EL NINO EFFECT HURTING NICARAGUAN ECONOMY

UNCLAS MANAGUA 001009 STATE FOR WHA/CEN STATE PASS TO USTR TREASURY FOR SARA SENICH TREASURY FOR INL AND OWH SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON ENRG EAGR ETRD EINV USTR NU SUBJECT: EL NINO EFFECT HURTING NICARAGUAN ECONOMY REFS: A) MANAGUA 941, B) MANAGUA 698 SUMMARY -------------- 1.(SBU) A drought caused by the El Nino climatic phenomenon is having a negative impact on many sectors of the Nicaraguan economy, including agriculture, banking, and energy. President Ortega's response has been to reassure the public that the drought is not as severe here as in other Central American countries, and that the Government of Nicaragua (GON) is ready to deal with it. Many experts, however, question the government's plan and are concerned that it might further the Sandinista National Liberation Front's (FSLN) political and commercial interests. With neither a coherent government strategy nor adequate financing to deal with the negative impact of the drought, it appears that the economy will continue to suffer for the remainder of 2009 and well into 2010. AGRICULTURAL SECTOR HURTING -------------- ¶2. (U) In 1997, the last time El Nino hit Nicaragua, agricultural production fell by 14 percent, with revenue losses of approximately $21 million. Since the El Nino effect began in Nicaragua in August of this year, most of the country's agricultural regions have experienced a sharp decline in rainfall when compared to last year. Many agricultural regions, most notably in Leon and Chinandega, have experienced rainfall declines of 70, 80, and even 90 percent. ¶3. (U) Producers are understandably worried. Yields of staples such as corn, rice, soy, sorghum, sugar, peanuts, and beans have suffered; crop failures have occurred already this year. Many farmers did not sow seeds for the second planting cycle because they were hoping for rainfall increases. Benjamin Dixon, Vice Minister of the Agriculture and Forestry Ministry(MAGFOR) has said that the GON plans to tell farmers to sow for the third planting cycle on October 15, one month earlier than usual, in hopes that the October rainfall will be higher. Other crops, such as plantains, are growing but the lack of rainfall has greatly diminished their size. The coffee industry appears to be stable, according to local media reports, but there is concern that this year's beans might be less flavorful and fetch lower prices. ¶4. (U) Cattle ranchers have been hit extremely hard this year. Ranchers in Leon told Econoff that they have been forced to sell their products at below normal prices because of a lack of feed and good pastureland; their cattle are growing thin, falling ill, and dying. Beef prices are currently lower because ranchers have sold off their herds for fear that their cattle will continue to lose weight. Dairy producers have seen declines of at least 20 percent in milk production due to a lack of food and water for their cows. The Chamber of Nicaraguan Milk Producers (CANISLAC) is lobbying the GON to create a fund of $59 million to help the industry to plant feed grains in areas of eastern Nicaragua less affected by the drought. They also want preferential energy rates to help keep irrigation costs down. According to Wilmer Fernandez, President of CANISLAC, there will be a marked shortage of milk products and higher prices for consumers if the GON does not act immediately. OTHER SECTORS IMPACTED -------------- ¶5. (SBU) Bankers are concerned that farmers will be unable to repay their loans. Officials from BANPRO, the largest bank in Nicaragua, told Econoff they are particularly concerned about peanut growers, who have received large loans. Diego Vargas, a peanut grower, acknowledged that some growers are worried about being able to repay loans, because the drought is affecting yields. The drought is also adversely affecting the energy sector. Ernesto Martinez Tiffer, the Executive Director of the National Electricity Company (ENEL),told local media that reservoirs are low and the country will need to import more oil to make up for a fall in hydroelectric power. ¶6. (U) On September 23, USAID organized a conference in Managua on food security. The drought's impact on the poorer rural areas of the country was a repeated topic of discussion. Experts in attendance were worried that the drought will have ripple effects on employment and inflation, as well as increase levels of hunger and poverty in an already desperately poor country. Bean prices have been rising steadily. Farmers have an agreement to feed their workers during the harvest, so a rise in the cost of beans significantly raises the cost of employing laborers. Enrique Zamora, General Manager of Lafise International Trade Finance, told Econoff that Nicaragua may have to import staples such as beans and corn that are typically grown in abundance domestically. In addition, aid organizations fear that the drought will affect subsistence farmers -- already poverty stricken -- most severely of all. GOVERNMENT RESPONSE -------------- ¶7. (SBU) During the initial stages of the drought, the GON lacked a plan to address it. As the drought's impact intensified, President Daniel Ortega asserted that it is not hitting Nicaragua as hard as in other countries and that yields for the first harvest were good. He has appointed his wife, Rosario Murrillo, to head a commission to address alleged speculation in basic grain prices. He stated that the state-owned Nicaraguan Basic Foods Company (ENABAS) will buy basic grains directly from rural farmers and small producers at "fair prices," so that they are not "victimized by intermediaries and speculators that have been trying to bleed our rural brothers dry." Farmers have told Econoff that the government does not understand the seriousness of the problem, as evidenced by the President's insistence that the first harvest was excellent and that the drought does not present a huge threat. In addition, the Nicaraguan Farm Producer's Union (UPANIC) opposes recent large budget cuts to MAGFOR and to Banco Produzcamos (Ref. B),which provides microcredit to many small farmers. The fact that these cuts are happening while the sector is confronting the drought provides further confirmation to agricultural producers that the government does not grasp the scope of the crisis. ¶8. (SBU) Many agricultural experts, including Manuel Alvarez, President of UPANIC, have stated that ENABAS does not have the capacity to carry out this plan. Alvarez said that other potential buyers, such as El Salvador, offer better prices to producers for staples than ENABAS does. ENABAS also has difficulty in its basic operations. According to local media reports, ENABAS has 103 silos, but only 10 are still in operation. Other silos have either fallen into disrepair or been sold to the private sector. POSSIBLE ULTERIOR MOTIVES -------------- ¶9. (SBU) Despite GON assurances that it can effectively deal with the drought, agricultural experts opine that ENABAS lacks funds to support the government's plan. It sells grain to consumers for less that it paid, causing the company to be dependent on external funding. Many Nicaraguans, such as Senor Zamora of Lafise, suspect that it comes from Venezuela via ALBANISA, the joint venture between Venezuelan oil parastatal PDVSA and its Nicaraguan counterpart PETRONIC, which monotizes Venezuela's subsidized petroleum sales here. They believe that ALBANISA is using the drought as an opportunity to impose predatory pricing to drive other buyers out of agricultural markets. In addition, experts worry that the GON will impose or threaten to impose price controls, as it has did in the 1980s, which will only harm the economy further. Banking officials noted in a meeting with the Ambassador that the triple-threat of the drought, the No Pago Movement to repudiate debts owed to microfinance lenders (Ref. A),and the GON's tax reform plan (Septel) will exacerbate poverty and social problems, for which the GON will likely blame the United States. COMMENT -------------- ¶10. (SBU) The drought caught the GON and private sector off guard, and neither is prepared to handle it effectively. The GON's plan to deal with the drought may end up doing more harm than good, and might simply serve to further the political machinations of the ruling Sandinistas and their Venezuelan backers. For an agriculturally-based economy like Nicaragua's, this drought presents economic challenges which the GON is not equipped to address. Its effects will be felt for the remainder of 2009 and well into 2010. CALLAHAN