NICARAGUA: ORTEGA TIGHTENS HIS BELT, BUT GON

C O N F I D E N T I A L MANAGUA 000173 STATE PASS OPIC AND IAF STATE PASS USAID/LAC E.O. 12958: DECL: 02/12/2019 TAGS: EFIN ECON EAID PGOV PREL NU SUBJECT: NICARAGUA: ORTEGA TIGHTENS HIS BELT, BUT GON PLEDGES SANDINISTA ECONOMIC PRIORITIES ON TRACK Classified By: Classified by DCM Richard M. Sanders for reasons 1.4 (b) and (d). ¶1. (C) Summary. Faced with a withdrawal of European budget support and decreased economic growth as a result of the global economic crisis, on January 20, President Daniel Ortega issued a presidential decree introducing a number of austerity measures to cut $67 million in expenditures from the 2009 budget. The austerity measures will apply across the board to all state ministries, and the Ministry of Finance will be the enforcer. Quickly following Ortega's decree, on January 23, First Lady Rosario Murillo and Finance Minister Alberto Guevara (along with other members of the cabinet) unveiled the blueprint of the GON,s response to the economic crisis, the "Program for the Defense of Production and Employment." Guevara and the First Lady addressed Nicaraguan financial stability and international cooperation, public investment, agricultural production, the social safety net, and employment. Ortega and Guevara, in addition to Central Bank President Antenor Rosales, have all recently expressed unequivocal support for continued cooperation with the International Monetary Fund's (IMF) Poverty Reduction and Growth Strategy (PRGF),which forms the bedrock of Nicaragua's relationship with traditional donors. End Summary. Hard Times... -------------- ¶2. (C) In response to the freezing of European budget support, and the effects of the global economic crisis on Nicaragua, President Ortega, during a two-hour televised presentation, announced on January 20 the implementation of austerity measures to counteract a projected 2009 budget deficit of $127 million. Ortega told his assembled cabinet that the deficit will be addressed by a cut in government expenditures by $67 million, and that the remaining amount will be covered by a GON $30 million bond issuance, along with a $33 million withdrawal from the Central Bank's international reserves. Ortega emphasized that every GON ministry must present a report on its savings one month following the presidential decree; subsequently, quarterly reports shall be filed detailing the savings achieved. Ortega's cost-cutting measures range from broad civil service personnel issues (a hiring freeze for the first three quarters of 2009) to the mundane (GON employees must print documents using both sides of a sheet of paper). ¶3. (U) Not surprisingly, Ortega used his January 20 presentation to argue that the global economic crisis facing Nicaragua (and the world) was the consequence of the failed U.S. economic model, i.e., neoliberal capitalism. He added that it was misfortunate that Nicaragua was "trapped" in this model, and that the United States, a primary customer of Nicaraguan exports, is now importing less from the developing world. In Ortega's view, Nicaragua must turn to alternative and more reliable trading partners such as Russia, Iran, and fellow countries in the Bolivarian Alternative for the Americas (ALBA). He criticized the steps that the USG had taken to address the economic crisis, observing that "there is money to subsidize banks and big companies, but no money to prevent people from losing their homes." ¶4. (C) During the same presentation, Ortega said that Nicaragua will adhere to its obligations under the International Monetary Fund's three-year Poverty Reduction and Growth Strategy (PRGF),including the maintenance of an adequate level of international reserves (currently about $1.1 billion). Similar supportive statements on the IMF were made by Central Bank president Antenor Rosales to the Nicaraguan media in the days after Ortega's speech. Comment: In the past, Ortega has referred to the IMF as "an instrument of the Empire" (e.g., the United States). He seems to have toned down this rhetoric now that he needs the IMF to help him convince traditional donors not to leave. End Comment. ...But the FSLN's Agenda Marches On -------------- ¶5. (U) Following Ortega's austerity measures pronouncement, on January 23, First Lady Rosario Murillo and Finance Minister Guevara rolled out the "Program for the Defense of Production and Employment," which reinforced Ortega's decree and reassured the FSLN faithful that the Sandinista social agenda will continue unabated in 2009, despite budgetary hardships. Highlights of The GON's "Program" included financial stability and international cooperation, public investment, agricultural production, and employment. Financial Stability and International Cooperation -------------- -------------- ¶6. (U) Guevara declared that the GON will continue to maintain a stable monetary policy, particularly with regard to its 5% crawling-peg cordoba exchange rate regime vis-a-vis the dollar, along with free convertibility. Following Ortega's lead, Guevara signaled that the GON will retain an adequate level of international reserves, and will continue to respect the terms of the IMF's Poverty Reduction and Growth Facility (PRGF) program. In addition, the Central Bank will provide "extraordinary financial assistance" to the Nicaraguan financial system. Specifically, the Central Bank will request a $200 million credit line from the Central American Bank for Economic Integration (CABEI) to inject liquidity into the local banking system. The GON will continue to negotiate with the European Union (EU) to restore 2009 budget support (which was withheld as a result of fraudulent November 9 municipal elections on November 9, 2008). ¶7. (U) A focal point of the "Program" will be increased trade with fellow ALBA countries and Russia, China, and India. To help finance this increased trade, Guevara said the GON is requesting $300 million loan from the Inter-American Development Bank (IADB). The GON will honor its debts and will encourage citizens to honor personal loans. Note: Despite speculation that the GON would not be able to meet its debt service obligations on February 2, the government did pay out the $100 million it owed. End Note. Public Investment -------------- ¶8. (U) Under the FSLN plan, the GON will prioritize infrastructure projects, especially the construction of roads, schools, and the expansion of water and electricity services. The GON forecasts that this effort will create 40,600 jobs. The GON will expand its "Zero Usury" program to issue low interest loans to 70,000-90,000 women. In addition, the GON's "Zero Hunger" program will be enlarged to include more beneficiaries. Improved government supervision of all projects will avoid "under-execution." Agricultural Production and Related Investments -------------- -- ¶9. (U) Minister of Agriculture Ariel Bucardo announced a number of measures to assist poor farmers in the 2009/2010 planting cycle, including a program to distribute improved seeds and 14,000 tons of fertilizer. A GON fund of $17 million will be made available in the 2009 budget to help finance the poorest producers. Agricultural import and export requirements will be made less onerous, and Nicaragua's integration with the rest of Central America's food markets will intensify. Bucardo also stated that Nicaraguan students will be encouraged to study agriculture and related careers. First Lady Murillo emphasized that state universities must work closely with the GON to encourage graduates with agricultural majors to work in the farming sector to decrease the "technical assistance deficit" in Nicaragua. Social Safety Net and Employment -------------- ¶10. (U) Notwithstanding a GON increase in the minimum wage by 60% over the last 20 months, the GON will negotiate new minimum wage salaries with all stakeholders in a way that protects secure employment. Subsidies for public transportation and other basic services will continue, along with a stable supply of basic grains and foodstuffs in order to satisfy domestic demand. The Nicaraguan Technological Institute will increase its capacity to provide job skills for the unemployed from 15% to 20%. Comment -------------- ¶11. (C) The GON has engaged in a very public full-court press since mid-January to reassure the Nicaraguan public, international donors, and the private sector that the FSLN is capable of implementing sound macroeconomic policies in a very challenging environment. Stories regarding the country's fiscal difficulties appear on the front pages of Nicaragua's two major newspapers almost daily. Confronted with a larger-than-usual budget deficit in 2009 as a result of greatly diminished European budget support (by at least $60 million so far) and the global economic crisis, Ortega appears to be scrambling to fill the budget breach while putting on a brave face for the party faithful. CALLAHAN