Envío Digital
Central American University - UCA  
  Number 93 | Abril 1989



Economic Reforms: Taking Effect?

Envío team

"Sale: 2 pieces, 4,000 córdobas," reads the sign in the Tip-Top Fried Chicken restaurant in Managua's Centroamérica shopping center. Prices coming down—almost unheard of in Nicaragua's current economy, where inflation topped 30,000% last year—are one indication that January's harsh economic austerity measures are taking effect.

The era of hyperinflation has hardly come to an end. Such price reductions occur only sporadically, an adjustment to lowered demand. But government figures released March 3 show that the monthly inflation rate sank to 45.8% in February, compared to 91.8% in January and 126.6% for December 1988. While inflation is traditionally somewhat lower during this part of the year, such a dramatic drop is significant.

What's in the package?

The measures announced in a January 30 speech by President Ortega represent one more turn of the screw in the austerity programs begun in February and June of last year. The series of reforms are intended to contain inflation, reduce the fiscal deficit, improve the balance of trade and reactivate the country's economy.

There are few ways left for the government to soften the blow of this austerity package. "For those who ask what are the differences between our measures and those of the IMF, here’s one response: we have to carry out the measures without financing from the international bank," FSLN National Directorate member Henry Ruiz put it bluntly in a February 25th Barricada interview.

The government's 1989 budget is 20% less than last year's total. Some 30,000 state workers are slated to be laid off, including 10,000 (both military and civilian personnel) from the Ministries of Interior and Defense, long considered off-limits from the budget axe.

State investment will be limited to repair and replacement of existing facilities and investment projects with short-term payoffs. Infrastructure damaged by Hurricane Joan will receive priority. Government-owned vehicles, protocol houses and other items deemed extraneous are going on the auction block.

Phasing out producer subsidies

The new measures restrict credit and continue the more realistic interest rates—tied to inflation for the first time—set in the June 1988 package. In addition, producers are being warned that their credit will be cut off if they fail to pay their debts.

The increased official rate of the córdoba, now virtually equal to the parallel rate, is one more step in phasing out producers' subsidies on imported inputs. The new tighter credit policy and the phasing out of producer subsidies aim to restore solvency to the Central Bank and restrict the fiscal deficit, since the state paid the difference between the real and subsidized costs of imports and interest rates. Continuing devaluations of the córdoba (117% in January and 110% in February) are also intended to boost exports and restrict imports, thus cutting the trade deficit, which reached $610 million last year.

Producers are having to adapt quickly to free market policies after years of virtually giveaway interest rates and subsidized inputs. In the agricultural sector, these measures fall hardest on those who produce for the domestic market, and those who depend upon substantial imported inputs for production. Those producing for the domestic market are directly affected by the contraction of demand due to layoffs and lower real wages.

Is the state "compacting"?

Layoffs planned last year as part of the February 1988 austerity package were never fully implemented. State institutions tended to reshuffle their staff, firing and rehiring. Is the "compacting," as it is known here, reaching its goals this time?

President Ortega announced March 3 that of all state institutions only the Ministry of the Interior has so far carried out its scheduled layoffs. From January 1 to February 24, 5,852 state workers were laid off in all regions, not including the autonomous regions or Special Zone III. Ortega's public announcement of which ministries are complying is a warning to all state institutions that the compacting is to be taken seriously.

The layoffs have a high cost, not only in human but also in organizational terms. "We never recovered from last year's compacting," said one MIDINRA employee, explaining that the layoffs also entailed a reorganization of workloads, staffing and whole departments. "We're barely getting used to working with the reorganization carried out last year, and now there's another one coming."

Back to the land?

The layoffs of state and industrial workers pose a serious problem, particularly in the already overcrowded capital. There is little alternative for the unemployed in Managua and Nicaragua's other cities, save pulling up stakes and setting off for the countryside. And those who do go back to the land will have to face the new credit policies. While numerous cooperatives and other agricultural enterprises suffer from a shortage of labor, the problem remains one of persuasion. How to convince people accustomed to city life to move back to the countryside is a dilemma that has haunted governments throughout this century.

On the heels of the budget cuts, Comandante Bayardo Arce, key political officer of the FSLN, announced the formation of the "10th Anniversary Brigade." Its goal is to enlist people to make the switch from city to country. In a special assembly that Minister of the Interior Tomás Borge held with the thousands of MINT employees now without work, he urged them to join existing agricultural cooperatives and said the MINT was looking into the possibility of handing over underutilized state land to these workers.

But the problem of concrete mechanisms to encourage people to return to the land remains just one of the many loose ends and questions raised by this latest phase of economic reforms.

A call for national unity

The new measures have been introduced with a new language, a more conciliatory tone: a call for a “national concertation” or unity agreement across political and economic lines to confront the deteriorating economic situation. The appeal to business, government and labor to work together to improve the economy went hand-in-hand with an opening to the opposition parties, touched off by a series of bilateral talks Ortega held with the opposition before and after the Esquipulas IV summit meeting held in El Salvador on February 13-14.

The government is going out of its way to reassure the private sector that it will do all it can to provide a safe business climate—in an effort that may be aimed as much at foreign as national investors. The week preceding Ortega's speech, Minister of Agriculture Jaime Wheelock declared that the agrarian reform program had effectively ended and that no more land would be confiscated. Government officials have also emphasized, however, that "not one inch of land" already distributed would be returned to its original owners—a very real concern among the 120,000 peasant families who have benefited from the agrarian reform.

The end to the agrarian reform is not as dramatic a change as might appear. The pace of expropriations under the agrarian reform law (generally with compensation) has already slowed drastically, from 460 landowners affected in 1986, to 150 in 1987, and just 7 in 1988. There is still a reserve of lands, some of which can be distributed: 680,000 acres of abandoned land in the war zones which can soon be reclaimed. MIDINRA, the Ministry of Agricultural Development and Agrarian Reform, has indicated that it may be willing to distribute some of the lands currently held by the state (a total of 13% of all arable land). Finally, landless peasants can be accommodated in the many agricultural cooperatives that include far too few members for the land and resources they have available. Yet the declaration that the agrarian reform is ending is a significant change in rhetoric.

The private sector responds

Will the private sector, especially the big growers, respond to the appeal to national unity and increased production? Opposition paper La Prensa urged readers not to trust the government's appeal, declaring that opposition leaders said there would be no concertation, either political or economic. Private businessmen's association COSEP initially rejected the appeal, arguing that Ortega's proposal included few specifics. But in a February 3 press conference, COSEP president Ramiro Gurdián declared that the organization's position is "to participate in these meetings [with the government], and we are urging all sectors to do so." In any case, COSEP represents only one small part of the private sector, the part most tied to the rightwing opposition. Other private producers' organizations, such as the National Association of Farmers and Ranchers (UNAG) and GRACSA, a large cooking oil processing plant, have already given a more favorable response.

"We're in agreement with the general trend of the new measures but not with the way they are being carried out," explained Bayardo Escobar Solís, Executive Director of AENIC, a newly formed association of directors of some 70 state, mixed and private enterprises. Expressing concern that the measures designed to correct the state's fiscal deficit will provoke a recession, Escobar claimed that current tax and credit policies discouraged investment while the high prices of electricity and fuel—the latter now above other Central American prices—make it impossible for Nicaraguan products to be competitive. Escobar estimated that Nicaraguan industry is currently operating at 30% of existing capacity and 10% of the industrial workforce has been laid off in the first three months of the year. Sales have dropped sharply and industries are piling up unsold stock.

On the positive side, remarked Escobar, the concertation does seem to be a reality. "We think that the concertation allows more space than before. We believe that working together we can put the economy back on its feet."

Concertation: For whom?

Not all government supporters were happy with this new call for national concertation. Let's not just talk about the private sector having confidence, wrote Barricada editorial writer Sofía Montenegro. "If there's a crisis of confidence here..., it's what the workers feel towards the producers." In the last ten years, Montenegro reminded readers, it is the workers who have shouldered the burden, while the large producers have received subsidies in terms of low-interest credit and low-cost imports but have failed to return the favors. "Where is their efficiency?.... Where is their economic will to reach agreements? Where is their reinvestment?" If the workers are to trust the producers, she cautioned, it will not be a blind trust but one based on economic facts: increased production.

Economist Mario Arana from the independent regional research institute CRIES also sounded a note of caution, warning in a freewheeling discussion with peasant and worker organizations February 9 that the term "national concertation" is very vague. He urged the revolution's "fundamental forces"—the workers and peasants—to be sure to put forward their demands. Arana stressed that post-war Nicaragua is now entering a new phase, in which the government will be mediating increasingly conflicting economic and political demands from all sides.

UNAG takes on the Central Bank

While no one doubts the austerity medicine is necessary, there are battles brewing about what the dosage should be and who should take it. Heading up these disputes is a highly charged exchange between UNAG and the Central Bank.

In its National Council meeting in early February, UNAG leaders discussed the new tighter credit policies and issued specific proposals regarding credit, technical assistance and general development strategies for each crop.

In response to these proposals from UNAG and from other associations of producers, the Central Bank modified its new credit policies for coffee, cotton, cattle raising and basic grains. In early March the Central Bank announced it would guarantee 100% of financing for agrochemicals for coffee and cattle raising; cotton growers who maintained average productivity would receive 100% financing as well. Basic grains producers would be permitted to export their crops. Picking up on a proposal made by UNAG, interest rates for basic grain will be tied to a basket of prices producers receive for their grains, instead of to a general basket used for determining interest rates for other producers, which includes export crops.

But in an unusually strong statement, UNAG President Daniel Núñez warned that farmers would simply not sow grains if further modifications were not made. The new interest rates fixed by the Central Bank are not sufficient, he argued, because producers still have to pay back debts incurred under the previous system of fixing interest rates. Núñez also expressed dismay that the Vice President of the Central Bank and the Minister of Planning, both invited to UNAG's National Council meeting, did not attend.

In a National Planning Council meeting March 7, the government agreed to set guaranteed base prices for grains and to have the state distribution agency ENABAS buy and store grain right after harvests, marketing it gradually so that prices remain stable.

Consumers take on INE and the Ministry of Finance

As the government looks for ways to increase state revenue, consumers are speaking out against what they see as particularly outrageous price hikes in state services.

The Nicaraguan Energy Institute (INE) was besieged by customers complaining about soaring electricity rates. The CDS neighborhood associations demanded that INE explain to consumers exactly how their bills are calculated. Barricada, El Nuevo Diario and Sandinista television station SSTV took editorial positions critical of these "electrifying" new rates. INE has been backpedaling ever since, issuing explanations of rates and admitting billing errors.

Truck drivers, taxi drivers and other motorists immediately spoke out against stiff increases in traffic fines and licensing fees, which they called simply unpayable given current wages. Just two days after the new rates were announced, President Ortega took the unusual step of intervening directly, publicly ordering the Ministry of Finances to revise the new costs.

Venezuelans take to the streets

The response of Nicaraguans to the austerity package is markedly different from the response of the Venezuelan people to the reforms announced by newly elected President Carlos Andrés Pérez. Venezuelans took to the streets in days of rioting and looting followed by police and army repression that has left hundreds dead, thousands wounded and arrested, and civil liberties temporarily suspended. The riots followed a 50% hike in bus fares and increases in food and fuel prices that, while stiff, seem relatively ordinary compared to the economic adjustments being carried out on a regular basis in Nicaragua. In the last month in Nicaragua fuel prices doubled, while bus fares jumped 600% in the course of a year.

In a public letter to President Pérez, President Ortega placed blame for the events in Venezuela on the foreign debt and the IMF-led austerity plan which Pérez had little choice but to implement. "Today it's Venezuela, tomorrow it could be Brazil, Mexico, Argentina or any of the Latin American or Caribbean countries," he cautioned. The Nicaraguan government is well aware it can hardly afford to be complacent as it carries out economic reforms that fall hardest on the very sectors from which it draws its support. Certainly there will be an increase in strikes, demonstrations and demands from many sectors of Nicaraguan society as the belt is pulled ever tighter.

Yet it is remarkable to compare the situation in Venezuela with the much harsher austerity package being carried out in Nicaragua, which so far has met with vigorous debate rather than riots and repression. The Nicaraguan government may have no economic capital to speak of—but, as responses to the austerity package indicate, it still has some political capital left.

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