NICARAGUA: THE ECONOMY AND SANCTIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00990R000100690001-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 27, 2016
• Document Release Date: April 10, 2013
• Sequence Number: 1
• Publication Date: July 15, 1988
• Content Type: REPORT

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Central Intelligence Agency
D/ALA
j Room 3F45
HQ
DIRECTORATE OF INTELLIGENCE
15 July 1988
Nicaragua: The Economy and Sanctions
Summary
The Nicaraguan economy has deteriorated markedly
since the 1979 revolution. Anti-private sector policies,
combined with financial mismanagefent and rising defense
costs have depressed economic activity, constrained
exports, and forced the regime to ignore its
international creditors. The regime has recently adopted
a series of reform programs in an effort to alleviate the
economic deterioration, but hyperinflation, poor
infrastructure, and continued serious foreign exchange
constraints will continue to limit progress.
Circumventing US economic sanctions has caused trade
disruptions and diversion of financial and managerial
resources which have exacerbated the economic
deterioration. We estimate that through the end of last
year the US trade embargo against Nicaragua cost about
$115 million'in lost export earnihjb, More expensive .
imports, and middlemen fees. Ihditect costs also have
been significant, but are harder to quantify. Shortages
of US-produced spare parts, machinery and other inputs
have stunted production and contributed to inflationary
pressures.
This typescript was prepared by the Nicaragua Branch, Middle
America Cuba Division, Office of African and Latin American
Analysis. Comments and queries are welcome and may be directed to
the Chief, Middle American-Cuba Division, ALA,
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The Nicaraguan economy remains marginally vulnerable
to further tightening of the US embargo. The 30 or so US
companies operating in Nicaragua continue to provide
important services to the economy from oil refining and
distribution to computer software. At the same time,
expenditures from US travellers and remittances from
support groups and relatives in the United States
probably provide as much as $25 million annually in
scarce foreign exchange.
General Economic Situation
The Nicaraguan economy has fallen to record depths since it
began its post-Somoza decline in 1981, primarily because the regime
has put political considerations ahead of economic ones. In real
terms, overall economic activity has fallen more than one-third
below pre-revolutionary levels. Per capita income is roughly half
its 1977 level despite a nearly four-fold increase in economic aid
since 1979. Inflation, which began Spiraling in 1985, climbed to
an annual rate of 16,500 percent earlier this year. Not
surprisingly, exports have declined to about one third of that
registered during the last years of the Somoza era.
In our judgment, economic policies driven primarily by
political concerns are responsible. for the steady deterioration of
the economy. Specific policies contributing to the decline
include:
The regime's seizure of much of the economy from the
private sector. Blatant and capricious anti-business acts
--including the uncompensated seizure of productive farms
and businesses--has led to massive capital flight, driven
many of the economic elite out of the country, and
alienated the rest. The remaining private farms and
businesses have deteriorated from lack of investment, and
business leaders say that many landowners and manufacturers
stay in Nicaragua only to protect their assets while hoping
for a change in the government.
o Tight bureaucratic controls that have choked production.
For example, until recently, private farmers had to have
their crop plans approved before planting; buy all their
seeds, fertilizers, and insecticides from the government;
hire labor from Sandinista unions at fixed wages; and sell
their produce to the state at artificially low prices.
the text.
1 See economic indicators in Figures 1 through 4 at the end of
2
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While low prices provide party members.with inexpensive
food and other consumer goods, this practice inevitably has
resulted in shortages of goods for the general population.
Sandinista financial mismanagement that has impeded
production, driven up the public sector deficit, and fed
inflation. Subsidized interest rates to state farms and
businesses as well as party loyalists have . inflicted. losses
on the State-owned banking system. These borrowers often
have used the funds to buy luxury items instead of
investment goods while private farmers and businessmen have
been denied funds to purchase needed inputs.
o Rapidly rising defense costs, especially since 1983, that
have siphoned off an increasing share of scarce resources.
The military now consumes 65 percent, o? the central
government's budget and has been a major contributor in.
driving the non-financial public sector deficit from 6
percent of GDP in 1979 to over 50 percent last year.
The depressed domestic output has had a major impact on
Nicaragua's international accounts. Declining exports have driven.
the trade balance from a $52 million surplus in 1978 to an average
annual deficit of more than $500 million during the past three
years.2 With debt service. added to the trade deficit, the amount
of assistance required to cover Managua's annual-foreign...
obligations has risen from nearly zero in 1979 to more than
$1.3 billion last year- equivalent to more than half-of the
country's annual GDP.
While many.official creditors have responded generously to
Sandinista calls for debt reschedulings, loans, and credits,
foreign assistance has not increased fast enough to meet Managua's
import and financial needs. Last year, imports were 25 percent
lower than 1981 levels in current dollars, worsening consumer
shortages, particularly in the cities. As a result, since 1981 the
Sandinistas have been increasingly inclined to ignore their debt
obligations, alienating commercial banks, multilateral
organizations, and many bilateral Western lenders in the process.3
The regime has sought to make up for the loss of Western aid with
assistance from the Soviet Bloc. Soviet Bloc aid, however, has
been mostly technical assistance and low quality goods rather than
production-enhancing investment funds and capital goods previously
2 See table 1.
3 See the Nicaraguan foreign profile in table 2.
3
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supplied by the West. By 1986, moreover, Moscow was beginning to
demand some payment for its assistance and started to question
Managua's constant requests for more aid, charging that much of the
aid already provided was being wasted. ~I 25X1
Attempts at Economic Reform
The gap between falling production and.the ever-increasing
need for foreign assistance forced the regime to slow its policy of
expanding state control and adopt some economic reform measures in
mid-1987. These measures--including indexing salaries to inflation
and easing some price and distribution controls--failed to revive
the economy, however, because the underlying causes of the economic
crisis were not addressed. By early 1988, shortages of oil and
other imports were crippling production-and soaring inflation was
destroying Nicaragua's currency and undermining the Sandinistas'
hold on the economy. Moreover, Managua's insistence on maintaining
price, wage, and exchange rate controls--even in the face of
additional reforms announced in February--further undercut
production.
In our view, the threat of further economic deterioration led
the regime to back away from total control of the economy further
`last month. Managua eliminated many wage and price controls,
implemented an 85 percent devaluation of the cordoba against the
dollar, increased credit to farmers with political ties to-the
regime, and indexed interest rates and . the. exchange rate-to .
inflation. The regime, however, made it clear that such measures
did not mean that the Sandinistas were renouncing Marxist-Leninism.
In a speech announcing the measures, Ortega admitted that the
reforms are a tactical necessity to protect the revolution. He
threatened to "bury" the private sector if it fails to increase
production and investment. The regime recently carried through on
this threat by expropriating several properties including the
country's largest privately-owned sugar refinery.
Outlook for the Coming Year
Numerous constraints, however, will keep production increases
modest at best, despite the government's reform efforts.
o Inflation--which we believe will not be substantially
reduced unless defense spending is slashed--poses the
greatest challenge. If the higher rates brought on by the
reforms are sustained beyond a few months, productivity
will suffer because more of, the economy will slip into the
less efficient black market system, and the currency will
again be in jeopardy of losing its transaction value.
o Output also will be limited by the government's insolvency
and increasingly dilapidated infrastructure.
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Should the regime retain or tighten export controls it
could negate many of the reforms' potential benefits.
Faced with discontent within the party, the Sandinistas could
backtrack on the reforms. Minor concessions to party loyalists--
including increased credit for state'farms and cooperatives--could
easily fail to buy their backing, forcing the Sandinistas to choose
between rescinding some of the measures or.losing political
support. Nearly all groups within the party will likely want to
dump those reforms that have taken away their access to cheap hard
currency, gutted education, health and other social programs,,and
forced state-controlled farms and businesses to compete more
equally with private producers.
Finally, poor relations with theeUnited States and other
traditional lenders and the domestic business' sector make it
unlikely that the Sandinistas will be able to revitalize the
economy any time soon, in our judgment. Managua is unlikely to
attract the billions of dollars in investment needed to bring the
Nicaraguan economy back to pre-revolution production levels. The
renewal of expropriations this week and Ortega's venomous attacks
on the private sector during a speech last month . almost. certainly
means that businessmen will remain reluctant to risk-major
investments. Furthermore, the Soviets, while interested in
maintaining the Sandinistas.in power by providing oil and vital
foodstuffs, have shown no signs that the are willing to invest
heavily in the rebuilding of Nicaragua.
Impact of Current US Sanctions
Trade disruptions and the diversion of financial and
managerial resources to circumvent US economic sanctions--imposed
in May 1985--have put additional pressure on the Nicaraguan
economy.. We calculate that through the end of 1987 the US measures
have.directly cost Managua $115 million--over and above the
$320 million decline that had been experienced since the 1979
revolution--because of the loss of access to US markets, higher
freight costs for exports and imports and new middlemen fees to
circumvent the embargo.
On the export side, we estimate that direct sanction-related
losses have cost the Sandinistas $70 million in net foreign
exchange losses since the embargo was announced. Of this amount,
$20 million was lost during the last seven months of 1985,
$28 million during 1986, and $22 million last year .4 In our view,
major losses have occurred in the following areas:
a See table 3.
5
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o We estimate that net hard currency earnings from beef
exports have fallen'some $24 million. since May 1985 because.
of the embargo. Efforts to find alternate markets in
Canada and elsewhere have been mostly unsuccessful,
according to Embassy
o Loss of the US sugar market has cost Managua about . -
$15 million. Since the Sandinistas lost the US sugar
quota, they have had to sell largely on the glutted world
market at less than one-third the, subsidized US price.-
o Net foreign exchange earnings from banana exports have
fallen by another $15 million since the embargo was
implemented. While new sales to West European customers
have taken up some of the slack,
higher transportation.costs and--product
deterioration during-the longer shipping time have sharply
cut profit margins.
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o During the same timeframe, net foreign-exchange losses::from
lower passenger and cargo revenue and higher prices fox
maintenance and spare parts have cost Aeronica--the state
airline--about $6 million, according. to official Nicaraguan-..,
estimates The 25X1
Sandinistas have been able to limit Aeronica losses
somewhat by selling Nicaraguan tours out ,of - US 'travel
agencies and rescheduling some flights through Mexico,
Honduras, and Costa Rica.
o Despite success, on. Managua's . part, . in.. redirecting -seafood
and tobacco exports, we estimate-that sanctions have cut
Nicaragua's net foreign exchange earnings by $9 million.
On. the import side, we estimate direct foreign exchange
expenses from higher prices. and new middlemen fees to. regain access
to priority US-sanctioned goods have cost,. the'Sandinistas about
$45 million, including $14 million in 1985, $16 million in 1986,
and $15 million in 1987.
the Sandinistas are only gradually reducing their dependency on US
goods-.
while the Sandinistas have found some new supplie
rs
for much of the foodstuffs and raw materials formerly provided by
US sources, they have not done nearly as well replacing imports of
US-built machinery, agrc'chen _cals, and spare. parts.. W.1-hile costs of
regaining access to priority US-sanctioned goods varies
considerably; an-average
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additional 25-percent markup to obtain these goods through third-
country US subsidiaries or by using front companies to procure the
items in the United States. As a result we estimate that from May
1985 through last year:
o The Sandinistas have paid an extra $34 million to buy
priority US-manufactured spare parts, machinery, and
chemicals because of embargo-circumvention surcharges.
o Managua has paid an extra $11 million to retain access to
raw materials and semi-finished and consumer goods.
While the Sandinistas have made some progress in reducing
their reliance on imported US goods and services, we estimate that
it will be years before they can work their way completely free of
dependency on US supplies.
at least Half of Nicaragua s existing capital stock (plants,
factories, machinery, and equipment) is still dependent on US spare
parts and equipment despite the longstanding Sandinista policy of
cutting economic ties to the United States.
. The indirect costs of the embargo to the economy are much more
difficult to quantify. the 25X1
embargo has required substantial bureaucratic attention, which has
further strained Managua's ability to address critical domestic
economic issues and development projects. Moreover, where the.
Sandinistas have been able to find replacement imports for US goods
in either the West or the Soviet Bloc and thus avoid the costs of
circumvention, the shortage.of 25X1
adequate replacement parts for US-made plants-and machinery
continues to stunt production in a wide range of activities. For
example, the domestic commercial fishing fleet has been virtually
disabled by lack of spare parts, although Managua has limited
foreign exchange losses by leasing some of its fishing grounds to
Cuba and to private fishermen in Costa Rica and Honduras. The
Sandinistas have also had to eliminate jobs in banana field
operations and in government-owned meat-packing plants because of
lower foreign trade demand, according to Embassy 25X1
reporting. In the aggregate, we believe these factors have played
a substantial role in dampening economic activity, increasing
consumer and producer shortages, and accelerating triple-digit
inflation rates. 25X1
Remaining Vulnerabilities
Tightening US economic sanctions could further reduce
Managua's access to US goods, technology and financing at the
margin. We calculate, for example, that restricting economic aid
on financial remittances from US persons to official and private
Nicaraguan recipients could cut Managua's foreign exchange receipts
7
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' I I
by as much as $20 million per year, or about 10 percent of 1988
estimated export earnings. In addition, limiting travel to
Nicaragua by Sandinista support groups and other US tourists
probably would shave off another $5 million in earnings.
Prohibiting US citizens and businesses from providing direct
investments or technical, financial, or related services could also
hurt Managua's efforts to minimize the impact of existing .
sanctions. While the exact dollar value of such activities is
difficult to calculate, it would affect areas ranging from access
to computer software to refining of oil products. From the
standpoint of in-country operations, only a few of the 31 US
businesses remaining in Nicaragua employ US citizens. According to
US business press, most of these companies have not been able to
remit more than token earnings to owners and, in many cases, are
staying. in country only to protect investments. In some cases,
thos.e.assets are significant; for example, Exxon's.assets were..
valued at close to $100 million in early 1987, according to press
Sandinista hard currency earnings could be further cut by
restricting their access to third-country-US subsidiaries or
tightening regulations on the import of Nicaraguan products
currently allowed to enter the United-States following-minimal-
processing in third countries. While either of these steps could
result in legal challenges, neither would result in substantial
financial costs to third countries,.and.both would hurt Managua
somewhat. Even so,-some third countries would be likely to fight
the steps.for political reasons in support of Nicaraguan
extraterritoriality -claims?:;
See table -f for a listing of US companies doing business
in. Nicaragua.
6 Exxon sold two distribution centers to the Nicaraguan
government in mid-1987 which would reduce figure somewhat.
8
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Figure 1
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17. 000 r
16, 000
15, 000
14. 000
13. 000
12. 000
11. 000
10. 000 F
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
NICARAGUA: Economic Indicators. 1979-1988
Consumer Price Inflation
(Percent)
1979
1981
,963
,985
A: Annual rate during quarter ending in January
B: Annual rate during quarter ending in May
jg63 19g8 14a'I igBB 6
jaT,
Export Earnings and Foreign Economic Assistance
Millions Current US $
800 r 735
300
T Foreign Economic
L Assistance
12
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Figure 2
NICARAGUA: ECONOMIC INDICATORS. 1979-1987
Per Capika Income
('1977 Doiiarsj
1977 1979 taj81 W93 19aS 19a7
Edta"d*d
Told Non-Ftnanclal Public Sector Deficit As
Share of GDP (Percent)
1981 1983= 19E3
Ect(mat.Q
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2.50
Coffo~ 204
.
NICARAGUA; EXPORT SALES BREAKDOWN
.1978-1988
.,
Cotton 141~
Non-oorfoultural 10
0fhcr
__ ~~ 17 5
1984 1983 1986 , 1987 1988'
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ullllon Currant US
6 0 0 _T ~...~_._?_-
NICARAGUA: ANNUAL ECONOMIC ASSISTANCE
BY MAJOR SOURCE, 1979-1987
r:7~ x q.....u.......+mmaa .. r~~~~~
06406? ..........
....~
rr......rrrrr.~rrrn ..~~rrrr~~~ ?r..r?
~
1981 2
1983
1984
1985
1987
Legend
Sovlet Bloc-Cuba
Latin America
HUIfIIat oral
Middle East -
1979
1980.
1981
1982
1983
1984
1985
10,16
1987
S
,
i
o
r
ot Bloc-Cuba
20
50
90
180
270
320
450
580
535
Latin America
50
150
300,
'230
220
120
80
40
40
OEC'~
85
.140
80
95
100
90
86
103
80
iiatoral
50
120
120
65
86
75
50
35
40
dIo East
0
0
125
25
40
40
40
20
10
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Nicaragua: Balance of payments,
1979-1987.
(I'll .1 1 ions LIS Dot 1 ars )
1
1979
1980
1981 1982
1983
1984
1985
1986
1987
180
-392
-563 -515
-565
-666
-856
-764
-879
Trade. Balrwice
227
-353
-422 -318.
-349
-414
-545
-519
-479
Exports, F.o.b.
616
450
500 406
429
386
297
226
251
Imports., F.o.b.
-389
-803
-922 -724
-778
-800
-842
-745
-730
Net Services and Tr-ansrers -47
-39
-141 -197
-216
-252
-311
-245
-400
-120
190
583 296
363
460
630
-139
135
Official
115
371
424 455
375
416
598
625
560
Debt a mor-t:i.-.etion
d U 0
-117
-130
-97 -113
-341
-166
-192
-690
-500
Rescheduled debt's
138
135
92 27
418
247
154
74
125
Oi:her cap i I_:al and
and omissions
error,
-256
-186
164 -73
-89.
-37
70
-148
-50
OVERALL BALANCE
60
-202
20 -219
-202
-206
-226
-903
Increase in arrears
37 78
254
202
4
827
-744
669
Net change in reserves 60
-202
57 -141
52
-4
-222
-76
-75
=Includes conversion of Central Bank short-term liabilities
from previous arrears into medium-term debt
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Nicaragua: Debt Profile*
(million US $)
Total
Medium Long-term
5344
5650
Official
4000
4275
Multilateral
772
830
Bilateral
3228
3445
Private
1344
1375
Financial market
1310
1345
of which:
US banks
59
23.
Suppliers=
33
30
Short-term
of which:
US banks 7 20
`Does not include arrears
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Nicaragua: Direct Costs of Sanctions
(million US $)
1985a
1986
1987
Total export and import lossess
34--
Export Losses
20
Beef
5
10
Sugar
7
4
Bananas
3
4
Aeronica
2
2
Seafood
2
1
Tobacco
1
1
Import losses
14
16
15
Machinery and chemicals
10
12
Other
4
4
aEmbargo phased in beginning 7 May 1985;,costs are estimated net
foreign exchange losses.
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Acei tera Corona
(United Brands)
Rcumuladores Centr-o-
americanos (Exide Cor-p.>
Cia. Petroler-a CI-evron
(Chevron Corp.)
Citizen Standard Life
Insur- lnce (same LIS na.me)
Citibank (Citicorp)
Eloctr-oquimica Pccrn.,al.t.
(same US name)
EmpagUeS Multi-r,-ill Ultra-
Fort (St. Regis Paper)
EssoStandard Oil
(Exxon)
Hercules de Centroamerica
(Hercules)
Hotel Intercontinental
(same US name)
IBM Hor-ld Trade Corp.
(same US name)
Ir d'. _rLria C_r^;nicm
(American SL-andard)
ITnd'rsLr- ar fl, rr7n._r
(General 1i J. 1'c)
IndusLrias r'I.-,f' i