Can Nicaragua’s economy sustain 5% growth?

After several years of steadying itself with ALBA training wheels, can Nicaragua’s economy continue forward on its own inertia?

Nicaragua’s economic prospects might look slightly less certain these days following the recent death of chief benefactor Hugo Chávez, but the Sandinista government notched another year of record growth in 2012 while the getting was good.

With its kooky combination of socialist rhetoric and capitalist practices, the administration of President Daniel Ortega led Nicaragua to an impressive 5.2% economic expansion last year, according to numbers released last Friday by the Central Bank. That high-water mark represents the first time the Nicaraguan economy has grown above five percent in more than a decade.

Well, maybe.

The Central Bank’s newly “revised” numbers from last week also show that Nicaragua’s economy grew by 5.4% in 2011—up seven-tenths of a percentage point from the 4.7% annual growth originally reported by the Central Bank. The government also adjusted Nicaragua’s 2010 numbers,  lowering the country’s originally reported economic growth rate by almost an entire percentage point, from 4.5% to 3.6%.

Néstor Avendaño (photo/ Tim Rogers)

The fluctuating figures have some independent economists rubbing their eyes. Economist Néstor Avendaño says he thinks one of two things is happening: either the government is playing it fast and loose with the economic statistics, or the Central Bank is too mathematically challenged to produce reliable and timely data. Either way, Avendaño says, the pulsating percentages suggest a statistical slapdashery that doesn’t reflect well on the Central Bank’s potential for preciseness.

 “With or without manipulation of the numbers, the amount of discrepancies in the reported percentages of economic growth demonstrates the lack of technical training by the Central Bank,” Avendaño told The Nicaragua Dispatch. “The Central Bank should concern itself with getting better technical training for its employees.”

Assuming that the newly tallied numbers are now within an acceptable margin of error, Avendaño says the challenge becomes how to accelerate economic growth to levels where Nicaragua can start to reduce poverty in a meaningful way.

“Nicaragua has reached the category of 5% growth, so now the goal is to maintain that and jump into the category of 6% growth,” Avendaño says.

To really put a noticeable dent in Nicaragua’s systemic poverty, the economy needs to double its current rate of growth, Avendaño says.

Javier Chamorro, executive director of investment-promotion agency ProNicaragua, says economic growth will continue to gain steam as Nicaragua reaches out to the world and opens its economy to new global players.

“The economy is seeing the obvious results of accelerated exports and foreign investment growth trends; if we can continue to achieve the types of results we have over the last three years, we should be well on our way to improve on a 5% growth rate,” Chamorro told The Nicaragua Dispatch today. “Our reality—a smaller, least developed economy—is also our opportunity, since the size of our economy allows us to achieve great impact with each new market and each new investment origin we open.”

Chamorro says that even Europe, despite its own economic downturn, is still a relatively new market for Nicaragua so any new business that results from the recently hatched Central American-EU Association Agreement “will generate an exponential growth for us.”

“That’s not to say that we are immune to a new global economic crisis, but we can weather the storm better by aggressively pursuing new opportunities,” Chamorro says.

Exports and construction motor growth

Driven by an 18% growth in exports and a 30% growth in construction, Nicaragua’s economy last year expand faster than the Latin American average of 3%. The government also kept inflation to 6.62%—its lowest rate in three years—and maintained international reserves close to its historic high of $1.89 billion (up notably from $1.1 billion when the Sandinistas returned to power democratically in 2007).

Nicaragua’s dramatic export growth is based on a diversification of products and markets, according to government economic advisors. The country’s traditional export market reached $2.67 billion last year, as commodities such as coffee, gold, sugar and dairy—and even nontraditional agricultural exports such as peanuts—all saw sales grow by more than 20% last year, according to the Central Bank numbers.

 In addition, Nicaragua’s  foreign owned free-trade zones, which produce textiles, automobile harnesses, tobacco, and other assorted doodads, reached a record high of $1.9 billion in exports last year.

a young boy picks coffee in Nueva Segovia, where roya is threatening thousands of hectares of coffee crops (photo/ Tim Rogers)

But export growth is not on autopilot. The Central Bank warned that this year’s coffee exports—and the country’s 2013 economic projections in general—could suffer notably if the government doesn’t respond appropriately to a fungal outbreak know as “coffee rust” (or roya, in Spanish), which is threatening thousands of hectares of coffee plants in Nicaragua.

Coffee producers have been asking the government for help combating the outbreak for more than six months, but the Sandinistas’ alleged master plan to counter the plague remains unknown. Earlier this month, the first lady said the government was finalizing a plan to combat the coffee rust, but that was the last she mentioned of it.

Investment in Nicaragua

Nicaragua is also on track to improve upon last year’s record-setting growth in foreign direct investment, which grew by a whopping 91% in 2011 to reach $1 billion for the first time in the country’s history.

“We will surpass the 1 billion mark again (this year),” Chamorro says. “Preliminary numbers by the Central Bank showed that we reached $1.102 billion in 2012, a 13.8% growth versus 2011. That result will not only confirm Nicaragua’s positive tendencies in foreign investment attraction, but will probably continue to position our country as the top performer in Latin America in terms Foreign Investment attracted as a percentage of Gross Domestic Product.”

If those numbers hold, it will mean that foreign direct investment has finally surpassed remittances as the top source of money sent into the Nicaraguan economy.

According to the Central Bank, remittances increased by 11% last year to finish over $1 billion. Until now, working-class Nicaraguans living in the U.S., Costa Rica and elsewhere have essentially invested more in Nicaragua’s economy than all foreign investors combined.

Changing trends in foreign aid

Foreign aid for Nicaragua has changed dramatically since the Sandinistas returned to power six years  ago. In 2007, 64% of all foreign aid entering the country went directly into government coffers, while only 36% went to the private sector. Six years later, those percentages have inverted; now 65% of foreign aid goes directly to funding private-sector initiatives and only 35% goes to the public sector.

Economic analysts (and the foreign donors themselves) say the shift in aid has to do with a combination of changing geopolitical development priorities—especially in Europe—as well as Nicaragua’s governability issues. Not coincidentally, the shifting of foreign aid away from the grasps of the Nicaraguan government has come during a period in which the Sandinistas have been accused of staging three less-than-exemplary elections.

The United States, Sweden, England, Denmark, Norway, Holland, Germany and Finland have all cut aid to Nicaragua since the Sandinistas’ electoral chief, Roberto Rivas, has snorted and wheezed his way through past three electoral spectacles.

Javier Chamorro, ProNicaragua

ProNicaragua’s Javier Chamorro (photo/ Tim Rogers)

Of the dwindling pool of bilateral donors, Japan, Switzerland and Russia are still cutting sizable checks to the Sandinista government. But most public-sector aid now comes from the multilateral financial institutions such as the Inter-American Development Bank, the World Bank and the Central American Bank for Economic Integration. The Nicaraguan government last year received a total of $471 million in public-sector aid, mostly in the form of loans, according to the Central Bank.

Nicaragua’s private sector, however, received $871 million in loans last year. Most of those loans were made by Venezuela through the private business network operating under the auspicious of the Bolivarian Alliance for the Americas (ALBA).

According to the Central Bank, Venezuelan aid for Nicaragua last year totaled $765.6 million, which represents a five-year high for ALBA largess and $150 million more than the Sandinistas’ pulled in 2011.

Of the entire $765.6 million ALBA package delivered to Nicaragua last year, $556 million was provided in private-sector loans for the Sandinistas’ various ALBA business holdings and $209.9 million came in the form of foreign direct investment, mostly for the hallucinatory Supreme Dream of Bolivar Oil Refinery, which after six years and hundreds of millions of dollars and an equal number of promises is still nothing more than a barren dirt field at the end of a rather unfortunately expensive concrete highway that leads to nowhere.

Of all the ALBA riches that entered Nicaragua last year, not a single centavo passed through a government bank account and not a single plastic bill was offered in the form of donation. Since Venezuela started lending money to Nicaragua under the auspicious of ALBA, the Sandinistas have racked up a hefty $2.19 billion debt, according to the Central Bank.

While Nicaragua’s political opposition has raised concerns that Sandinista ALBAgarchs might try to slip out to the bathroom when Venezuela finally comes to put the bill on the table,  Avendaño says the whole arrangement has happened with the imprimatur of the International Monetary Fund (IMF).

Had the Venezuelan loans entered the government coffers and become public-sector debt, Nicaragua’s budget deficit would have jumped from .8% to 7.5%, and the country’s touted macroeconomic stability would have gone to the dogs, the economist said. So by privatizing the Venezuelan aid, the Sandinistas got the bottomless discretional slush fund they wanted, the IMF got the macroeconomic stability it wanted, and all interested parties could vivir bonito.

The problem, Avendaño says, is that only time will tell if the existing terms of the ALBA arrangement will continue to be honored in the post-Chávez era. Acting Venezuelan president and self-describe “Chávez disciple” Nicolás Maduro, whose histrionic sycophantically has a North Korean feel to it, vows that ALBA will continue uninterrupted if he’s reelected next month. And the polls suggest that will happen.    

But even if things eventually fall apart in Venezuela as Maduro trips about in shoes that are too big for his feet, Sandinista boosters say Nicaragua is steady enough and ready enough to stand on its own legs.

“In any case, Nicaragua is building its own economic development model and is on path to sustainable growth,” Chamorro says.

  • Nick

    Good one Tim. Finally someone using the figures to figure it out.
    Nestor is nay-sayer, has been and always will be. 5% is not enough he says. If it were 7, he would warn of impending problems. Just his job.
    Glad to see that you do not use that hack Rene Vargas for any anyalism.
    Proof is in the pudding. Keep your eyes on the gold and other minerals. Only country in the region that can get away with it… so far.

  • Jerry

    This is an interesting article on the Nicaraguan economy that makes rightful reference to Venezuelan aid. However, the shots at Venezuela’s Nicolas Maduro are a little unnecessary and also a bit clumsy themselves.

    “Maduro trips about in shoes that are too big for his feet”? Yes, Chavez died, and now Maduro has filled his place until an election takes place next month. Could anyone fill Chavez’s shoes? It doesn’t seem like a possibility. So, rather than some caricature of Venezuelan politicians, some analysis would be nice.

  • Ternot

    Very good article Tim. However, I am a bit skeptical of the figures the government and the central bank have provided. As we all know, economic development must promote social development, more jobs, more training, more money for education and health, etc. Not to mention the end of child labor (what is that child doing picking coffee, instead of being in school?). Every Nicaraguan should ask how the society treats its seniors and its prisoners. Perhaps in another article you can look into the area of social development. At any rate, I enjoyed reading the article.

  • flaco delgado

    Whenever I see analysis in terms of percentages, I always have to ask, what is the denominator? A percentage consists of a numerator and a denominator: If the denominator is low, it doesn’t take that big of a numerator to give you a nice fat juicy-looking percentage.

    In Nicaragua’s case, the existing economic status (allegedly the second worst in the Western hemisphere after pobrecito Haiti) gives you a nice low denominator. It doesn’t take a lot of actual growth to give you a good-looking percentage,

    Congrats to Nicaragua for finally starting to move in the right direction, but read the percentages for what they are — a comparison of the current situation to the past situation. Right now we are 5% better than awful.

  • http://www.cigarsafari.com Jonathan Drew

    I am certainly not an economist, but would like to make an important point about the potential for Nicaragua’s future. If the following three areas are focused on, I believe that Nicaragua’s potential is limitless:

    1. Continued Safety and Security for Nicas, foreign businessmen, and tourists;
    2. Continued clarity from the government in regard to laws and foreign investment;
    3. Expanded push into the education system in regard to pollution for everyone in Nicaragua, including schools and businesses.

    Nicaragua – we can do it …!
    JD