The announcement this Thursday, July 28, that the US economy is in a state of ‘technical recession’, could further weigh down the Nicaraguan economy, whose growth has slowed throughout the year, according to several multilateral financial entities, although the president of the Board of Directors of the Central Bank of Nicaragua (BCN), Ovidio Reyes, continues to declare otherwise.
At the beginning of the year, the Economic Commission for Latin America (ECLAC) predicted that the gross domestic product (GDP) of the country, would grow 3.0% in 2022, data that was modified in its forecast for April, to leave it at 2.5%. Similarly, the World Bank predicted that the nica economy could grow 3.0% during the year, but already in April he had lowered it to leave it at 2.9%.
Although between January and July of this year, the Intelligence Unit of the prestigious British magazine The Economist (EIUfor its acronym in English), increased its forecast for Nicaraguan GDP growth by 0.1 percentage points (raising it from 2.0% to 2.1%), also warned that “growth is expected to slow down notably in 2022-2026”, for “a moderation in external demand, a poor investment climate, and weak credit growth.”
Right now, the highest forecast is from the International Monetary Fund, which puts it at 3.8%, but it still falls short of the upward optimism the regime shows every time it updates its own calculations.
Yes at the beginning of the year, the BCN forecast a growth of 3.5% to 4.5% for 2022, two weeks ago, President Reyes declared on the TV program ‘Estudio TN8’, that “we have already recovered that negative space that we had, and now we are in the field of seeking that path of natural growth for our economy that, we believe, this year it may be between 4% and 5%”.
“That growth projection indicates that they conceive a floor of 4%, it is close to the 3.8% of the IMF, but it does not consider the necessary updates due to conjunctural factors. If anything, those levels of growth are insufficient to lift more people out of poverty,” he told CONFIDENTIAL an economist who works for a guild in the agri-food industry.
“The National Plan for Production, Consumption and Trade”, published late“reflects production rates that indicate that the economy is not going to grow as much as was said in principle,” he added.
Additionally, this expert noted another matter in which the Government also gets a ‘failure’, and that is in relation to the distribution of wealth. “Citizens perceive that the growth achieved only increases the levels of inequality”, perpetuating the injustice that the rich keep getting richer, while the number of poor people who are getting poorer grows.
Political decisions that harm
The deterioration of the Nicaraguan economy has two origins: one internal, and the other external.
Among the local causes, the economist includes “political and social elements, such as the lack of governance, which drives migrationand discourages the positive expectations of citizens and economic agents”.
Also the factors that led to the tax reform and that of pension systemwhich “are not sustainable over time, because they consume the resources [de las empresas] in the form of taxes that should be allocated to investment, in addition to any investment being restricted, because how to invest in a territory where the internal market is depressed, and the installed capacities do not justify making investments?”, he questioned.
From abroad, the brake on the international economy due to the pandemic is listed, and the global logistics crisis that followedplus the Russian invasion of Ukraine, to which must now be added the publication of quarterly growth data for US GDP, after the first quarter of this year was 1.6% lower than the fourth quarter of 2021, and that the second quarter 2022, was 0.9% lower than that of the first quarter of this year.
“The FED (the Federal Reserve, which is what the Central Bank of the United States is called) raised interest rates by 0.75%, to slow down its economy, preventing prices -and wages- from continuing to rise, because it is considered that chronic inflation is more damaging than a short recession,” explained Julio Sevilla, professor at the Terry School of Business at the University of Georgia.
The performance of the economy of Nicaragua’s first business partner -and main source of foreign investment- as well as the economic policy decisions that its authorities take to try to influence the direction that the main macro indicators will take, will have consequences for our country.
Exports and remittances at risk
Professor Sevilla explained that, when interest rates rise, it means that there is less access to credit, which will affect Nicaraguan banks that seek resources abroad to finance local economic activity, while at the same time raising the cost of money they keep in their coffers, to finance the activity of Nicaraguan businessmen.
Regarding the domestic consumption of US citizens and families, he explained that, although the statistics show an increase of 1%, “inflation has been higher, so the net result is negative,” which could lead to a lower growth in the volumes of exports to that country, or the prices we get for them.
“There are sectors in Nicaragua that have been benefited from an improvement in exports”. The number of US citizens doing tourism “is also waking up, but a recession would slow it down again,” she warned.
Similarly, if this ‘technical recession’ affects the wages of workers employed in retail, agriculture, restaurants, etc., that will have an effect on the amounts of remittances they send to Nicaragua, just as the improvement of their income in the previous months, allowed remittances received by the country will increase.
In any case, the economist quoted above indicated that “there is no relationship between the growth of remittances and that of the economy,” he assured.
His opinion is that “although there are more remittances, consumption has a limit”, and that not all recipients of these resources use them to buy products and services. “Some use them to pay debts, which leads to greater bank liquidity, without the banks being able to find secure clients where to place the resources raised. This improves the situation of the banks and the macroeconomic indicators, but not the micro”, he reiterated.
