Caribbean & Central America - January 2012 (ISSN 1741-4458)

As President Daniel Ortega took office earlier this week for a second consecutive five-year term (and his third in total), despite the doubts surrounding the legality of his candidacy and the extent of his November victory [RC-11-12], he provided further signs that his new found control of the legislature will not translate into the kind of radical economic changes associated with the 21^st Century Socialism of his close ally, Venezuela’s President Hugo Chávez. His declared plans to seek a new deal with the IMF once again exposes the gap between his left-wing rhetoric and the reality of his economic policy-making, which prioritises good government-private sector ties. Ironically, the IMF deal could prove a strain on this relationship.

Retaining good relations with the IMF has been essential to Ortega’s efforts to reassure the local private sector and international investors. In late October 2011, the multilateral completed the seventh and final review of Nicaragua’s economic performance under its Extended Credit Facility (ECF) arrangement, approved in 2007 [RC-11-11]. The announcement by the head of the central bank, Antenor Rosales, at the end of 2011 that, as of March 2012, the new Ortega administration would be seeking another deal with the IMF was accompanied by reports of other government achievements vis-à-vis the economy. This includes a “minimum” of 4% GDP growth projected for 2011 (which, in a December report, the UN Economic Commission for Latin American and the Caribbean (Eclac) raised it to 4.5%, second only to Panama in Central America) and inflation of “no more” than 8.5%. As well as record foreign direct investment (see sidebar), Rosales pointed to a new record for the export sector which, led by coffee and beef, reached US$2.3bn in 2011, up 23% on 2010 (although this was due to higher prices as export volumes were actually down by 1.37%).

Having previously appeared to back Ortega throughout the controversy over his candidacy by appearing at official events and providing reassurances regarding the business climate, prominent private sector representatives had become more critical in the immediate run-up to - and following - the contentious election. At the end of October, a leading business figure who lent his approval at this earlier stage, José Antonio Baltodano (president of the CISA-Café Soluble group and the president of the board of directors of the private sector think-tank, Nicaraguan Foundation for Sustainable Development, Funides), underlined as a priority for the government the need to strengthen institutions and the rule of law. Local commentators had seized on this unprecedented comment on the political situation as a warning to Ortega.

Yet it is the recommendations contained within the IMF’s November 2011 report marking the completion of the final review of the ECF arrangement, (likely to provide the basis for negotiating a new deal), which could prove the biggest point of contention with the private sector. This friction has already been revealed in relation to one of these issues, upon which the government has already acted - increasing energy rates. In its report, the IMF flagged up the “deterioration” in the sector’s financial situation during 2011 “as sharp increases in oil prices combined with a tariff freeze, created a gap between generation costs and tariffs of about 1½ percent of GDP.” Ortega was able to keep energy costs down thanks to financial support from the Venezuela-led regional grouping, Alianza Bolivariana para los Pueblos de Nuestra América (Alba). According to David Castillo, the director of Nicaragua’s state energy institute (INE), Venezuela/Alba “helped fund the electricity sector to the tune of US$6m in 2010 and US$108m in 2011”.  However, the IMF said that “transfers of this magnitude are not sustainable”. While the INE called for a 20% increase to cover the costs, after strong resistance from the private sector, on 5 January, a 9% increase was approved with the remainder to be subsidised with Alba funds.

Other possible sources of government-private sector friction include the IMF’s demands for a “fundamental reform” of the social security system (INSS), coverage of which, it notes, is among the lowest in Latin America, “with less than a ¼ of the total working-age population contributing to it, and benefits mostly directed to high-income workers”. Also unlikely to be viewed favourably by the private sector is the IMF’s call for further tax reform. (A minimal amendment in 2009 increased revenues by 1.14% of GDP to end-2011). In its report, the IMF advocated for the elimination of “numerous tax exemptions and loopholes, particularly on VAT…and corporate income taxes”.

• Land registration

In December, Funides presented a report which cited the lack of legal security surrounding land ownership as a “fundamental obstacle preventing the dynamisation of the agri sector and the promotion of investment in the country”.

    Funides highlights the fact that 36% of ranches in the country, or some 76,000 productive units, of which 85% are less than 50 manzanas (or 84 acres), are in “legal limbo” due to different land reform efforts undertaken in the 1960s, 1980s and 1990s. The think-tank also cites the latest World Bank Ease of Doing Business report for 2012, which ranks Nicaragua as the worst country in all of Central America for the ease of registering property – at 122 of 183 countries (down from the regional average of 50 for Latin America and the Caribbean).

   While the report notes that the area of cultivable land in Nicaragua has increased from 5.4m manzanas (9.07m acres) in 1963 to 8.9m manzanas (14.95m acres) in 2011, its author, Dr Horacio Rose, highlighted the impact of the legal chaos on crop yield and productivity. He points out that the average yield of beans for the 2010/2011 harvest was 13.7 quintales (100lb bags) while in mechanised plantations, which had seen increased investment levels, this rises to 41. The same goes for corn with an average of 24 quintales, increasing to 120 in mechanised areas.

• Attracting FDI

According to the government, foreign direct investment (FDI) grew 80% in 2011 to total US$900m. The growing appeal of Nicaragua for foreign investors has been attributed to the country’s cheap labour costs: in lamenting the recent relocation of sportswear companies Adidas and Nike from Honduras to Nicaragua, Daniel Facussé, the president of the Honduran Association of Maquiladoras, said the minimum wage in Nicaragua was 50% less than in Honduras. The increase in FDI has also been explained by a comparatively better internal security situation: Nicaragua had a relatively stable homicide rate of some 13 per 100,000 inhabitants in 2010 compared with 82.1 per 100,000 in Honduras (2010), 66.0 in El Salvador and 41.1 in Guatemala.