Caribbean & Central America - April 2024

Gisela Sánchez, the new head of the Central American development bank (BCIE), has said that she will rebalance its portfolio by ending loans to Nicaragua and El Salvador.

During her term, which will run from December 2023-2028, there will be no more money for these two nations as they have “surpassed the limit of loans that they can receive,” Sánchez told Central American media consortium Redacción Regional in an interview published in March. This marks a departure from the approach of predecessor Dante Mossi, who became known as “the banker to dictators” after making a number of large loans to El Salvador and Nicaragua, which drew criticism due to democratic backsliding in both nations.

In El Salvador, at least US$200m in BCIE funds were diverted to projects linked to the cryptocurrency bitcoin, breaking the bank’s own rules according to Redacción. And the bank has lent billions to Nicaragua in recent years even as President Daniel Ortega has engaged in worsening human rights abuses. Redacción highlights that, as of end 2023, El Salvador accounted for just over 25% of BCIE total lending, followed by Nicaragua at around 22%. Next up is Honduras (17%), Costa Rica (10%), and Guatemala (5%).

There has also been controversy around the bank’s role in funding projects aimed at reducing deforestation in Nicaragua’s Bosawás and Río San Juan biosphere reserves. The BCIE was due to finance US$44.2m of the US$116.6m “Bio-CLIMA Project: Integrated Climate Action to Reduce Deforestation and Strengthen Resilience in the Bosawás and Río San Juan Biosphere Reserves" alongside the United Nations Green Climate Fund (GCF) and the Global Environment Facility, a multilateral environmental fund. It was approved in November 2020, but an investigation by the GCF, which was meant to provide US$64.1m in funding, showed that the BCIE had omitted information on violence against indigenous communities in its report on the project, allowing the loan to proceed. As a result, in March 2024 the GCF announced the termination of the agreement, citing non-compliance with GCF policies and procedures on environmental and social safeguards (ESS).

The GCF decision causes further harm to the reputation of the BCIE, and Sánchez has work to do to repair the damage caused by her predecessor Mossi’s leadership of the organisation. The early signs are encouraging, with Sánchez, who is the first woman to head up the BCIE, promising to “correct the course” of the bank and diversify its portfolio. She has already moved to crack down on excessive salaries, removing Ana Marcela Giammattei, daughter of former Guatemalan president Alejandro Giammattei (2020-2024), from a role at the bank which reportedly paid her a salary of US$5,000 per month.

During Sánchez’s short time in charge, the bank has approved a new anti-corruption policy, and signed an agreement with the regional office for Central America and the Caribbean of the United Nations (UN) High Commissioner for Human Rights (OHCHR) to inform the bank’s operations in the future. 

Sánchez also told Redacción that the bank is working with the UN Office for Project Services (UNOPS) in Nicaragua to make sure funds are being used for the projects they are intended for and revealed that the bank shares its plans with the US Office of Foreign Assets Control (OFAC), which is responsible for administering and enforcing sanctions.

She also plans to work with an external organisation to analyse the bank’s operations over the last 10 years in order to improve its capabilities in the future. Sánchez says that her reformist agenda has the support of extra regional members of the bank such as Taiwan, South Korea, Spain, Mexico, and Colombia, which will help her achieve her goals, and she has promised that the bank will regain people’s trust. 

Managua office

Mossi also opened a new US$16.5m BCIE office in the Nicaraguan capital Managua in March 2022 and has faced criticism for an increase in administrative costs as well as excessive salaries.

Moody’s upgrades Nicaragua’s credit rating

On 15 March international credit ratings agency Moody’s upgraded Nicaragua’s long-term foreign and local currency issuer rating from B3 to B2 with a stable outlook. The agency cited structural improvements due to the accumulation of significant fiscal and external buffers which exceeded previous forecasts.

Since 2022 the country has been running a fiscal surplus as tax receipts increased due to a 2019 tax reform and a moderation in public sector wages and social spending, said Moody’s.

In 2023 the fiscal surplus widened to an estimated 1.5% of GDP, allowing 10.2% of GDP in central bank deposits to accumulate by October 2023. A small fiscal surplus of 0.1% of GDP is forecast for this year, but Moody’s believes this figure could be higher due to renewed efforts to cut public spending.

This strengthening of public finances is a result of government efforts to mitigate challenges posed by international sanctions, it added. These sanctions pose a risk in that they constrain external financing options and could disrupt investment flows, but fiscal and current account surpluses and efforts to secure financing and investment from China mean the economy is overall more resilient to potential shocks than before, said Moody’s.

“The authorities’ track record of navigating prior shocks while maintaining a prudent policy mix that safeguarded macroeconomic stability supports this view,” added the agency.