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Cablegate: El Nino Effect Hurting Nicaraguan Economy

VZCZCXYZ0000
RR RUEHWEB

DE RUEHMU #1009/01 2871602
ZNR UUUUU ZZH
R 141602Z OCT 09
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 4656
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1376
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUEAIIA/CIA WASHDC
RUCJAAA/USSOCOM MACDILL AFB FL

UNCLAS MANAGUA 001009

STATE FOR WHA/CEN
STATE PASS TO USTR
TREASURY FOR SARA SENICH
TREASURY FOR INL AND OWH

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON ENRG EAGR ETRD EINV USTR NU
SUBJECT: EL NINO EFFECT HURTING NICARAGUAN ECONOMY

REFS: A) MANAGUA 941, B) MANAGUA 698

SUMMARY
-------

1.(SBU) A drought caused by the El Nino climatic phenomenon is
having a negative impact on many sectors of the Nicaraguan economy,
including agriculture, banking, and energy. President Ortega's
response has been to reassure the public that the drought is not as
severe here as in other Central American countries, and that the
Government of Nicaragua (GON) is ready to deal with it. Many
experts, however, question the government's plan and are concerned
that it might further the Sandinista National Liberation Front's
(FSLN) political and commercial interests. With neither a coherent
government strategy nor adequate financing to deal with the negative
impact of the drought, it appears that the economy will continue to
suffer for the remainder of 2009 and well into 2010.

AGRICULTURAL SECTOR HURTING
---------------------------

2. (U) In 1997, the last time El Nino hit Nicaragua, agricultural
production fell by 14 percent, with revenue losses of approximately
$21 million. Since the El Nino effect began in Nicaragua in August
of this year, most of the country's agricultural regions have
experienced a sharp decline in rainfall when compared to last year.
Many agricultural regions, most notably in Leon and Chinandega, have
experienced rainfall declines of 70, 80, and even 90 percent.

3. (U) Producers are understandably worried. Yields of staples such
as corn, rice, soy, sorghum, sugar, peanuts, and beans have
suffered; crop failures have occurred already this year. Many
farmers did not sow seeds for the second planting cycle because they
were hoping for rainfall increases. Benjamin Dixon, Vice Minister
of the Agriculture and Forestry Ministry(MAGFOR) has said that the
GON plans to tell farmers to sow for the third planting cycle on
October 15, one month earlier than usual, in hopes that the October
rainfall will be higher. Other crops, such as plantains, are
growing but the lack of rainfall has greatly diminished their size.
The coffee industry appears to be stable, according to local media
reports, but there is concern that this year's beans might be less
flavorful and fetch lower prices.

4. (U) Cattle ranchers have been hit extremely hard this year.
Ranchers in Leon told Econoff that they have been forced to sell
their products at below normal prices because of a lack of feed and
good pastureland; their cattle are growing thin, falling ill, and
dying. Beef prices are currently lower because ranchers have sold
off their herds for fear that their cattle will continue to lose
weight. Dairy producers have seen declines of at least 20 percent
in milk production due to a lack of food and water for their cows.
The Chamber of Nicaraguan Milk Producers (CANISLAC) is lobbying the
GON to create a fund of $59 million to help the industry to plant
feed grains in areas of eastern Nicaragua less affected by the
drought. They also want preferential energy rates to help keep
irrigation costs down. According to Wilmer Fernandez, President of
CANISLAC, there will be a marked shortage of milk products and
higher prices for consumers if the GON does not act immediately.

OTHER SECTORS IMPACTED
----------------------

5. (SBU) Bankers are concerned that farmers will be unable to repay
their loans. Officials from BANPRO, the largest bank in Nicaragua,
told Econoff they are particularly concerned about peanut growers,
who have received large loans. Diego Vargas, a peanut grower,
acknowledged that some growers are worried about being able to repay
loans, because the drought is affecting yields. The drought is also
adversely affecting the energy sector. Ernesto Martinez Tiffer, the
Executive Director of the National Electricity Company (ENEL), told
local media that reservoirs are low and the country will need to
import more oil to make up for a fall in hydroelectric power.

6. (U) On September 23, USAID organized a conference in Managua on
food security. The drought's impact on the poorer rural areas of the
country was a repeated topic of discussion. Experts in attendance
were worried that the drought will have ripple effects on employment
and inflation, as well as increase levels of hunger and poverty in
an already desperately poor country. Bean prices have been rising
steadily. Farmers have an agreement to feed their workers during
the harvest, so a rise in the cost of beans significantly raises the
cost of employing laborers. Enrique Zamora, General Manager of
Lafise International Trade Finance, told Econoff that Nicaragua may
have to import staples such as beans and corn that are typically
grown in abundance domestically. In addition, aid organizations
fear that the drought will affect subsistence farmers -- already
poverty stricken -- most severely of all.

GOVERNMENT RESPONSE
-------------------

7. (SBU) During the initial stages of the drought, the GON lacked a
plan to address it. As the drought's impact intensified, President
Daniel Ortega asserted that it is not hitting Nicaragua as hard as
in other countries and that yields for the first harvest were good.
He has appointed his wife, Rosario Murrillo, to head a commission to
address alleged speculation in basic grain prices. He stated that
the state-owned Nicaraguan Basic Foods Company (ENABAS) will buy
basic grains directly from rural farmers and small producers at
"fair prices," so that they are not "victimized by intermediaries
and speculators that have been trying to bleed our rural brothers
dry." Farmers have told Econoff that the government does not
understand the seriousness of the problem, as evidenced by the
President's insistence that the first harvest was excellent and that
the drought does not present a huge threat. In addition, the
Nicaraguan Farm Producer's Union (UPANIC) opposes recent large
budget cuts to MAGFOR and to Banco Produzcamos (Ref. B), which
provides microcredit to many small farmers. The fact that these
cuts are happening while the sector is confronting the drought
provides further confirmation to agricultural producers that the
government does not grasp the scope of the crisis.

8. (SBU) Many agricultural experts, including Manuel Alvarez,
President of UPANIC, have stated that ENABAS does not have the
capacity to carry out this plan. Alvarez said that other potential
buyers, such as El Salvador, offer better prices to producers for
staples than ENABAS does. ENABAS also has difficulty in its basic
operations. According to local media reports, ENABAS has 103 silos,
but only 10 are still in operation. Other silos have either fallen
into disrepair or been sold to the private sector.

POSSIBLE ULTERIOR MOTIVES
-------------------------

9. (SBU) Despite GON assurances that it can effectively deal with
the drought, agricultural experts opine that ENABAS lacks funds to
support the government's plan. It sells grain to consumers for less
that it paid, causing the company to be dependent on external
funding. Many Nicaraguans, such as Senor Zamora of Lafise, suspect
that it comes from Venezuela via ALBANISA, the joint venture between
Venezuelan oil parastatal PDVSA and its Nicaraguan counterpart
PETRONIC, which monotizes Venezuela's subsidized petroleum sales
here. They believe that ALBANISA is using the drought as an
opportunity to impose predatory pricing to drive other buyers out of
agricultural markets. In addition, experts worry that the GON will
impose or threaten to impose price controls, as it has did in the
1980s, which will only harm the economy further. Banking officials
noted in a meeting with the Ambassador that the triple-threat of the
drought, the No Pago Movement to repudiate debts owed to
microfinance lenders (Ref. A), and the GON's tax reform plan
(Septel) will exacerbate poverty and social problems, for which the
GON will likely blame the United States.

COMMENT
-------

10. (SBU) The drought caught the GON and private sector off guard,
and neither is prepared to handle it effectively. The GON's plan to
deal with the drought may end up doing more harm than good, and
might simply serve to further the political machinations of the
ruling Sandinistas and their Venezuelan backers. For an
agriculturally-based economy like Nicaragua's, this drought presents
economic challenges which the GON is not equipped to address. Its
effects will be felt for the remainder of 2009 and well into 2010.


CALLAHAN

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