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Without a Political Agreement, Nicaragua’s Economy goes into Free Fall

Funides estimates fall between -7 to -11%, Copades projects -20%. Construction, agriculture, commerce, tourism and financials.

With its refusal to reach a political agreement to advance the presidential elections, the regime of Daniel Ortega is giving a “coup de grace” to the Nicaraguan economy—which slides into depression—after the country fell into recession last year.

“The recession in the Nicaragua economy since the second quarter of 2018 is deepening, and it risks becoming a depression in the short term,” without measures being taken to prevent an economic collapse, affirms Nestor Avendano, President of Consultants for Business Development (Copades) of Nicaragua.

Of all the forecasts, the most amiable is that of the economist Mario Arana, whose calculation predicts a fall close to -5%. Then there is the Nicaraguan Foundation for Economic and Social Development (FUNIDES), which places it between -7% to -11%, depending of various factors.

“That -7 to -11% is a range. Not having an agreement leaves our prognosis the same,” maintains Juan Sebastian Chamorro, Executive Director of the Foundation, and one of the Civic Alliance leaders and a member of its negotiation team. Beyond that, is the -20% to where the calculations of the team of economists working with Avendano leads.

Before talking about his own analysis, Arana prefers to validate those of Funides, which if fulfilled in 2019, “would be more than double the contraction observed in 2018,” which seems “quite dramatic,” although the basis of the calculation for this year started from a lower base.

“The risk factor is the contraction of credit, which was not seen in 2018, but will be felt in 2019, and will slow down all economic activity, whose effects will be seen in the agricultural cycle and commerce,” says Chamorro, of Funides.

Even poorer

In the case of an economy of 13 billion US dollars, a contraction of 10% implies that the gross domestic product (GDP) will be reduced by 1.3 billion dollars more this year, says Arana, who estimates that, the implications for companies will be determined by the sector of the economy in which each one operates. As an example, he points out that those in the area of internal consumption (such as automobiles, or luxury goods), suffer more than those who sell food.

“The tourism industry is also suffering a lot: there is some tourism, but it is small-scale. The construction sector suffers from the lack of financing, and in fact the financial sector itself is suffering. Those of the agroindustry sector faces both the problem of low international prices, and the lack of financing,” he specified.

Confronted with the possibility that nothing will stop a fall that touches the level of -20%, Arana admits that it is possible, although for this, he believes that perhaps a bank failure would come first, a tragedy that no one predicts yet.

Avendano assesses especially “the impacts of the political uncertainty and the tax reform in force since March 1st,” to indicate that “there is a risk of the paralysis of the 2019-2020 agricultural cycle, coupled with the fall of the agro-exportable production on the agricultural cycle 2018-2019.”

Meanwhile, “construction collapses and commercial activity continues to be depressed, aggravated by rising unemployment and the deterioration of the purchasing power of wages,” he warns.

In this probable scenario, “the production of goods and services tends to fall 10.6%, the open unemployment rate plus the equivalent unemployment rate related to unemployment approaches 36% of the economically active population,” that do not generate income, while annual inflation reaches the barrier of 8%, he warns.

Cancel the difficulties

By the different business associations, sectors like the agro-business and housing construction find that the lack of an agreement means quite an uphill battle companies and the producers must transit while the country returns to the path of growth.

Alvaro Vargas, Vice President of the Agricultural Producers Association of Nicaragua (UPANIC), explains that both the permanent crops, as well as the annual crops and livestock, face a combo of difficulties in this 2019, which does not seem to recede, and much less when an agreement was not reached.

That “combo” includes a drop in the international prices of our export products, the possibility that this is a year of drought, if El Nino is declared; the decrease of credit, (and that which is available, will be at high interest rates), plus the tax reform, the Social Security contribution increase, the rise in the price of fuels, and of electricity, etc.

In addition, a member of the Nicaraguan Chamber of Housing Developers (CADUR), told Confidencial that “for us it is not an option that the dialogue be fruitless,” given the collapse of construction activity in general, which in their case has materialized in a fall in the number of houses placed on the market, especially, those that depend on bank credit.

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