Nicaragua - Prologue

MANAGUA. Nicaragua When the Sandinistas stormed Managua on July 19, 1979, they were welcomed by an optimistic though war-weary populace. The new, inexperienced leaders took the reigns of an indebted nation, with vast potential resources but severely limited means with which to develop them.

By the time General Somoza had fled, the Nicaraguan economy was suffering from a virtual paralysis of its principle industries and a restricted monetary supply. During his final days. Somoza ordered the National Guard to bomb the nation's major industries. Material losses in infrastructure alone - housing, schools, hospitals - was estimated at $78 million by the United Nations. Over 10 percent of the nation's mid-to-heavy industries were critically damaged.

At the time, the World Bank reported that private investment was virtually non-existent: real GDP had dropped by 25 percent and production and construction had nearly ceased. Lost income from late 1978 to early 1980 exceeded $2 billion, the equivalent of one full year's Gross Domestic Product. Capital flight prior to and during the insurrection exceeded half a billion dollars, according to the United Nations.

The banking system had been completely decapitalized during the last two years of the revolution. The Somoza government had borrowed extensively from commercial lenders raising the national debt to $1.6 billion and leaving the nation with an urgent need for external financial assistance. Somoza's last act as President was to strip the National Treasury and the nation's overseas accounts of hundreds of millions of dollars.

Nicaragua's financial crisis was compounded when the international petroleum price doubled. The country has to import all of its oil and petroleum products. Combined with a declining demand for Nicaragua's primary exports, Nicaragua's balance of trade went from a $99 million surplus in 1978, to a S71 million deficit in 1980.

In purely economic terms, Nicaragua did not always fare so poorly. During the 1950's and 1960's, the Nicaraguan economy showed exceptional growth, supported by its agricultural and industrial expansion. Though it was subject to cyclical variations, the nation generated substantial growth in exports.

Nicaragua's Gross Domestic Product was the healthiest in Central America, growing at an average rate of 5.6 percent in the 1950's and 6.8 percent in the 1960's. This early growth was attributed to the rapid expansion in the agricultural sector (cotton, coffee, and beef production) and Nicaragua's entrance into the Central American Common Market.

Moreover, during this period, a number of American multinationals, as well as companies from the Netherlands, France, Belgium, and others, set up shop in Nicaragua. Between 1960 and 1970, the total value of exports increased threefold from S63 million to $178 million. Unfortunately, the primary beneficiaries of this economic growth were not average Nicaraguans. President Somoza had amassed a personal fortune in excess of $500 million. Meanwhile, official social indicators revealed a 57 percent literacy rate in 1970, among the lowest in the region. Real salary levels in 1970 had not increased above 1961 and housing, drinking water and adequate sewage facilities were inferior.

Corruption and a low standard of living were not the only problems to besiege Nicaragua. A major earthquake in 1972 destroyed the capital city of Managua, killing thousands and causing an estimated one billion dollars in structural damage. President Somoza's ultimate response to this natural disaster contributed to the fundamental loss of confidence in his regime. In order to finance the city's reconstruction, Somoza's government drew heavily on external credit.

The reconstruction program did not succeed in rebuilding Managua, which remains in ruin today. Indeed, the effort to rebuild was mired in fraud and speculation. Somoza and his close political and business cronies sought to monopolize the program for their own enrichment, alienating both the independent business community and the population as a whole.

The net result of spiraling economic and social instability was a stagnation in public and private investment. By 1975, Nicaragua had the highest level of public foreign indebtedness in Central America. Imbalances in public finances, a negative balance of payments, increasing inflation, a growing foreign debt and rampant domestic capital flight, all contributed to the downfall of the Somoza regime.

Even during periods of relatively stable economic growth in the 1950's and 1960's, the Kissinger Commission Report concluded, "the fruits of the long period of economic expansion were distributed in a flagrantly inequitable manner." Hence, as Somoza's indiscriminate repression became more systematic and pervasive, support for the armed struggle opposition fomented in the productive and professional sectors, as well as in the countryside.

During the 1970's, President Somoza's expanding ownership of Nicaragua's industrial and agricultural sectors squeezed many prominent Nicaraguans out of their businesses. In protest, they organized two major national strikes in 1978. They closed their stores and factories, and rallied foreign support for the revolution.

Most businessmen who remained in Nicaragua after the revolution were part of the National Unity Coalition that toppled Somoza and many supported the revolution's commitment to improved health and education programs for the poor, agrarian reform, religious freedom, political pluralism and a mixed economy.

Shortly after taking power, the Sandinistas began to implement their economic reforms. The Government of National Reconstruction that replaced the Somoza regime consisted of a broad range of representatives from different political perspectives including business people, ranchers, guerrilla commanders and worker's representatives. The junta's original pluralistic goals were a direct result of the diversity of interests represented in the group. The vision of a mixed economy consisted of four principle sectors: traditional business in the private sector; the state sector; production cooperatives in the city and countryside; and the peasant and artisan sector.

The Sandinistas began by nationalizing the Central Bank and appropriating the vast holdings of former dictator Anatasio Somoza Debayle and his personal, political, and business associates. These holdings alone amounted to nearly 25 percent of the economy. These early actions received near universal support from the National Unity Coalition. The group's goals were to raise the living standards of the population through such measures as land redistribution, credit programs, subsidizing basic food prices, and expanding human services.

But beginning in 1981, Nicaragua's economic problems began to multiply. Most importantly, the United States discontinued its foreign assistance, and began supporting the Contra's war efforts. Contra activity resulted in costly damage to Nicaragua's agricultural sector and its infrastructure. Moreover, the government was forced to allocate badly needed resources to the war effort at the same time that private banks were curtailing investment. By 1982, the World Bank, under pressure from the United States, had ceased making loans to Nicaragua. Reluctant to accept the harsh conditions required by other foreign lending institutions and wary of politically motivated lending to certain sectors, the Nicaraguans refused a badly needed Agency for International Development loan in 1982. The $5.1 million loan was slated for private sector development.

International market prices for Nicaragua's primary exports - coffee, cotton, and sugar - steadily declined after 1981, exaggerating the already acute shortage of foreign exchange. Massive flooding in 1982 caused millions of dollars of damage to crops and villages, further straining scarce resources.

The Nicaraguan economy experienced a real growth of one percent by 1983, due in a large part to the small increase in agricultural production. At year's end, Nicaragua's GDP had recovered to only 78 percent of its 1977 level. According to official Nicaraguan figures, as of 1983, agricultural production had reached only 1977 levels. Construction was at 33 percent of the 1977 total, mining at 13 percent and manufacturing at 90 percent. Real wages dropped and the inflation rate jumped to 60 percent. According to the United Nations Economic Commission for Latin America (ECLA), using a baseline of 1975=100, agricultural wages had fallen from 86.9 in 1980 to 42.6 in 1983, while industrial wages had dropped from 152.8 to 84.3.

In analyzing this data, the U.S. embassy has predicted that 1984 and 1985 will bring still worse news for the "hard-pressed" Sandinistas. "At best, the economy will achieve zero percent real growth, with roughly 60 percent inflation, even more severe foreign exchange shortages, little or no private sector investment and a further decline in individual economic well-being," a U.S. economic counselor in Managua reported.

Due largely to a 59 percent decline in terms of trade between 1978 and 1983, Nicaragua has had a balance of payments deficit of $400 to $450 million a year. Annual exports are presently $400 to $420 million and annual imports are $800 to $850 million.

Total trade among Central American countries has declined nearly 50 percent in recent years due to a breakdown of the Central American Common Market, exacerbating problems for Nicaragua and the region.

The Sandinistas have called upon fellow Nicaraguans to bear with the country's economic hardships and to face austerity measures that the government has imposed. Shortages of basic consumer goods are commonplace.

Recently Nicaragua announced to its creditor banks that it was not in a position to make more than a token payment on its debt service arrears, but assured the banks that it would pay when possible. Although the Nicaraguan government was able to meet the payments on its rescheduled $900 million debt to private foreign banks through the end of 1982, foreign exchange shortages have made even the rescheduled debt payments impossible for the last two years.

According to official figures, Nicaragua's total foreign debt is now $4.5 billion.

In addition to current financial and military opponents, the Sandinistas are facing a rising tide of criticism from Nicaraguan entrepreneurs.

To stem this tide the Sandinistas have offered a number of economic reforms, some of which address private sector concerns. In an attempt to boost the economy, President Ortega declared last February that austerity measures had to be instituted as a consequence of the war effort. The economy, he said, was the "rearguard in the people's war" and he asked Nicaraguans to prepare for bigger sacrifices in facing the country's acute economic crisis. The primary measures included:

• incentives for domestic agricultural production via credits, higher prices, and payment in dollars for large harvests;
• elimination of subsidies on basic goods such as rice and cooking oil;
• devaluation of the currency. The rate of exchange increased from 10 to 28 cordobas for the U.S. dollar. A free parallel foreign currency market will be allowed to operate through money change houses.

In defending the government's major economic reform package, Vice-President Sergio Ramirez confidently stated "this is the first country in Latin America in 26 years to ... introduce a strong economic reform package that will call upon the people to sacrifice in which riots have not occurred. It is a simple demonstration that we have strong support of the people."

But, says a high-level U.S. official in Managua, "the Reagan administration hasn't really begun to tighten the screws on these people."

In order for the Sandinistas to succeed on the home front, they will need the full cooperation of Nicaragua's businesspeople. According to the Ministry of the Interior, 60 percent of the economy is still in the hands of the private sector and 40 percent is controlled by the state sector. The private sector participates in 75 percent of the country's primary activity, 60 percent of its secondary, and 50 percent of its tertiary activities.

Abolition of the Ministry of Planning offers some indication that the Sandinistas are serious about pursuing a "mixed economy." Oscar Sanchez, President of the Dutch subsidiary of Van Leer Ltd., is already supportive of the government's efforts to work with the private sector. He thinks a sincere dialogue is developing that could lead to economic improvement. But what's needed most, he says, is peace.