Disinformation abounds in relation to Nicaragua. Daniel Ortega’s government has received criticism from left and right for its economic policies. From the left the FSLN is criticised for being too cosy with local big business and the IMF. From the right it is criticised for being involved in ALBA. Both left and right allege inflation is higher than it need be. At the end of July, Tortilla con Sal spoke to Nicaragua’s Finance Minister about inflation in the country, about ALBA and about economic and finance policy in general. Here is an abridged version of that interview.
 
TcS : Can you give us a panorama of the main factors affecting inflation in Nicaragua?

AG :  Talking about inflation is to talk about something composed of various things. There are internal components and aspects of an international character that affect a small, open economy, highly dependent on the external sector. So that is the first thing to evaluate when we are talking about Nicaragua and the Central American region. All of us are subject to the damaging effects of the increase in international prices of products that have a direct impact on national production and on the results of that production. In first place is the crisis in energy which is having a strong impact on our economies.

And it is useful, when we are talking about inflation to try and establish the differences that exist in the way processes are worked out in Nicaragua and how they are worked out in, for example, El Salvador. Because patterns do exist which if we break them down can show us that there are differences and that these cause different impacts, necessarily, in the case of oil. In Nicaragua, the energy framework is weighted 80% towards oil consumption. In other words, we depend 80% on oil. So therefore the shock for us is absolutely greater than for El Salvador which depends on oil for barely 38% or 40%  Sometimes people want to draw comparisons without taking these realities into account.

There’s another aspect for example, that is very important to consider and that is the exchange rate. El Salvador is dollarized and so the inflation trajectory in El Salvador is going to be more in line with the inflation trajectory internationally in those countries  that use the dollar as their currency of reference. While we have a sliding devaluation which is at 20 córdobas to the dollar, not at one to one. That also has an important inflationary effect.

And a third thing that I think is important to consider has to do with how the parameters are measures that help us to calculate inflation in the country. I am talking about the basket of the Consumer Price Index. So here the weighting of food products in Nicaragua is almost 45%. In Honduras, the weighting for food products is about 35%. In Costa Rica it is somewhere under 30%. So that international rise in food prices has also had a domestic impact, given the weighting that it has in the make up of our prices.

So the boom in oil prices is a very important cause. It is a tragedy for our countries. To give you a figure that I think might help prick the world’s conscience as regards the tragedy we are living through, 70% of our exports go to pay the oil bill. Here practically nothing is left to invest in social programmes or in economic or social development. Oil is eating up our economies. Oil is eating up our highways.

The contracts we were undertaking with the World Bank, the Inter-American Bank or whoever it may be, in order to build a highway of 300 kilometres, let’s say, today with the increase in oil prices and its impact, because it is a universal cost, now we can only build perhaps 150 kilometres and that’s if we act right now and that is something becoming constant. Because there’s a cycle in the process of appraising highways. We have to invite bids and when we invite bids we have to go with amounts that we already know are below the real cost and so the contracts end up being declared void.

And every day that passes with that increase in the oil price, that tragedy going on in the world right now, I think the developed world could give a response.  I think that if there were a consensus between everyone about what is the reality of oil then oil could not be subject to the volatility of financial bubbles. It could not be subject to future prices. It could not be subject to countries’  individual policies because oil has to do with the very life of the planet.

So that is a powerful reason why inflation is being generated in the world. Really not a single country has escaped, not even the developed countries. I just came back from the Untied States and there the price of fuel for vehicles is higher than we have here. It is something that shows we really are seeing a shock.

There are other reasons that have to do  with inflation and that has to do with the structural aspects of our economy. We have prices that are structurally high. For example, investment costs, interest rates are structurally high in our countries. Because it is difficult to resort to the international market to get resources to finance and set up production or investments in our countries, because , as well as the normal cost they apply country risk factors or some other factor in such a way that makes those rates structurally high here. And it has to do too with the poor development of our financial system. All that together also makes it harder for us to produce competitively with an overall impact that might keep inflation to a minimum.

There are other reasons, that I think our countries have been steadily eliminating. For example, Nicaragua has been subjected to structural adjustment policies for about 17 years. That does not cause us to generate inflation via an excess in money supply. Nor does it lead us to generate inflation via fiscal imbalances. No. Because we are very adjusted. And now, at a time when we really are beginning to have some success in our macroeconomic programmes, we are beginning to be affected by external factors that are leaving our countries without any fiscal capacity.

But that’s not the only problem. The problem is the lack of any real coordinated response from the international financial organizations  that are working with us to maintain macro-economic stability at any cost. Because there are no new resources. There are no new cash resources  we can make use of so as also to exploit the advantages that accrue from an increase in world food prices  when our countries are food producers. We are net food producers. Theoretically,  we ought to be able to take advantage of this kind of situation and we cannot.

We are just about on target to increase food production so as to avoid famine in our countries. And in Nicaragua, since we have a successful revolution here, we are talking about managing to reach maximum production of basic grains, of beans, of rice, of products that are a useful part of the basic basket of products in Nicaragua, but also we are thinking of people in Central America because we think in terms of joint projects, of regional projects. Projects in which all of us together seek how best to face our problems. And there the quality of any responses we get is really important. We have not met with totally satisfactory responses in those we have got from the international financial organizations so far.

So  the result of all this is that the fundamental balances in our countries deteriorate and that could lead us towards potentially greater risks of inflation despite the fact that we are working to try and eliminate all the collateral elements, working on all those aspects that from the point of view of government policies, the politics of the State might serve to weaken the impact of those risks.

Thank goodness those impacts are not too bad yet, because we have made progress on policy. We are negotiating directly with producers so as to reach agreements jointly with them  that permit us to keep costs as low as possible. And we are eliminating some tariffs for them on raw materials that are vital for producing bread for example or other things vital for people’s survival. That is the context we are in. It is a very inflationary context.

TcS : What weight within that inflationary context does it have – I think it was in March 2006 that the US Federal Reserve stopped publishing figures of  M3 and since then various independent analysts have calculated that right now the supply of money and credit in the US is up around a range of 16% to 20% -what weight does that have for the inflationary context here in Central America?

AG : Well, that’s an issue that has a direct impact. The reality is that Central America’s biggest trade partner is the United States. So it is simple when we know who is that fundamental trade and economic partner, using the Stopler-Samuelson theorem we can easily work out that any policy action in the United States is going to have a big impact on our economies. Only in our economies the effect will be an inverse one. It is an old saying that when the United States catches a minor cold then here we end up with pneumonia. That is the reality.

…. the problem of weakness in the North American currency is what is leading the United States to take domestic policy action that also works against the possibilities for our markets to enter the North American market. For example, faced with the mortgage crisis they have produced billions of dollars to try and resolve their domestic situation. And that turns into a shower of dollars falling into our countries and creates problems for our exchange rate and fundamentally for our export competitiveness.

The terms of trade turn very difficult for our countries in conditions where we have no say. We become simply passive receivers of that kind of policy. Right now, for example, the solution to the North American crisis is still not clear, the housing crisis, the financial crisis. And the responses the US government is offering are right for the US government, for the US people, in the sense that they are expanding budgetary spending. They are producing resources from wherever they have them and increasing internal spending to try and sustain more or less stable conditions but they have not been able to do so.

There is a crisis situation for North American workers who are being dismissed by the thousand. There is a crisis situation in the supply of some products and all that immediately turns into a problem for our economies because when they are dismissing even North American workers, there is that much less opportunity for emigrants from our region who represent a flow of important remittances  for our economies. Opportunities for them  are just diminishing or else they are turning to less well paid economic activities  or else simply disappearing from the North American job market.

The same is happening in Europe and all that creates pressure on us because a significant part of the resources that come in the form of family remittances serves to give our countries financial and monetary stability. Those remittances turn into a monetary tool that strengthens our reserves and allows us to maintain a dynamic internal economy. But in the measure that starts to diminish then it generates a scarcity of reserves. That translates into a shortage of cash in people’s hands and that immediately affects price levels.

In effect, the North American crisis, that still has no sign of a solution, no one up to now has been able to show me that we in fact know for sure when it will end, that crisis is rather like a dark night where one still sees no light at the end of the tunnel. There is no way out. No possibilities present themselves. That leads our countries to have to make adjustments. And that means more unemployment, less production and less budgetary capacity in our countries to fund social projects and all that impacts directly on inflation.

TcS : From the point of view of the Finance Ministry what have been the government’s key measures to control inflation?

AG : The measures we have been developing in our country since the government of Comandante President Daniel Saavedra Ortega took office have been aimed primarily at maintaining the health of public finances. The public finances are healthy and that is an important achievement that means the rest of the monetary and financial system also stay within an acceptable range of well being. But that fiscal health is characterized mainly by a lack of excess spending without clear funding sources. So any expense has to have its financing clearly defined so as not to create inflationary pressures that are going to affect the poor and we have already noted that inflation affects the poor most of all.

That was also accompanied by what I would call radical savings measures, radical in the sense that for years we struggled to eliminate mega-salaries from the State institutions….Here there were individuals earning exorbitant salaries that never in their life would they earn anywhere else in the world. But they were earning them here. So I use the term radical because President Ortega said, this is my salary and everyone else earns less relative to this. And as Finance Minister obeying Daniel’s orders, we then applied norms for public officials’ salaries leaving them within ranges that were acceptable but very much lower than what previously was earned by the average Minister.

That is a very important measure that freed up resources that were assigned straight away to social policies the government was beginning to development that were made up in a first phase of ensuring free education, free health care, food production programmes called Zero Hunger and the funding programme for small business initiatives for poor people in urban areas related to the Zero Usury programme.

….we also found numerous projects that generated inflationary pressures,projects supposedly aimed at protecting the most dispossessed but in which more than 40% went on running costs, in consultancies, in studies, in sub-contracts to sub-contracts of services that were the duty of the State to do but which were farmed out to others. And all that did was remove huge resource  flows from projects that were operating without delivering anything much to the poor.

All that we have tried to eliminate from a fiscal point of view. But what else have we done? We have ensured a medium term fiscal plan and schedule that is well advanced and structured and which has helped us in our negotiations with the International Monetary Fund, the Inter-American Development Bank, the World Bank, so as to try and articulate a vision of human development that allows us categorically to set a long term horizon for our country….

TcS : Lately, Minister, you and your colleagues in government have reached an important agreement with the IMF and it looks as though the IMF in general and the other international financial institutions that affect the economic life of the country seem very satisfied with the government’s achievements, do you think that is an accurate observation?

AG : I have to say that from the moment we in the Sandinista Front and the Nicaragua Triumphs Alliance offered a programme of government to the people, we laid out the basic points for our government. And on that basis we developed Nicaragua’s economic and financial programme and from that we implemented economic and financial programmes with the IMF. In other words, all that we are doing is not done to satisfy the IMF or the World Bank or the Inter-American Development Bank of the Central American Bank for Economic Integration. Everything we are doing is because we understand what we must do to give impoverished people in Nicaragua a chance to escape from poverty.

And we know very well that if we do not have economic stability, if we do not manage to have a good environment to attract investment, if we do not manage to channel  initiatives to generate employment for our people, then we are not going to meet our historic programme of taking the Nicaraguan people to a higher level of economic and social development. So everything we do from the point of view of fiscal and economic decisions and policies of all kinds in this government of President Daniel Ortega stems from our collective conscience under the leadership of Daniel which has meant we developed those actions and policies. And he has always been very clear. With or without the IMF that is what we are going to do. Because it is not to satisfy someone else.

TcS : We have just come from a meeting with the compañeros of the Caruna Caja Rural Nacional cooperative. And one of the things that was impressive in the presentation they made of Caruna’s activities was the impact on production of the investment Caruna is able to make thanks to Venezuelan cooperation. How important is that investment from Venezuela for the country’s economic development?

AG : I prefer to use the term Venezuelan participation, because when some people see it in terms of cooperation they think it is an official cooperation and want to confuse things so as to give it another interpretation. No. Venezuelan participation is strategic for Nicaragua. It is a strategy with the revolutionary meaning that Comandante Hugo Chavez has given the Bolivarian Revolution. I think in our countries, given the habitual context we have lived and from which we are coming, we have no alternative. We do not have alternatives to change the correlation of terms of trade in which the prices of the goods we import constantly rise while the price of the primary products we export constantly falls.

In that context, in that international market, in that savage capitalism, we have no alternative. In that savage capitalism in which every resource that you need to get for your country, come what may, is made available with political and ideological interests or with conditions that become more and more difficult to meet so that you end up stripping away from peoples their right to self-determination. There are no choices for us in that kind of set up, in that world of selfishness, exorbitant profits where nobody cares about ecological balance or the conservation of the environment we live in, where people only seek profit. In that world we do not have alternatives.

So in Latin America, thank goodness, exists ALBA. The ALBA of the people. ALBA is a non-traditional response based on values like solidarity and complementarity, respect for sovereignty, recognition of unequal development among countries, the need to search for joint policy responses among everybody, to look for viable alternatives that really do favour our countries’ social and economic development. So in the ALBA framework Nicaragua now forms part of that Bolivarian alternative for the peoples of our America. We get advantages like the fact that today we do not have energy rationing.

Sometimes people see that as something easy. It is not easy. For 16 years neoliberal governments misgoverned our country and I say misgoverned not because I want to criticize. They misgoverned because the number of people in poverty grew and because poverty won our across the whole of Nicaragua. Nobody can feel proud of that. That’s why I say they misgoverned. The very people that had the most harmonious relations with the United States, with the big countries that affect our lives, they were unable to resolve the problems of the power cuts  or the energy problem. Who knows where we would be in Nicaragua under those kinds of policy frameworks?

Within the ALBA framework we have had flexibility only a brother can give you. For example the electricity generating plants. Venezuela never said to us they would sell us those plants or rent them to us. Venezuela told us "Brother , you need them, I was bringing them for us but here, you take them, we’ll sort out later how we settle up." It’s like when you are thirsty and your friend or your brother has a glass of water and says, here, drink this. That is crucial.

That is why I tell you it is strategic for Nicaragua  the contribution and participation of Venezuelan financial mechanisms or institutions  that have allowed us via Caruna for example – a private company, completely private – to help thousands of rural workers and their families who had been forgotten by the neoliberal system, who were unable to get credit to work their plots of land, who had been unable to get technical assistance to improve their productivity, who had been unable to access markets that let them market their produce equitably, at a fair price – none of that existed. So via Venezuelan participation  those resources have been made available and I can say for sure that today I feel content because on the journeys I make I see the fields green again. And that is a sign that here there is going to be production, food and that there is not going to be famine in Nicaragua.

TcS : Could you talk a bit about the outlook you see for the country’s economic development between here and 2011 and your hopes as regards inflation?

AG : I think the model we are developing in Nicaragua is a model supported by our country’s natural economic base which is agriculture and cattle which for years were neglected because specialists who know about these matters asked us why we were going to produce food and that we’d do better to import food because it was cheaper to do that. And that led to thousands of Nicaraguans having to emigrate because rural production seized up. It was an ideological thing more than a pragmatic one.

So the model we are developing is oriented to reactivating the medium, small and micro production base that sustains our economy and is the dynamic for Nicaragua’s economic activity. This model we are developing is allowing a massive participation by the people in regenerating productive processes, social processes, processes of cultural transformation of our national identity. It is an integral model in which the perspectives for economic development are generating real hope. …..

That has to give us hope that in future we are going to have abundant, sustainable production that helps our people to eat in the first place but also to have employment and that we are going to be bequeathing to our children in truth a better Nicaraguan more productive, deeper rooted, more humane, more social. From the economic point of view I can foresee that all the programmes and projects we are developing are already beginning to meet success and starting from next year we are going to see substantive production in areas in which Nicaragua almost stopped producing.

So I believe one has to recognize the leadership of compañero Daniel. It is compañero Daniel’s leadership that has made possible the articulation of all Nicaragua’s revolutionary forces, which are the most democratic forces, as it happens, because they are those that allowed the Sandinista Revolution to eliminate the Somoza dictatorship and create the bases of the Constitution that now governs us. And it is that that gives us the rules of the game for our country so that in the moment of losing the 1990 elections, power was handed over and the Revolution worked with the people to return again and re-inspire hope, returning to carry out this victorious revolution. I don’t think the Revolution can go into reverse now

That is the greatest hope I have because I know it is based on the motor that drives every revolution which is the people. And it counts with a solid, mature leadership, proof against anything, that has shown responsibility as much in its political decisions as in its economic ones, in its social decisions and even when necessary in its military ones. Because I am not going to conceal the fact that Sandinistas know how to struggle in every context. But today we are in combat in a different way. Today our enemy is the scourge of poverty. And you can be sure we are going to defeat it.

In the long run what I understand by my vision, from the perspective of the model we are developing which I believe is going to be successful and that we will see very soon, very soon in every area. I think Nicaragua is being reborn. I think Nicaragua is going to have a unique opportunity in its history to rebuild its social relations, to rebuild its productive relations, to rebuild its bases for a more just society.

Nicaragua, a different focus – www.tortillaconsal.com

---