Is the Government giving the same response to two different crises?

The Nicaraguan Government´s lack of a public call for social distancing and instead, implementing measures to increase direct contact, befuddle many observers. This Nicaraguan economist makes a cogent economic policy argument that might explain such an approach, while also showing the seriousness of the economic impact of the crisis, that will make it significantly different from the April 2018 crisis.

Is the Government giving the same response to two different crises?

By José Vélez in Confidencial, March 28, 2020

[original Spanish]

All the economic measures taken up by other Governments in economic matters terrify and outperform the Government of Nicaragua.

According to Mario Benedetti, on a mural in the city of Quito is the famous phrase “when we had all the answers, they changed the questions on us”. The president of Nicaragua should begin his speech with this quote. The responses of the Government of Ortega to deal with the economic crisis resulting from the social and political explosion of April 2018 left the governmental priority clear. Keeping intact the state apparatus was the central objective. This model assumed the subsistence of large businesses and the existence of an unchanging external world, with family remittances growing and the maquilas operating at 100%.

The Government responded to the first crisis with contractive measures and as expected, the recession worsened. The tax reforms and the reforms to Social Security weakened the production sector and made the basic basket of goods more expensive. The Government accomplished its objective, maintaining a payroll of 200,000 public employees, while the private sector laid off more than 150,000 workers. Another one of the government measures to delay the energy crisis, in times when each barrel of oil had to be paid in cash, was to increase three consecutive times the cost of energy. The increase in the rate charged to households added up to 17% (FUNIDES), reaching the highest rate in the Central American region. The cumulative result of the contractive policy in times of crisis lead to drop in GDP of 5.7% (IMF). In other words, since the beginning of the crisis GDP has lost 1.431 billion dollars, an amount nearly equal to family remittances received during an entire year.

The Government has still not reacted to the second crisis caused by coronavirus, and it has good reasons for not doing so. All the economic measures taken up by other Governments in economic matters terrify and outperform the Government of Nicaragua. The measures assumed by the paralysis of economic activity exactly undermine the revenue collection policy that has ensured the subsistence of the immense state apparatus. In Spain, France and Italy the governments decreed a moratorium for months for the payment of taxes for small and medium enterprises, it also suspended payments to Social Security. Argentina and Chile in the midst of their crisis also waived contributions to social security for businesses that have had an interruption of their operations, and deferred income tax payments. In Nicaragua the hunger of the Government for resources keeps it from limiting public life as a health measure, because it would paralyze economic activity which it cannot even moderately redress.

The Government of Nicaragua seems to be willing to provide the same contractive response to this new crisis. Tax relief or a significant reduction in the cost of energy are not in view.  In addition to the indifference of the Government to the new panorama of the Nicaraguan economy, severe external changes compound the situation.

Family remittances that grew each year until surpassing $1.5 billion dollars are about to plummet. 700,000 families counted on this monthly salvation package. The pandemic has paralyzed all the countries where these remittances come from, such as the United States (56%), Costa Rica (17%), and Spain (13%). Calculating the blow from the fall in family remittances is a complex and terrifying task. How much are our compatriots earning from their apartments under quarantine? Do they have enough to survive? How do they get to the remittance agencies with the health measures? Are they in good health?

The businesses under the Free Trade Zone regime that generated 125,000 jobs also are directly affected by the world crisis of the pandemic. These jobs are linked to  value chain gears in the international market, depend on specific orders from brands, and the existence of raw materials that they receive partly from other countries. The situation of these enterprises has to be critical, on March 24 after hours of discussion they were able to sign an emergency agreement with the authorities of the Free Trade Zone Commission and a dozen unions. The document justifies the measures, appealing to “the interest of mitigating the effects caused by the COVID-19 contagious disease, produced by the coronavirus.” This is an example of responsibility on the part of a state entity worthy of replication. With what appears to be a layoff letter with a ton of illegible signatures, the businesses are authorized to “carry out temporary suspensions of labor contracts”, naturally supported by article 38 of the Labor Code. Knowing how many of these enterprises will close operations and how many thousands of men and women will lose their jobs is a matter of days.

In Nicaragua two crises coexist, and a Government with the same objective, maintaining a huge and powerful State.  The relief from remittances could remain as a good family memory, the large job creators are packing their bags. Public life and business dynamics are being paralyzed, adapting to the fears of contagion that the rest of the planet is suffering. The Government has to assume its responsibility and revise its responses, even though it is not because of its decrees that the population and the private sector are dedicating all their efforts to “mitigate the effects caused by the COVID-19 contagious disease.”

 

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