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Cablegate: Nicaragua: Imf Rep Predicts Gloomy 2009

VZCZCXRO6716
RR RUEHLMC
DE RUEHMU #1492/01 3501712
ZNY CCCCC ZZH
R 151712Z DEC 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 3525
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RHEHNSC/NSC WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUEAIIA/CIA WASHDC
RUMIAAA/CDR USSOUTHCOM MIAMI FL

C O N F I D E N T I A L SECTION 01 OF 02 MANAGUA 001492

SIPDIS

TREASURY FOR SARA SENICH

E.O. 12958: DECL: 12/14/2018
TAGS: EAID ECON EFIN NU PGOV
SUBJECT: NICARAGUA: IMF REP PREDICTS GLOOMY 2009

Classified By: Ambassador Robert J. Callahan for reasons 1.4 b & d.

1. (C) Summary. The IMF's Resident Representative in
Nicaragua, Humberto Arbulu, told the Ambassador on December
10 that the GON faces a very difficult 2009, and that the
Fund had recently downgraded the country's economic growth
forecast from 4% to 2%. The December 4-5 IMF review of
Nicaraguan performance under the Fund's three-year Poverty
Reduction and Growth Facility (PRGF) was unsatisfactory, and
the GON must act to approve a fully-financed 2009 budget if
it is to receive the third PRGF tranche of $25 million. In
February 2009 the GON must service $150 million in bond debt,
a relatively large sum given Nicaragua's limited reserves.
Failure to meet this obligation could result in a collapse of
the financial system, led by runs on banks and capital
flight. The GON's economic team clearly understands
Nicaragua's precarious situation, but it has been unable to
exert any significant influence on President Ortega, who must
take the political steps necessary to assuage an outraged
international donor community as the result of fraudulent
municipal elections on November 9. End Summary.

2. (C) IMF Resident Representative in Nicaragua Humberto
Arbulu met with the Ambassador on December 10 to offer his
views on the results of the December 4-5 review of GON
progress under the Fund's three-year, $110 million Poverty
Reduction and Growth Facility (PRGF) agreement. Arbulu told
the Ambassador the IMF had downgraded its 2009 Nicaraguan
economic growth forecast from 4% to 2% based on three
factors: decreased U.S. demand for Nicaraguan exports as a
result of the recession, a decrease in demand in Central
American markets, and lower worldwide commodity prices for
coffee and other important Nicaraguan agricultural exports.
Decreased remittances from Nicaraguans working abroad in the
United States, Costa Rica and Spain will also contribute to
an economic slowdown in 2009. Remittances account for 12-15%
of Nicaraguan GDP (about $800 million); of that amount,
according to Arbulu, the U.S. share is almost half. The GON
will stagger through the end of 2008 able to meet its
national budgetary requirements, but 2009 will be
challenging, owing in no small measure to the likely decline
of foreign budget support from European donors as a
consequence of the FSLN,s anti-democratic actions.

3. (C) Arbulu told the Ambassador that in February 2009 the
GON must service $150 million in sovereign bonds, issued as
compensation for properties seized by the Sandinistas during
their first period in power (1979-1990), and flagged this
payment as a flashpoint. If the GON fails to honor its debt
obligations, it could face capital flight, runs on banks, and
a collapse of the financial system. International reserves
of $1.1 billion would allow the GON to fully pay the import
bill for 3 months, after which the exchange rate would
collapse. According to Arbulu, the GON,s primary economic
players--Central Bank President Antenor Rosales and Senior
Advisor Bayardo Arce--clearly understand the ramifications of
a default. Rosales privately told Arbulu that the GON could
forgo paying civil service salaries as a stop gap measure.

4. (C) A self-described optimist, Arbulu confessed that he
now only gives the three-year PRGF a 50/50 chance of
continuing in its present form. At this juncture the IMF is
not prepared to disburse its third tranche of approximately
$22-25 million, mainly because the GON lacks an approved,
fully-funded 2009 budget as a result of European budget
support donors threatening to end assistance. Arbulu
emphasized that under no circumstances would the IMF Board of
Directors approve disbursements if the GON does not legislate
its own budget. He added that the IMF will not conduct
another review of Nicaragua until these requirements are met.
Until recently, Arbulu added, the IMF has played softball
with the FSLN economic team, but now that global financial
circumstances have changed and Costa Rica, El Salvador and
the Dominican Republic are requesting IMF assistance, there
will be increased scrutiny of Nicaraguan performance under
the PRGF,s measurements.

5. (C) On the political side, Arbulu told the Ambassador
that while Arce and Rosales are competent in crafting sound
national economic policies, their influence on President
Ortega and First Lady Rosario Murillo is limited. Arbulu
confided to the Ambassador that Rosales had told him recently
that Ortega had paid a very high political price for the

MANAGUA 00001492 002 OF 002


November 9 municipal elections and was at the point of no
return. Even with Nicaragua's isolation in the international
donor community, and a costly potential cutoff of 2008-2009
EU budget assistance, Ortega seems impervious to reason.

COMMENT
-------

6. (C) Arbulu's sobering 2009 prediction for the Nicaraguan
economy would sound alarm bells for most rational economists
or policymakers. The fact that Arbulu's office is physically
housed in the Nicaraguan Central Bank (which affords him
ready access to Rosales' office) along with the fact that he
has represented the IMF here for over four years, lends
increased credibility to his analysis.
CALLAHAN

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