast for the medium term. This is slightly below the 2000-2017 average of 3.9% per year, but overall the IMF says the outlook is positive with balanced risks. While a stronger recovery in domestic demand could boost GDP growth and remittances could grow still further, IMF officials also cite the country’s vulnerability to natural disasters and the possibility of more international sanctions as potential risks to the economy.

The IMF said that it supports continued efforts to maintain a prudent fiscal policy as part of fiscal consolidation plans. “Staff recommended more ambitious fiscal efforts, to entrench fiscal sustainability, build fiscal buffers and create space for higher social and capital spending in the medium term, to reduce poverty, and support growth, through tax administration measures, better targeting subsidies and reallocating current expenditures,” it added.