Nicaragua seeks to de-dollarize economy

Government seeks to strengthen the role of the córdoba, which has become a second-class currency in Nicaragua’s economy

The Bottom Line: Nicaragua is one of the most unofficially dollarized countries in Latin America

photo: Nicaragua Dispatch

The Bottom Line: Nicaragua is one of the most unofficially dollarized countries in Latin America

Nicaragua, one of the most unofficially dollarized economies in Latin America, is asking the International Monetary Fund (IMF) for help to strengthen its currency.

The córdoba, which has been pegged to the U.S. dollar since 1991, has essentially become a second-rate currency in it’s own country. Nicaragua’s Central Bank says 70% of all bank deposits and 90% of loans are made in U.S. dollars. Independent economist Néstor Avendaño estimates the córdoba now represents only 20% of the total liquidity of Nicaragua’s economy.

“We’ve taken up the issue of de-dollarization, or strengthening of the córdoba, with the IMF,” Central Bank president Ovidio Reyes said Monday during a luncheon organized by the Nicaraguan-American Chamber of Commerce. “We’re looking at ways we can work with them to make the córdoba stronger in our economy, which will be a process that takes a long time.”

Reyes said the Sandinista government, which eight years ago promised the IMF would be gone from Nicaragua by 2011, is asking the international lending institution about the experiences of other countries that have tried to strengthen their own currencies against the dollar. Still, the Central Bank chief stressed that the Nicaraguan government is not planning to do anything drastic to regulate or limit the circulation of U.S. dollars in the economy.

“It’s not like we are going to take any measures so that bank deposits in dollars are now paid in córdobas — nothing like that! We’re not even thinking about that; it wouldn’t even occur to us to think of that,” Reyes said, pushing the thought from his head as fast as he could.

While Reyes was careful to mention several ideas that Nicaragua’s financial policymakers would never think about, he was more vague on the ideas they are thinking about. He alluded to lifting some restrictions on the córdoba, but didn’t elaborate.

What can Nicaragua do?

For the past two decades Nicaragua’s currency has been pegged to the dollar on a “crawling peg” of a fixed 5% devaluation per annum. That policy means the Central Bank can’t play with exchange rates or devalue the córdoba in an attempt to reduce the country’s $3 billion annual trade deficit.

The Central Bank says the monetary policy, implemented by the so-called “neoliberal governments” after the hyperinflation of the 1980s, has worked well. Indeed, the Sandinista government has maintained its predecessors’ policy and said the córdoba’s peg to the dollar is a key part of Nicaragua’s ability to attract foreign investment.

Nestor Avendaño

photo: Tim Rogers

Nestor Avendaño

But it’s also led to an annual trade deficit around 40% of the country’s GDP and a level of unofficial dollarization that tops all other economies in the region, according to economist Avendaño. In fact, the economist says, the only place in Latin America where greenbacks have a greater penetration in foreign economies is where governments have officially dollarized: El Salvador, Panama and Ecuador.

“The córdoba has a marginal participation in Nicaragua’s economy,” Avendaño told The Nicaragua Dispatch in a phone interview. “People here think more in dollars than córdobas. Even taxi drivers would rather get paid in dollars than córdobas.”

Much of Nicaragua’s economy operates exclusively in dollars; the oil and energy industry runs on dollars, as does the real estate market, financial institutions, foreign trade and even remittances—the single largest source of U.S. legal tender into the economy. Even parts of Nicaragua’s pervasive informal economy use dollars and córdobas interchangeably.

The structural trap

While the economy is growing and inflation is under control, Avendaño worries that Nicaragua is building a house of cards on a sinkhole.

“Nicaragua’s macroeconomy is excellent but fragile,” says Avendaño. The country’s economy could be growing on a shaky foundation, and the crawling peg exchange-rate regime limits the Central Bank’s ability to deal with the challenges effectively, the economist says. “Nicaragua is trapped by its own structural problem.”

Nicaragua, Avendaño says, needs to “re-cordobafy” its economy, but do so in a way that’s smart, transparent and doesn’t limit the free conversion of currency. He notes that the córdoba is still Nicaragua’s official currency and the government doesn’t need to ask the IMF’s permission to strengthen its role in the economy. Nor should the country look too hard for an algorithm for success from countries such as Bolivia, Peru and Paraguay, all of which have very different socio-economic and political realities than that of Nicaragua.

But Nicaragua needs to do something; with nearly 80% of the economy already unofficially dollarized, it’s getting harder to put the gini back in the bottle.

“Each day we are closer to official dollarization,” Avendaño says.

 

  • Pepe Turcon

    The only thing that dollarizes or not a currency is called trust. Just this message has alerted people to run away from Cords and into the US$. The only reason Ortega is doing this is because he is running out of petrodollars. Just another REAL statistic like the line at the Costa Rican Consulate and the 2000 visa requests each day.
    In case you didn’t know, there is not a iota of trust in Nicaragua (Ortega I should say) and the Ortegas themselves are the first ones to keep only imperialists dollars. Like Castro and Chavistas the just love the Imperial dollar.

  • http://www.elportonverde.com Mike@Farmstay El Porton Verde

    I would suggest that Nicaragua get on an SDR (Special Drawing Rights) based currency that includes the Chinese Yuan. The petrodollar is fading fast and the current problems between East and West will be used as a cover for a massive devaluation. Look at what the BRIC countries are doing, for example China and Russia are now doing all their trade in their respective currencies and not using the dollar as a medium of exchange. Just my dos centavos…