The package of fiscal and Social Security reforms imposed by the Government, hoping to raise tax collection, faces a unanimous rejection by business chambers: “It means a coup d’état to the economy, it will cause more unemployment and capital flight,” summarized the President of the Superior Council of Private Enterprise (Cosep), Jose Adan Aguerri.
The business sector contradicts the government discourse and assures that the reforms will not only decapitalize large companies but will increase the prices of basic products imposing new burdens to the lower income sectors, and also the negative effect it will have on the insured and potential pensioners.
The million-dollar question is how the business people will react faced with the certain passage of this fiscal package this week. Will they accept it under protest? Will they negotiate with the Government? Or will they resort to other forms of pressure, such as civil disobedience, to try to reverse it? “We are going to review what is approved first…any action is contemplated…nothing is ruled out,” answered Aguerri in this interview with “Esta Semana” (This Week) and Confidencial.
Cosep assures that this reforms package is confiscatory, ant that it represents a coup d’état to the economy, why?
It is confiscatory because article 114 of the Constitution prohibits confiscatory taxes. The non-confiscatory principle is based on the economic capacity of the companies; taxes cannot go beyond the patrimonial capacity. They cannot reach the level that the company’s assets are practically confiscated. And, what is happening with this reform is that there are companies that, effectively, to apply this reform as is, would have to face that reality.
It is a coup d’état to the economy, because this reform, if passed as it is, will decapitalize companies by reducing their working capital; Second, it produces capital flight; Third, it causes a lack of investment. This will have concrete results such as unemployment, a larger informal sector and the rising cost of living.
We are already living, since last year, problems of falling consumption and the lack of credit. This will only aggravate these problems, and will lead to a situation of illiquidity, insolvency and bankruptcy of companies, and therefore to a greater number of Nicaraguan families affected.
The blow is for all citizens
In justifying this reform project, Finance Minister Ivan Acosta and other government officials Government and deputies allege that it is specifically aimed at 400 large and medium-size companies. How does it affect the rest of the population, small businesses, salaried workers, the unemployed and those self-employed workers?
It is false that those who have less will not be affected. It is false that micro and small businesses will not be affected. The first blow for all citizens goes through the fact that a greater number of basic products will be taxed with the VAT (value-added tax). That means that it will be more expensive for me to make a juice, make a soup. In the case of indirect taxes, when the chayote goes up, when the orange goes up, it does not discriminate if I have more (money) or I have less, it will rise the same for the one who has little, as for the person who has a lot.
The chamber of industries affirms that 70% of the basic products that were exempted will be affected. Have you made any estimate of how much prices could rise?
In the case of industry, costs will rise by approximately 16%. Depending on what type of competitiveness and elasticity the product has in the market it will be determined how much that product will go up to the consumer, and if it will take you out of competitiveness and the market.
For example, the basic products made by national industries includes soap, detergents, etc., if this is approved as it is, they will not be able to continue producing, because it will be cheaper to bring Costa Rican and Honduran products, and they will take you out of the market because of that reality, in which you cannot close the borders either.
Does it have any impact on fuel, which is a variable that has chain effect on the rest of the economy?
If the fuel companies wanted to transfer their tax increases to the final consumer, that means that the final gallon pump price would have to be increased by a dollar and fifteen cents, and there you do not differentiate between an executive from the free trade zone or a messenger who works with his motorcycle. These are real situations that do not differentiate if you are small or if you are big.
Transnational corporations: “we are leaving the country”
Last Thursday the approval of this reform was postponed until this week, and the Government alleges that it’s going to expand a so-called consultation by inviting different sectors. Is there a negotiation of the business chambers or the companies with the government and with the National Assembly?
In the case of the chambers, and as Cosep, our position has been evident that if the Government continues in the position of not wanting to enter into a negotiation on (political) issues [with the opposition forces], not only economic ones, we are already advancing in the decline that the entire Nicaraguan society is suffering.
The chambers, in general, do not present ourselves to the (National Assembly), what we did was to express through communiqués the reality of this reform depending on the sector to which you belong. Yes, there were companies and one or another chamber that attended, and they were very clear in expressing what it means to them if this is maintained.
There are transnational corporations that participated and said bluntly: “it this is approved as it is, we are leaving the country.” And, I believe that they (the deputies) do not understand that this will produce an economic situation where the most affected will be the Nicaraguan worker and family, so the economic cost will have to be assumed by the one that makes the final decision.
Has the Government presented any projection of the collection impact of these measures? Is it viable that they can raise 300 million dollars?
Since last year the government is looking for 300 million dollars, which it has not been able to obtain abroad. So, now it is trying to find, through this reform, how to recover that loss of tax revenues. In the budget reform last year, they said that they would have by the end of the year an injection of 300 million dollars that did not arrive. The same thing is going to happen with this reform. They say again that they are going to get 300 million, but that will not come, because there is no certainty and confidence.
If there is no recovery of credit, if there is no recovery of consumption, these numbers are not going to happen. And, as has been presented in different scenarios, done from Funides to different independent economists, what we are going to see is an even greater fall of the economy this year, added to the almost nine points that we dropped last year.
The Social Security reform package, which increases the contributions of employers and workers and reduces future pensions, has already entered into force when it was published in La Gaceta. How does it differ from what was approved before April 18, and from which Ortega subsequently retracted and said it had been a mistake?
First, the gradual effect of the previous reform disappeared. Here they apply an immediate increase to employers. In the case of the free trade zone, in the maquila sector, free trade zone workers will have to pay 4.3 million dollars, as a result of this increase that has been made with this reform to Social Security, and for the companies it means more than 20 million dollars. That (will happen) in a market where you are a price taker, in companies where they already have signed contracts, based on international prices, and that they will not be able to transfer this type of increase.
Secondly, what the Government continues to do, as it did with the previous decree, is once again transferring the costs, mainly political and financial, to the companies, and not assuming the sustainability of INSS (Nicaraguan Social Security Institute). Job stability at companies will be affected over time and this will not allow INSS to be sustainable in the future.
The government is shying away from the substantive issues for the INSS to have that sustainability. We already had an impact of tens of thousands of loses of formal employment. The only thing that this will do is continue to increase informal employment, and for companies to make the decision to stop being formal.
The administrative expenses of INSS have increased fivefold, their discretionary investments have been maintained, without an independent investigation being carried out, and we also have the core problem of this institution, which is its lack of autonomy. The Social Security is the petty cash box, subject to the presidency of Ortega. In this reform package, are there any considerations about these problems?
No. Here we are urgently trying to give oxygen to a patient. What is sought is how to inject immediate income, and I think there is no willingness of the Government to make cuts in expenditures, in the case of INSS and in the government, that would lead to a decision to reduce personnel, public employees. And, therefore, what they are doing is transferring it to the private sector, making us be one to reduce personnel, with the huge error that they are killing the hen with the golden egg, because it will be unsustainable in time for them to continue with that cost structure, without reducing it, and without reducing jobs in the public sector.
Will you accept the reforms, negotiate or resist?
These reforms to Social Security, together with the repression that the regime unleashed when faced with the initial protests, were the trigger for the April crisis, and now Ortega comes to increase them and aggravate them. What would be the possible outcome, if there is a legitimate protest reaction from the population, from the potential pensioners who will have their pensions reduced, or from the companies that cannot assume this burden, or from the workers?
We have insisted that without a political solution to the crisis, this will not give an answer to all the problems we face with the issues of justice, democracy, security and progress.
Parallel to this particular situation that we are commenting on, we have seen signs that had not been there before. We saw a mission come from the United States government, and a mission of Members of the European Parliament, there have been informal, unofficial meetings.
International pressure is a reality that will continue, the economic downturn will continue. As the private sector we are insisting that, while the storm lasts, that the least amount of companies and workers be lost, because once this is over and we start in a very different situation from the one we are living, the private sector is needed, its companies and jobs to generate the reconstruction of the country.
It has been more than a week since the meeting between Ortega and Murillo with the envoy of the State Department, Michael McKinley, who conveyed to him the national clamor to the release of political prisoners, cessation of the repression, and political reforms with early elections. However, until today, Ortega’s only response is this fiscal package and the reforms to Social Security, reviving the situation prior to April 18. Or do you know of any change in the political will of the regime to accept a political solution?
In the political sphere, when these types of missions occur, I think that waiting a week for answers is not the usual. In any case, if there is anything left of these missions, we must give it a reasonable period of time. I believe that we are not going to find out until some actions are taken.
It is clear that the United States this week took the decision to prohibit transactions with Albanisa, that is, in this case the pressure is evident, but I would think that we should be attentive to what these two meetings with different US and European officials have caused.
Let’s go back to fiscal reforms and Social Security. The position of the private sector, as expressed by Cosep, AmCham, Funides and other business chambers, is of total rejection. What will the private sector do when this is approved? Are you going to accept it with resignation? Are you going to negotiate with the Government looking for a modification? Or will you resist and press to try to reverse it?
In the case of Social Security, we will introduce a writ of amparo, regardless of whether the authorities have taken the decision to go forward with that decree, and despite knowing what the situation is that exists in the courts. We have to use what the Constitution and the law give us, and we are going to proceed with a writ of amparo.
Secondly, it has been important for companies to know what the impact of this reform is, with the intention that companies can do the analysis and indicate what will happen. Let’s hope that the deputies who have received these messages, if they have any possibility of doing something about it, will transfer the messages to the authorities where the decisions are made, and we will have to wait for what those answers will be.
On the other hand, it is important for the population isn’t manipulated, in terms of the presentation that the Government puts forth with this type of reforms, saying they are aimed at the rich, that is it affecting those who have more, which is totally false. We are working on a strategy so that the people realize that this affects all Nicaraguans without exception, and that the ruler is responsible, because he has no political will to understand that he has to sit down (to negotiate) so that the country will not continue to be destroyed.
If they are confiscatory measures, as you have said, and if they amount to a coup d’état to the economy, does this represents the basis for an action of civil disobedience? If the Government is violating the law, if it is also impoverishing the population, and causing the flight of capital, is the possibility of civil disobedience contemplated?
Any action is contemplated. We have to know when it is time to take that kind of action. We are in the process, first of finishing the review. Let’s see what happens next [this] week, if they make the decision to continue approving this as it is, if they change it, or if they don’t change it. We have to wait for that moment, and once that happens, we have to start from there to make decisions where, I repeat, nothing is ruled out.