Caribbean & Central America - October 2020

Nicaragua is an outlier in terms of its response to the coronavirus (Covid-19) pandemic, with President Daniel Ortega opting not to shut down the national market in an unsuccessful bid to stave off further damage to the domestic economy. The local economy had already suffered due to the crackdown that the Frente Sandinista de Liberación Nacional (FSLN) government launched in April 2018 against its opponents, which it accuses of seeking to carry out a coup.

While most countries around the world have implemented some kind of lockdown in the face of the pandemic, Ortega government has so far refused, warning that the country would “die if people stopped working”. In a white paper published 25 May the government said its position is based on Nicaragua’s “reality and conditions”, arguing that high rates of informality mean too many people would not receive an income if a lockdown were imposed (according to the white paper, some 80% of workers in urban areas are employed in the informal economy). The government said it was following the so-called ‘Swedish model’: providing information and guidelines but letting the public make their own decisions. The white paper highlighted the mobilisation of public health workers who carry out home visits, as well as a fumigation programme of public spaces such as schools and markets.

Ortega resisted calls to shut non-essential economic activities from both the main private sector lobby, Consejo Superior de la Empresa Privada (Cosep), and medical associations. His government also continued to organise public events, which was criticised by Ciro Ugarte, head of the Health Emergencies Department at the Pan-American Health Organization (PAHO), on 9 June. Overall, PAHO says that the Ortega government’s measures have not been strict enough, and there hasn’t been enough strengthening of the country’s medical capacity.

The virus began spreading throughout Nicaragua since March, but case numbers and deaths have been trending down since mid-June. In its most recent report on the current economic situation, released on 14 August, local think-tank Fundación Nicaragüense para el Desarrollo Económico y Social (Funides), attributed this fall to preventive measures taken by the population, such as reducing travelling; measures adopted by the private sector, such as allowing working from home; measures taken by civil society, including a handful of communities which introduced self-imposed lockdowns; the changing attitude of government, which stopped encouraging public gatherings; and school holidays, which ran from 26 June to 20 July. 

The Ortega government has come in for widespread criticism for its lack of transparency over Covid-19 case numbers and deaths (see sidebar). While the true number of cases and deaths may never be known, the effects of the pandemic on the economy are clear. Despite the fact that the government refused to shut down the economy, it is now set to register the deepest contraction (-8.3%) in Central America according to the latest forecast from the United Nations Economic Commission for Latin America & the Caribbean (Eclac). This is above the -6.2% average forecast for the sub-region. While the extent of the fall depends on external factors, including the coronavirus situation in major trade partners the US and El Salvador, it is also linked to how far the virus can be controlled so the economy can get back to work.

In its report, Funides predicts that the economy will contract by 6.5%-13.7% this year, significantly more than the 1.1% contraction it predicted pre-pandemic. As the organisation explains, there is a lot of uncertainty in its predictions due to a lack of good official information. This will see poverty rates increase to 32.2%-36.9% this year, up from 28.2% in 2019, according to the report, equivalent to 2.1m-2.4m people. Unemployment will increase from 6.6% in 2019 to 7.3%-9.2% in 2020, and GDP per capita will fall 6.9%-13.7% year-on-year. While it does forecast modest growth of 1.2% in 2021, Funides predicts that Nicaragua will struggle to bounce back to growth next year.

International ratings agency Fitch Ratings agrees with these gloomy predictions, revising Nicaragua’s outlook to ‘negative’ from ‘stable’ in mid-June. Fitch cites “increased financing risks amid a revenue shock caused by the coronavirus pandemic, rising [government] spending pressures, and constraints posed by a small local market and international [economic] sanctions”. The credit ratings agency predicts that Nicaragua’s economy will contract by 4.5% this year, citing reduced remittances, maquila exports, and tourism revenues.

The Ortega government has yet to implement policies that will mitigate the economic effects of the pandemic beyond minor moves to reduce minimum credit card payments and cutting electricity bills. Funides recommends loosening the budgetary purse strings to allow more support for small businesses, a moratorium on payments for basic services for the most vulnerable households, cash or goods transfers to these households, and a reduction in tax charges. It also recommends measures to ensure liquidity and availability of loans to encourage consumption and investment in the medium term. In addition, Funides would like to see more actions to control the spread of the virus, such as suspending non-essential activities, providing masks to the most vulnerable, guaranteeing access to drinking water, suspending school classes, and cancelling public events.

There have been no fiscal measures to support the economy during the pandemic. As a result, Fitch forecasts that the general government deficit will be contained to 2.8% of GDP in 2020 although expects a widening of the deficit to 3.6% of GDP in 2021 owing to spending ahead of November 2021 general election and the continued widening of the social security deficit (see sidebar). 

• Access to finance?

In its June 2020 assessment Fitch Ratings notes that financing conditions for the Nicaraguan government are showing signs of stress. Since March it has been unable to issue bonds in local currency and it has only placed bonds payable in US dollars, an instrument introduced in October 2019. According to Fitch as of June, the government had placed 0.3% of GDP in local bonds, 72% of this amount has been in US dollars with a weighted average interest of 10.6%. Fitch does not expect that annual net external financing in 2020 and 2021 will be meaningfully higher than that of 2019 (1.4% of GDP) but it notes that availability of international financing is constrained by sanctions imposed by the international community on key allies of Ortega as part of efforts to pressure the government to end the crackdown on its opponents. Fitch expects sanctions to remain in place in 2020 and 2021. Yet Nicaragua does continue to receive international financing. On 7 September the Central American bank for economic integration (BCIE) and Nicaragua’s central bank (BCN) signed the 11th renewal of a US$200m credit line aimed at strengthening the country's financial management, acting as a contingency if required and reinforcing Nicaragua’s liquidity position. This follows the approval on 21 August of a US$50m BCIE loan for Nicaragua, to help small and medium-sized enterprises (SMEs) affected by the impact of the coronavirus pandemic. Meanwhile on 1 August the Inter-American Development Bank (IDB) agreed a US$43m loan to strengthen the health system.

• Divergence in figures

Observatorio Ciudadano, a collaborative civil society group set up to monitor the local epidemic, has collated its Covid-19 own data that contrasts with official figures. As of 23 September, Observatorio Ciudadano had tallied 10,396 suspected Covid-19 cases compared with 5,073 as registered by the health ministry. The discrepancy is even larger when it comes to deaths, with 149 confirmed by the authorities but 2,735 suspected Covid-19 deaths reported by the Observatorio.

• Fiscal consolidation?

Fitch notes that the government implemented significant fiscal consolidation measures after the social unrest in 2018 including pay freezes for public sector employees, tax increases, and social security reforms. It notes that “implementing additional revenue raising measures or continued spending restraint may be challenging in the context of elections and latent social tensions; ad hoc and potentially unsustainable measures to contain the deficit are possible”.