NICARAGUA: COMPOUNDING ECONOMIC PROBLEMS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88T00768R000400480001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 30
• Document Creation Date: December 27, 2016
• Document Release Date: June 13, 2011
• Sequence Number: 1
• Publication Date: November 1, 1986
• Content Type: REPORT

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Secret
Directorate of
Intelligence
Nicaragua: Compounding
Economic Problems
An Intelligence Assessment
Secret
ALA 86-10048
November 1986
297
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~f~E}tf Directorate of Secret
Nicaragua: Compounding
Economic Problems
This paper was prepared by I Office of
African and Latin American Analysis, with
contributions from
Office of Leadership Analysis. It
was coordinated with the National Intelligence
Council and the Directorate for Operations.
Comments and queries are welcome and may be
directed to the Chief, Middle American-Caribbean
Division, AL
Secret
ALA 86-10048
November 1986
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Nicaragua: Compoundin
Economic Problem STAT
Key Judgments The Nicaraguan economy, already in a tailspin because of Sandinista anti-
information available private-sector policies and financial mismanagement, has been further
as of 15 October 1986 strained during the last 18 months by the growing civil war, continuing
was used in this report.
problems related to the US trade embargo, and economic decision making
based wholly on political concerns. Unprecedented consumer shortages and
deteriorating public services now are combining to lower personal welfare.
We estimate that, unless circumstances change fundamentally, real per
capita GDP will continue to decline during 1986 and 1987, even taking into
account the present trend of increasing Soviet aid. In this case, we believe
Managua will have to rely even more on police-state tactics to try to short-
circuit the growing potential for food riots or work disruptions.
The effect of the economic slide on the Nicaraguan population is increas-
ingly severe:
? Overall economic activity is now one-third below prerevolution levels.
? Export revenues are down two-thirds, and foreign debt has soared from
$1.5 billion in 1979 to $6 billion.
? Recent agricultural harvests have been the worst this decade.
? Government officials expect consumer price inflation to hit 600 percent
this year.
? Real wages and average personal income are about one-half pre-1979
levels,
by mid-1986 shortages of basic
foods were more serious than at any time since the revolution.
many Nicaraguans have cut their diets to
subsistence. eves an tat some are going hungry.
Sandinista efforts to consolidate political control and prosecute the war
have become primary economic policy determinants, largely determining
budget allocations, agricultural and industrial reforms, and commercial
and foreign trade relations.
the Sandinistas view the existence of
private enterprise as only a short-term tactical accommodation until the
regime can establish full state controls
Secret
ALA 86-10048
November 1986
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The slide in real GDP in 1987 could intensify if increased US aid to the in-
surgents requires a response by Managua that saps an additional share of
the Sandinistas' limited managerial and budget resources. The military's
share of the total budget already has risen from 25 percent in 1984 to some
60 percent in 1986, In our opinion, the more
intense the armed rebellion, the more the Sandinistas will be encouraged to
attack the remaining productive private sector, which is perceived by the
regime as its political and philosophical enemy.
External assistance provides a safety net but is unlikely to be sufficient to
brake the economic slide. Some $1 billion in Soviet Bloc economic aid
during 1985 and thus far in 1986 has had no appreciable effect on the
downturn. Given current Sandinista policies and likely increasing war
costs, we calculate that for the next 18 months Soviet aid-even if
continuing to grow at current rates-probably will only keep consumption
at minimum levels.
Public discontent over economic shortages is underscored by unprecedent-
ed consumer disturbances
Since last June, the US Embassy has reported spontaneous, food-related
disturbances in Managua, Leon, and San Juan del Sur
consumers
are disgusted with shortages of foodstuffs and other goods that Nicaragua
formerly exported. Moreover, Nicaraguans blame
government mismanagement and inappropriate policies rather than exter-
nal forces for the dismal economic situation.
In our view, any further economic deterioration would increase the
potential for spontaneous antigovernment demonstrations and in time could
present a major obstacle to the Sandinistas' efforts to extend political.
control. While the Sandinistas apparently are preparing to ride out what
they presumably see as an almost inevitable economic decline, they run the
risk that over time regime stability could in no small measure be
determined by their response to mounting consumer distress.
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The growing economic plight, potentially reinforced by increased battle-
field losses for the Sandinistas, will continue to erode popular confidence in
the regime, and could eventually translate into increased popular support
for the insurgents. On the basis of the Sandinistas' track record, we believe
the regime will continue to respond to the compounding economic problems
by tightening political, social, and economic controls. While these tactics
are likely to encourage a considerable number of Nicaraguans to abandon
their country, they are also likely to encourage others to join the armed op-
position, especially if the insurgents can effectively use increased interna-
tional support to build a "winners" image.
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Key Judgments
Restructuring the Economy
Creating a Socialist State
1
Shifting International Economic Linkages
1
The Tailspin Worsens in 1986
5
Steep Production Declines
5
Growing External and Internal Deficits
6
New Distribution Controls
7
Consumer Shortages
9
Looking Down the Road
10
Poor Prospects for Policy Changes
10
Growing Managerial Problems
11
Agricultural Deterioration
11
The Soviet Safety Net
12
Implications for Sandinista Vulnerabilities
13
Appendixes
A. Sandinista Economic Decision Making
B. Key Economic Policy Makers
vii Secret
ALA 86-10048
November 1986.
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Figure 1
North
Pacific Ocean
Boundary representation is
not necessarily authoritative.
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Nicaragua: Compounding
Economic Problems
The Sandinistas are increasingly having to make
tough economic policy decisions in order to meet
competing priorities and keep the economy, which is
nearly a shambles, afloat. Real per capita GDP has
fallen sharply in recent years and inflation has sky-
rocketed. Despite increased shipments of staples from
the Soviet Bloc, consumer supplies
This paper analyzes the causes, extent, and implica-
tions of the economic slide. It evaluates the policy
priorities of the Sandinistas and their success in
centralizing the economy and forging new interna-
tional economic linkages. Looking forward, it evalu-
ates the prospects for the economy in light of probable
government initiatives and increasing internal and
external pressures. The paper also assesses the effec-
tiveness of Soviet Bloc financial support and the
probable implications of the continuing economic
decline for the potential vulnerabilities of the Sandi-
nista regime.
Restructuring the Economy
Creating a Socialist State
Despite lipservice to the importance of a "mixed
economy," Sandinista policies since the revolution
have moved Nicaragua inexorably toward a state-
dominated socialist economy.' This goal was first
identified just weeks after the Sandinistas took power
when an internal document set government policy as
the "elimination of the traitorous bourgeoisie ... once
the private sector ceases to be of value." By moving
only gradually toward full state controls, the Sandi-
nistas have been able to help maintain substantial
access to official Western economic support while
initially retaining many key technicians and manag-
ers.
During the past several years-and particularly since
Daniel Ortega's inauguration in January 1985-the
Sandinistas have stepped up attacks against the pri-
vate sector and taken firmer control of the econom
according to US Embassy and press reporting. s~ 25X1
private-sector access to bank
credits has continued to plummet. Land confiscations,
authorized by a 1981 land reform decree, have picked
up markedly since 1983 and increasingly have become
politically motivated
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The net result has been the nearly complete central-
ization of state economic power.' Private-sector
investment has virtually disappeared, causing Sandi-
nista National Directorate member Bayardo Arce to
comment publicly that "all investment projects in our
country belong to the state. The bourgeoisie no longer
invests, it subsists." Increasingly, anti-private-sector
rhetoric and the repressive political climate created by
the Sandinistas are causing business executives, man-
agers, farmers, and professionals to abandon their 25X1
careers and go into exile, according to press and US
Embassy reporting.
the state-includ-
ing government-directed cooperatives-now holds
about 60 percent of all arable land and productive
capital assets and produces about two-thirds of all
GDP. Before the revolution, the state owned virtually
no arable land or factories, and government services
accounted for only 15 percent of GDP; for his part,
former President Somoza personally owned about 10
percent of all arable land, and his farms and factories
accounted for as much as 15 percent of all economic
activity
Shifting International Economic Linkages
At the same time that the Sandinistas have been
working to centralize their economy, they have taken
equally pronounced steps to redirect their foreign
7 See appendixes A and B for a detailed examination of the
economic decision making process and its key players
Secret
ALA 86-10048
November 1986
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Figure 2
Nicaragua: Expanding Role of Public Sector, 1978-86
Public-Sector Share of Arable
Farmland and GDP O
Honduras
Costa Rica
El Salvador
alncludes state-controlled cooperatives.
bAs a percent of GDP.
`Projected.
0 78 79 80 81 82 83 84 85
economic relations away from the West and toward
the Soviet Bloc. According to US Embassy reporting,
Sandinista policy has consistently been to reduce
trade with the United States as a matter of ideological
principle.' After the May 1985 trade embargo was
announced, the Sandinistas redoubled their efforts to
cut their economic reliance on the West. As a result,
official trade data show that nonmilitary trade with
the Bloc, which had been negligible before 1979,
climbed to one-half of the total during 1985, and will
very likely account for 75 percent of all trade during
Managua's foreign aid linkages also have been dra-
matically altered since 1979. Immediately following
the revolution, large amounts of concessional funding
came in from all corners, including Cuba and the
Soviet Bloc. During the period 1980-81, the West
provided Nicaragua $450 million per year in financial
support compared with $60 million from Cuba and
the Soviet Bloc. During 1984-85, economic aid from
the West slipped to $240 million per year, while
financial support from the East jumped to an annual
rate of about $400 million. By 1985-86, Cuba and the
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Soviet Bloc were providing about three-fourths of all
economic disbursements, while aid from Western
sources continued to decline.
Since 1981, Nicaraguans have experienced a steady
decline in living standards. Sandinista government
statistics indicate that, by the end of 1985, overall
economic activity was one-third below the prerevolu-
tionary level. National accounts prepared by Mana-
gua show that about half of the falloff in economic
activity resulted from a reduced output of goods,
while the remainder was caused by the marked
deterioration in services. The only economic sector to
buck the trend was government activity, which ex-
panded rapidly throughout the period.
Agricultural output fell steadily, even according to
government figures. Using official statistics to com-
pare average export performance during 1984-85 with
that of the 1975-78 period, we conclude that:
? Coffee and tobacco output fell 10 percent.
? Beef production fell by a little over 20 percent.
? Banana output was down by one-fourth.
? Cotton production dropped by one-half.
? The shrimp and lobster catch dropped 60 percent.
? Lumbering activities were down 70 percent.
Official figures indicate that farm output for the local
market held relatively steady, because the Sandinistas
kept prices paid to farmers for staples higher than
export prices. Even if government figures are correct,
however, population increases cut per capita produc-
tion and consumption of corn, rice, and beans substan-
tially during the same period.
The other economic sectors also contracted sharply.
Official figures show that industrial production fell 22
percent and mining output tumbled by more than half
between 1977 and 1985. At the same time, economic
activity in the service sector also fell sharply, despite
an increase in government spending on military,
health, education, and public services. In the transpor-
tation, financial, and commercial sectors, where state
nationalizations hit services the hardest, economic
activity fell by an average of 40 percent,
Managua fared no better on the international side.
During the 1970s, Nicaragua exported slightly more
than it imported. In contrast, during 1980-85 it
exported one-half the amount it imported. In dollar
terms, the trade balance shifted from a small surplus
during the 1970s to an aggregate $2.4 billion deficit in
1980-85. Agricultural exports fell by one half and
exports of other goods by 75 percent, according to
official figures. While some of the drop was caused by
lower prices for Nicaragua's commodities and the
disruption of the Central American Common Market, 25X1
national statistics suggest that the bulk of the loss
resulted from lower sales volume caused by produc-
tion shortfalls.
Nicaragua's public budget record has been equally
poor. Despite lipservice to the importance of control-
ling public expenditures, the budget deficit as a share
of GDP rose from less than 5 percent before the
revolution to one-third of GDP since 1982,
The deficits have been driven by the huge
increase in public-sector spending; government expen-
ditures as a share of GDP soared from less than 20 25X1
percent before the revolution to almost 60 percent
since 1982. By comparison, government expenditures
as a share of GDP in the Core Four Central American
countries averaged about 20 percent during 1983-85.
Government statistics also show that, while the Sandi-
nistas financed a large share of the deficit with loans
from the nationalized banking system, the bulk of the
deficit was covered by printing new currency
As a result of the skyrocketing money supply and
huge foreign payments deficits, the foreign exchange
value of the cordoba plunged. After being fixed at 10
cordobas to the dollar immediately following the
revolution, the cordoba was first devalued in February
1985 when Managua reset its official exchange value
at 28 to the dollar. A depreciated black-market rate
had developed much earlier, however, and the cordoba
traded at about 200 to the dollar on the streets at the
time of the devaluation. By the end of last year, while
officially still fixed at 28 to the dollar, the cordoba
traded on black markets at 500 to the dollar.
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Figure 3
Nicaragua: Economic Indicators, 1978-86
n
nnnnn
-30 1978 79 80 81 82 83 84 85 86a 0 1978 79 80 81 82 83 84 85 86a -40 1978 79 80 81 82 83 84 85 86a
Per Capita Index: 1977=100 Export/Import Index: 1977=100 External Public
LM I LE LM 79 80 81 82 83 86
-LJHL
0 1978 84 85
a
Export
Percent Budget Deficit as a
Share of GDP
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As the money supply surged and consumer shortages
increased, inflationary pressures mounted. By mid-
1984, the government, citing growing budget deficits
and the need to curb black-market speculation, began
boosting official prices for food staples. From Decem-
ber 1984 through December 1985, official consumer
prices jumped 334 percent, according to government
statistics. Meanwhile, food prices soared 387 percent,
housing prices 219 percent, and clothing prices 142
percent, according to the same sources.
Average real wages also fell steadily. The Sandinistas
gave workers a 40-percent wage hike when they took
power-despite an inflation rate of 70 percent-then
virtually froze wages during the next several years.
Our analysis of official statistics between 1979 and
1984 shows that the average real wage fell by half and
the miminum wage by slightly more. During 1985,
three wage adjustments were not enough to keep up
with inflation, and IMF statistics show that average
real wages fell by another 20 percent.
The Tailspin Worsens in 1986
The Sandinistas' economic problems have continued
to mount this year. According to official estimates,
recent agricultural harvests have been the worst so far
this decade. New licensing regulations and punitive
taxes have made economic activities increasingly dif-
ficult for independent businessmen, according to press
and US Embassy sources. Moreover, production
shortfalls and the US embargo are undermining
Nicaragua's import capacity. In these circumstances,
consumer price inflation has continued to soar, and,
by mid-1986, government officials were acknowledg-
ing that consumer shortages and living standards were
the worst since the revolution.
Steep Production Declines
The agricultural sector, where key harvests are al-
ready in for 1986, is taking its worst pounding since
the major disruptions caused by the Sandinista revo-
lution. Overall, we project that agriculture-which
accounts for one-fourth of Nicaragua's GDP, nearly
half of its employment, and the bulk of its exports-
will probably fall by an additional 15 to 20 percent
this year. The coffee harvest, which alone accounts for
20 percent of agricultural production, appears to be
among the hardest hit. Statistics from INCAFE, the
state coffee-trading monopoly, indicate this year's
coffee harvest fell to 35,000 tons, one-third below last
year's, and about 40 percent below pre-1979 levels.
Private producers have told Embassy officials that the
harvest actually was no better than 25,000 tons
Other export crops have not fared much better.
Private producers say this year's cotton harvest, which
accounts for about 15 percent of all farm output, was
one-third below last year's and 60 percent below pre-
1979 levels. Recent government reports forecast fur-
ther declines in banana and sugar production.
Harvests of foods for local consumption are also down
sharply, according to Nicaraguan agricultural ex-
perts. Food distribution officials report the winter rice
harvest was only half that expected, and early indica-
tions are that the summer crop was also poor. Mean-
while, official sources indicate that the crucial corn
and bean harvests also have been highly disappoint-
ing. While providing no details, President Ortega
stated in his 19 July speech celebrating the seventh
anniversary of the revolution that the current corn
harvest was "poor" and that consumer rations would
have to be cut.
Government officials cite bad weather and shortages
of manpower and imported inputs for the declines,
but, according to US Embassy reporting, private
growers place more blame on government controls,
the lack of credit, and civil war disruptions. For
almost every crop, most private producers say that
price and marketing regulations preclude acceptable
profits. Various reports indicate that government mis-
management-including inadequate field mainte-
nance, untimely and inappropriate planting, and im-
proper handling-have also been important factors in
the decline. Significantly, Sandinista officials had
claimed during the coffee harvest that increased
security had effectively blunted insurgent attempts to
disrupt the harvest.
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Figure 4
Nicaragua: Agricultural Production
i
0 1979 80 81 82 83 84 85 86
'During 1979-86 coffee accounted for 34 percent of total export value,
cotton for 23 percent, sugar for 6 percent, and bananas for 3 percent.
Rice
Beans
0 1975-78 79 80 81 82 83 84 85 86
average
While information on 1986 industrial activity is still
sketchy, it appears that output has continued to fall.
Anecdotal reporting, including various censored sto-
ries from the now shutdown independent newspaper
La Prensa, indicates that capacity at numerous fac-
tories has declined sharply this year. Among the firms
apparently hardest hit are food-processing plants and
processors of chemicals and wood products, largely
because raw material shortages-caused by depressed
agricultural production and import constraints-have
been the worst for those products. Moreover, although
government plans originally projected increases in
various state-owned and -operated concerns, severe
budget constraints caused President Ortega to order
sharp across-the-board cutbacks at midyear
These conditions are made worse by the continued
flight of capital and human resources. During the past
year, press and US Embassy reports have indicated
that many professionals who have seen their practices
disrupted by new Sandinista controls, as well as
engineers and technicians unable to make a living
without resorting to contraband activities, are leaving
the country. The US Embassy notes that a compari-
son of Nicaragua's trade statistics with partner data
indicates that, despite tough foreign exchange con-
trols, tens of millions of dollars are being sent out of
the country by private persons and by government
officials using false invoicing techniques.
Growing External and Internal Deficits
Depressed economic activity is further undermining
Nicaragua's international accounts. Recent official
Nicaraguan projections indicate that exports will
amount to 30 percent of imports and that the trade
deficit will exceed $600 million this year. When debt
principal is added to Nicaragua's current international
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Impact of the US Trade Embargo
Direct losses attributable to the embargo since its
inception in May 1985 have reached $75 million,
according to Nicaraguan .figures and our own analy-
sis. Increased Soviet Bloc assistance, however, has
more than offset lost foreign exchange, and Managua
is mostly affected by lack of access to vital spare
parts. The effect of the embargo is likely to decline
with time as the regime establishes new export mar-
kets, replaces US-made equipment, and improves
circumvention efforts.
Export losses have driven Nicaragua's hard currency
earnings to less than half 1984 levels, and denial of
critical imports has stunted production. The US
Embassy reports Managua's banana sales are no
longer profitable since shipment to new European
markets is costly and the fruit often rots en route.
Moreover, the regime has been unable to find new
customers for its seafood and beef, and withdrawal of
the US sugar quota means Nicaragua has to sell on
the glutted world market at less than one-third the
subsidized price. In addition, the lack of imported
spare parts, machinery, and other raw materials and
intermediate goods has reduced agricultural produc-
tion and virtually shut down the fishing fleet, accord-
ing to various sources.
The Sandinistas have been somewhat successful at
offsetting the embargo, and its effect probably will be
substantially lowered in the future. Immediately
following the imposition of the embargo, Soviet Bloc
countries responded to Sandinista pleas by providing
over $100 million in increased economic assistance,
much of that in hard currency. Since last year the
Soviet Bloc has continued to boost financial support,
partly in response to Nicaraguan pleas for protection
from the embargo.
trade and service deficits, Managua is faced with the
nearly impossible task of borrowing or rescheduling
more than $1.1 billion during 1986 to finance its
imports and stay current on debt obligations.
As a result, Nicaragua is virtually ignoring its debts.
value.
Nicaragua's 1986 National Economic Plan also indi-
cates that, to help keep their military and political
programs going, the Sandinistas have continued to
rely on printing currency to cover deficit spending. As
a result, the budget deficit as a share of GDP will
probably grow slightly-to about 35 percent of
GDP-this year. Even though this way of dealing
with the deficit is further driving down the value of
the cordoba, the government reportedly has no plan to
slow down the printing presses. Meanwhile, the black-
market rate for the cordoba plummeted from 500 to
the dollar at the beginning of the year, to 2,500 to the
dollar by September. While the Sandinistas have
sought a partial solution to the problem of currency
depreciation by opening a government-controlled
exchange house that buys dollars at about half the
black-market rate, the regime has devalued only once
this year and the cordoba now officially trades at 70
to the dollar, more than 35 times its black-market
New Distribution Controls
As production and trade continued to deteriorate, the
regime demonstrated its commitment to authoritar-
ian, socialist, economic principles by tightening
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Nicaragua: Foreign Financial Gap, 1978-86
1978
1979
1980
1981
1982
1983
1984
1985
1986
-25
180
-392
-563
-505
-559
-631
-801
-908
93
227
-353
-422
-316
-349
-415
-545
-608
Exports, f.o.b.
646
616
450
500
408
429
385
297
232
Coffee
200
158
166
136
124
154
122
123
127
Cotton
141
136
30
122
87
110
134
91
40
Other
305
322
254
242
197
165
129
83
65
Imports, f.o.b.
553
389
803
922
724
778
800
842
840
Debt amortization due
68
117
130
97
113
157
166
197
220
Financial gap
-93
63
-522
-660
-618
-716
-797
-998
-1,128
Official capital disbursements
111
115
371
424
458
369
412
525
650
Other capital and errors and omissions
-242
-256
-186
164
-29
-112
-91
-95
-100
Debt rescheduling a
138
135
92
7
269
278
179
200
External debt yearend
1,261
1,531
2,147
Debt serving
a Includes conversion of Central Bank short-term liabilities from
previous arrears into medium-term debt.
marketing regulations, by assuming direct control
over more of the wholesale and retail network, and by
further prioritizing access to food rations. Last De-
cember, the Ministry of Internal Commerce
(MICOIN) announced an "iron fist" campaign de-
signed to force consumers and merchants to observe
state-authorized distribution channels and prices. The
new measures toughened licensing procedures and
established a cadre of uniformed inspectors who were
given authority to impose fines, confiscate goods, and
suspend commercial licenses. Only merchants who
had been in business for at least five years and who
limited their sales to one specific line of merchandise
could renew their licenses.
Using these new controls, MICOIN aggressively
forced thousands of independent merchants out of
business during the first half of 1986, according to US
Embassy reporting. In mid-June, MICOIN supple-
mented its authority with a new "July Victory"
campaign designed to crack down on informal
markets that had developed near traditional market-
places, on street corners, and at bus stops. The
campaign uses 200 plainclothes inspectors to assist the
uniformed MICOIN inspectors.
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Cost of the Military Buildup
The military is placing increasing strain on
Managua's weakening economy. Military spending
now absorbs 60 percent of the federal budget and one-
third of total GDP.
before the insurgency began.
expenses have been necessary to fightthe insurgency,
the active military grew to two-thirds its present size
Figure 5
Nicaragua: Military's Share of
Government Budget, 1978-86
goods have been increasingly diverted from develop- 20
ment projects, further undermining long-term eco-
nomic growth. While the regime claims the military io
skills needed to boost economic activity have been
allocated to the war, and labor shortages in combat
zones have contributed to lower harvests of export
crops. Moreover, scare raw materials and capital
As mi itary spen ing soared, vital managerial
Military aid alone ballooned from $6 million in 1980
gency has cost Managua some $500 million since
1982. The bulk of the loss is from lower productivity
and reduced farm exports, caused by the Sandinistas'
diversion of manpower and other resources to the war
efort. Direct costs involve insurgent attacks on irEfra-
structure, state farms, and government-controlled
cooperatives. The regime's losses, however, have been
more than offset by Soviet Bloc and Cuban aid that
has totaled $2.5 billion in Soviet Bloc and Cuban
financial support and military assistance since 1982.
On a net basis, we estimate-on the basis of cost
studies prepared by the US Embassy-that the insur-
According to Embassy reporting, MICOIN has used
its direct control of an increasing share of the distri-
bution system to reward regime friends. At midyear,
the Sandinistas revoked the operating licenses of
private perishable-food wholesalers, replacing the
wholesalers with a new state company, and took over
the country's last privately owned supermarket chain.
In August, MICOIN set aside two of the supermar-
kets for exclusive distribution to the families of
designated government employees and party officials.
Remaining supermarkets will serve dependents of
nondesignated public employees who will receive half
of the rations available to the designated families.
Under this scheme, private-sector families are virtual-
ly forced to depend on black markets, according to US
Embassy reporting.
Consumer Shortages
Taken together, Managua's production and distribu-
tion policies have aggravated consumer shortages and
are driving black markets deeper underground. De-
to $248 million in 1984.
spite well-publicized emergency food shipments from
the Soviet Union, consumer shortages this year have
been increasingly severe; the US Embassy has noted
the extremely short supply of staples from government
outlets. Moreover, in recent months a number of
staples-including rice, beans, and cooking oil-have
been practically unavailable. The Embassy reports
that, in these dire straits, more consumers are going
directly to farms in search of food. Farmers, however,
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Figure 6. Empty shelves await Nicaraguan
At a personal level, skyrocketing inflation has trans-
lated into a further drop in real wages. While
Managua boosted minimum wages 90 percent in
January and another 50 percent in March, US Em-
bassy analysis and our calculations show that inflation
ate up those increases, by the first of June, and the
regime has announced its intention to hold the line on
further wage increases through the end of the year.
Even so, real wages will fall at least by 50 percent this
year, according to our calculations, for a total decline
of three-fourths since the Sandinistas took power.
Looking Down the Road
STAT
are reluctant to provide any because such sales-and
even gifts to relatives or friends-are strictly prohibit-
ed and make offenders subject to fines, commodity
and land confiscation, or jail terms. While many
middle- and upper-income consumers are resorting to
the black markets-where commodities cost as much
as 10 times their official prices-this option clearly is
not open to most families. The US Embassy reports
that minimum-wage earners are being forced to post-
pone purchases of clothing and other basic consumer
goods. ,A pair of slacks on the black market, for
example, costs the equivalent of half a month's earn-
ings.
Consumer shortages, government deficits, and de
facto cordoba devaluations have caused the govern-
ment virtually to lose control of consumer prices, and
inflation is soaring. In March alone, prices of some 50
consumer necessities were hiked an average 150 per-
cent. Milk, rice, salt, soap, sugar, and toilet paper, for
example, were raised an average 130 percent, while
corn and bean prices increased 300 percent. Monthly
cost-of-living surveys by the. US Embassy have shown
that inflation grew by more than 10 percent each
month from April through September. In these cir-
cumstances, regime economists reluctantly admit that
inflation is running about 600 percent on an annual
Because the key determinants of economic policy
making-political concerns and the war-almost
surely will not change, we believe economic activity
will continue to fall through at least 1987 at about the
same rate experienced over the past two years. The
slide could be even greater as anti-Sandinista insur-
gent activities intensify and the civil war requires a
response from Managua that further drains the
Sandinistas' limited resources. Growing public-sector
inefficiencies and the poor outlook for agriculture
further undermine the medium-term economic out-
look. In these circumstances, Managua's ability to
keep the economy afloat and consumption at accept-
able levels will increasingly depend on the Soviet
Bloc's willingness to continue to underwrite the econo-
my.
Poor Prospects for Policy Changes
We see only a remote chance that the Sandinistas
would adopt measures needed to increase business
confidence and restore trade and financial flows from
the West. While key Sandinista policymakers do not
always agree on tactical economic positions,
that they share a common economic
goal-the creation of a Marxist-Leninist state.4 In our
'See appendix B for a detailed discussion of economic policy
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view, rather than risk breaching consensus, the Sandi-
Embassy reporting]
nista leaders will back away from politically divisive
proposals-even if they are more technically sound.
Managua has consistently ignored reforms-recom-
mended by pragmatic technocrats and sympathetic
Western governments-that could stimulate econom-
ic activity. We believe Sandinista leaders are instead
preparing for a further centralization of controls by
moving against persons they see as state enemies and
calling for individual and collective sacrifice
IIn early 1986, after
Managua revised the land reform law to allow farms
of any size to be seized if owned by dissidents or if
such action were deemed in the public interest,
National Directorate member Jaime Wheelock stated
publicly that exclusive land ownership no longer
existed in Nicaragua, and that the concept of "private
property" had become obsolete.
As the economy worsens, Managua almost surely will
emphasize political responses.
virtually all economic decisions will continue to
take a back seat to the goal of creating a socialist
state. Moreover, we believe that heightened reliance
on Communist assistance and advice will reinforce
Managua's move into the Soviet camp and inexorably
toward full state-economic control.
Growing Managerial Problems
As state domination continues to grow, the critical
shortage of managers will constrain the economy
further. Despite seven years of on-the-job training, the
regime lacks enough committed technocrats or skilled
collaborators to manage the state farms and indus-
tries, government-controlled cooperatives, and public-
sector enterprises they have now, according to US
In these circumstances, reliance on inexperienced
managers and bureaucrats will result in increasing
economic waste, in our view.
government inefficiency is already ram-
pant, particularly in retail and wholesale distribution
channels and in state farms and industries.
Perhaps even more detrimental are the economic
distortions caused by growing corruption. According
to US Embassy state graft is
more prevalent now than at any time in recent
memory Regardless of the exact level of corruption,
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US Embassy reporting suggests official graft is clear- 25X1
ly frustrating many private-sector business transac-
tions and is further undercutting public-sector effi-
ciency. As the state squeezes more private farmers,
merchants, and industrialists out of business, and new
government regulations dictate an ever-increasing
portion of business transactions and economic deci-
sions, we believe the incidence of official corruption
will grow apace. Moreover, further deterioration in
living standards will very likely encourage even more 25X1
government workers to use their positions for personal
benefit.
In our assessment, the Sandinistas at best will only
restrain the growth of official graft. Because access to
the public till has been a principal technique for
winning and rewarding Sandinista militants and col-
laborators, we believe the regime is likely to take
measures only against flagrant abusers or uncoopera-
tive bureaucrats.
Agricultural Deterioration
Nicaragua's medium-term outlook for recovery of the
key agricultural sector is very poor. The recent surge
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Figure 7
Economic Disbursements to Nicaragua, 1979-86
Q USSR
fl Multilateral and bilateral aid from Western
nations including Latin America
Other Eastern Bloc and Cuba
aEstimated.
bProjected.
I I I I I I I I I I I"]
83 84 85 a 86b
staple harvests,
tially reduce important cotton, coffee, banana, and
and further undercut field-maintenance operations. constrain farm production.
Poor weather conditions thus far in 1986 will substan-
in land reform almost surely will accentuate farm- agriculture will have to continue relying on less
management problems, continue to reduce plantings, efficient Soviet Bloc equipment, which will further
The US trade embargo also will continue to depress
Nicaraguan agriculture over the medium term. While
some of the initial export disruptions caused by the
embargo have been overcome,
Janoth-
er two years or more will be needed to replace lost US
commodity markets. On the import side, Nicaraguan
The Soviet Safety Net
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Although we believe that the Soviets will continue to
increase economic support to keep the Sandinistas
afloat, we calculate that probable increases in foreign
financial support will not be enough to reverse
Managua's economic slide in the near term. To date,
the generous Soviet increases have not, been sufficient
to offset revenue losses from lower Nicaraguan ex-
ports and higher food import requirements. We expect
that little, if any, extra Soviet Bloc financial support
will be available to boost capital goods and raw
material imports needed to restore factory output or
increase agricultural production.
A review of Sandinista and IMF projections for
Nicaragua's 1986 balance of payments, for example,
shows that substantially higher Soviet Bloc aid will
probably be just enough to maintain imports at the
depressed 1985 level.
we project Soviet Bloc financial support to
increase by some $150 million during 1986 to a total
of some $600 million. In our estimation, however,
none of this will be available to increase productive
imports because of compensating reductions in
Nicaragua's export earnings, the continued decline in
Western financial support, and higher prices for most
nonoil imports.
Public discontent over economic shortages is under-
scored by unprecedented consumer disturbances
? Two government market inspectors were killed in
separate incidents early this year as they tried to
enforce Sandinista policies against the black mar-
ket, according to the US Embassy.
? In June, four police detachments were needed to
restore order when a crowd attacked a MICOIN
inspector trying to arrest a woman for illegally
selling beans.
? Shortly thereafter, an Embassy source reported that
hungry consumers hijacked a government corn
truck near Managua and made off with its cargo.
? During July and August, the Embassy reported that
peasant groups took corn and Soviet rice during
raids on state farms near Leon and at the port of
San Juan del Sur.
? In September, a patrol car was smashed by angry
vendors as police attempted to close a clandestine
food market just north of Managua.
consumers are
increasingly disgusted with shortages of foodstuffs
and other goods Nicaragua formerly exported, and
blame the government rather than external forces
for the growing economic problems
Both government allies and opposition groups have
recently joined the chorus of public criticism. Last
April, the collaborationist Conservative Democratic
Party used the progovernment press to declare that
Sandinista inefficiencies were wrecking the economy
and that Nicaraguans could not survive on current
rations. Further, the statement from the usually sym-
pathetic Conservative Democrats warned that correc-
tive actions were needed because "the counterrevolu-
Implications for Sandinista Vulnerabilities
In our assessment, the dismal economic situation will
become an increasing point of vulnerability for the
Sandinista regime.
L As living standards continue to erode,
we believe chances are growing that government
policy moves could spark sharp consumer reactions,
including serious food riots or even work disruptions
over the next 18 months.
tion- begins in the kitchen."
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In our assessment, increasing official corruption will
further undercut the population's flagging confidence
in the Sandinistas' ability to manage the economy and
could seriously undermine the regime's moral author-
ity. Growing official graft also risks increases in the
perception of average Nicaraguans that the Sandinis-
tas are unable or unwilling to control the bureaucracy
and deliver foods and social services as promised.
In response to further economic deterioration and
growing popular discontent, we believe that concern
for regime survival will encourage Sandinista leaders
to increasingly emphasize political solutions. For ex-
ample, in a mid-July press interview, Interior Minister
Tomas Borge said he favored continuing coercive
economic measures-presumably property confisca-
tions-to neutralize opposition leaders still in
Nicaragua. Almost certainly, concern about peasant
support for the anti-Sandinista insurgents will prompt
the regime to step up land confiscations for redistribu-
tion. Even so, we doubt that the Sandinistas would
allow corresponding increases in actual peasant con-
trol over government cooperatives. While other re-
gime policies probably will continue to be designed to
deflect blame and intimidate the opposition, we be-
lieve that most Nicaraguans will continue to hold the
Sandinistas responsible for economic mismanage-
In our assessment, the growing economic plight, par-
ticularly if combined with increasing battlefield
losses, will continue to erode internal confidence in
the Sandinistas, and could eventually translate into
increased popular support for the insurgents. In-
creased military pressure against the regime in the
wake of scheduled boosts in international support for
the rebels would further divert already scarce Sandi-
nista managerial and budget resources. We believe
that, as the economy spirals downward, the Sandinis-
tas run the risk that regime stability could in no small
measure be determined by public perceptions of San-
dinista policy responses. Moreover, on the basis of
tactics to date, we believe there is a greater likelihood
the Sandinistas will be viewed by many Nicaraguans
as both unresponsive and repressive. While mounting
political, social, and economic controls will almost
surely force a considerable number of Nicaraguans to
abandon the country, we believe that the rising popu-
lar discontent will also encourage a significant num-
ber of Nicaraguans to join the rebels. The number of
those who cast their lot with the insurgents probably
will grow to the extent that increased international
support results in insurgent battlefield successes.
As the economy deteriorates and Managua further
tightens controls, Sandinista vulnerabilities will in-
crease to the extent that:
? Regime crackdowns on new consumer-worker
demonstrations are viewed by the public as exces-
sively repressive.
? Regime centralization policies and distribution inef-
ficiencies are perceived as unresponsive to the basic
values and needs of the people.
? New revelations of official graft raises the percep-
tion that the Sandinistas are unable or unwilling to
control the bureaucracy and deliver food and ser-
vices as promised.
? Rebel leaders offer a sophisticated propaganda cam-
paign to further establish the culpability of the
regime for economic hardships.
? Insurgent leaders are able to assure the populace
that a rebel victory would not jeopardize the positive
aspects of land reform and extended health, educa-
tion, and other social services.
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Appendix A
Sandinista Economic
Decision Making
The reporting on economic decision making in Nica-
ragua is often conflicting, making it
difficult to dissect and analyze the policymaking
apparatus. We believe, however, that decisions are
reached through the interaction of a tiered structure
of several executive bodies. In descending order of
importance, these organs are: the Sandinista National
Liberation Front's (FSLN) National Directorate and
Executive Commission, and the executive branch's
National Planning Council and Planning and Budget
Secretariat.
The Role of the National Directorate
The ruling nine-man National Directorate is at the
apex of the decisionmaking process. As the self-
proclaimed vanguard of the Sandinista revolution, the
Directorate chooses and initiates policies. It has estab-
lished numerous administrative and consultative bod-
ies to secure control over Nicaragua's economy. These
organizations operate under the direct authority of
the National Directorate but lack decisionmaking
power.
Even though the Directorate customarily makes deci-
sions by consensus, it is not necessarily a cohesive
group. Ortega, Wheelock, and Ruiz each represent
one of the three original factions within the FSLN:
the Terceristas, the Proletariat Tendency, and the
Prolonged Popular War, respectively. We believe that
the three original factions still maintain differing
political, social, and economic outlooks that compli-
cate the decisionmaking process and agitate personal
rivalries. Although the Directorate members have a
common goal for Nicaragua-that of a Marxist-
Leninist state-they apparently disagree on issues
such as the pace and amount of private property
confiscations, how to deal with the private sector, and
fiscal and budgetary policies. Hardliner Henry Ruiz,
for example-supported by members Tomas Borge
and Bayardo Arce, both fellow members of the Na-
tional Directorate and of Ruiz's faction-favors a
more rapid and thorough government takeover of
Figure 8
Nicaragua: Party Government
Policy Links
Party Policy Government Policy
Sandinista National
Liberation Front (FSLN)
Directorate
FSLN Executive
Commission
Coordinator:
Daniel Ortega
National Planning
Council
Chairman:
Daniel Ortega
Planning and Budget
Secretariat
private property and harsher policies to limit the
influence and power of private business leaders. On
the other hand, Ortega has sought a slower rate of
confiscation to project a moderate image to the world
and to soften international criticism.
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The Executive Commission
The next level of the hierarchy is the Executive
Commission, a group of-five National Directorate
members responsible for implementing all-not solely
economic and financial-Directorate policies. In ad-
dition, the commission is designed to bolster the
FSLN's ties to government organizations and Nicara-
guan society by strengthening the quality of the
party's vanguard and leadership. US Embassy reports
indicate that the commission members (Daniel and
Humberto Ortega, Bayardo Arce, Tomas Borge, and
Jaime Wheelock) wield more power than the four
remaining Directorate members (Henry Ruiz, Victor
Tirado, Luis Carrion, and Carlos Nunez).
The National Planning Council
The National Directorate and the Executive Commis-
sion receive support from a variety of subordinate
administrative and ministerial organizations that pro-
vide advice and carry out day-to-day tasks. Prominent
among these bodies is the National Planning Council,
which, since its creation in January 1985, has become
the primary government organ dealing with the econ-
omy. The Council is made up of representatives from
the five key economic sectors-agriculture, industry,
infrastructure, foreign assistance, and finance-who
are responsible for coordinating and supervising poli-
cies and projects in their respective areas. The estab-
lishment of cohesive and complementary policies is a
principal objective of the Council. According to Presi-
dent Daniel Ortega, the Council is responsible for
assuring that the country's economic program sup-
ports those areas vital to military defense and the
survival of the Sandinista revolution.
The Planning and Budget Secretariat
Another advisory body, the Planning and Budget
Secretariat, is largely dedicated to economic planning
and to counseling both President Ortega and the
National Planning Council. The task of overseeing
both the planning and budget aspects of the economy
gives the Secretariat an influential hand in policy-
making formulation. Because it is indirectly con-
trolled by Ortega and is composed of his own personal
advisers, we believe the Secretariat may be more
cohesive and not as subject to internal conflict as are
the other decisionmaking mechanisms.
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Appendix B
Key Economic Policymakers
In our opinion, a relatively small group of officials directs Nicaraguan economic
policy: Daniel Ortega, Jaime Wheelock, Henry Ruiz, and Sergio Ramirez. We
believe they are the most influential in the economic realm because they hold top
Sandinista National Liberation Front positions as well as economic or administra-
tive portfolios. Moreover, these four, along with other technocrats, are prominent
in several of the above-mentioned core policymaking organizations and ministries.
Daniel Ortega
President. Member, National Directorate. Coordinator, Executive Commission.
Chairman, National Planning Council. Age 40
Ortega, who leads the four most important decisionmaking bodies, is possibly the
reigning economic policy maker.
In addition, we believe that Ortega's influence is bolstered by the position
and power base of his brother, Humberto, a National Directorate member and
Minister of Defense. Both are members of the moderate Tercerista faction of the
FSLN.
Jaime Wheelock
Member: National Directorate, Executive Commission, and National Planning
Council. Minister of Agriculture and Agrarian Reform. Age 39
Wheelock holds several high-level offices'that give him an important role in
decisionmaking; moreover, he heads the most crucial sector of the Nicaraguan
economy-agriculture. Despite its dismal performance under his leadership, he
remains influential and popular.
his stewardship of land reform policies has made him popular in rural areas.
An intellectual Marxist-Leninist, he is a member of the Proletariat faction.
STAT
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Henry Ruiz
Member: National Directorate and National Planning Council. Minister of
Foreign Cooperation. Age 42.
Ruiz is responsible for obtaining financial and material assistance from foreign
nations and organizations. Ruiz advocates rapid confiscation of private property,
and he has stated that he does not envisage a mixed economy in Nicarau?a's
He has close ties to the Soviet Bloc
as a result of study in the USSR and frequent trips to secure aid for Nicaragua.
Sergio Ramirez
Vice President. Member, National Planning Council. Age 44
oversees activities relating to the country's infrastructure: construction,
transportation, and communications.
US officials in
Managua say he is at least as influential as Ruiz and Wheelock. Ramirez is not
identified with a particular faction and apparently tries to maintain a neutral
position in the government. A moderate, he often represents Nicaragua abroad and
is well regarded both inside and outside the country.
capable, experienced official ... age 35.
Emilio Baltodano. Minister of Industry. National Planning Council member
responsible for coordinating industrial production, fishing, and mining ... a
and trade delegations ... loyal to Ortega and Tercerista faction ... age 40.
Dionisio Marenco. Director of the Planning and Budget Secretariat, technical
secretary of the National Planning Council, and key adviser to President Ortega.
Excellent administrative abilities, politically adept ... has led various ministries
and hold posts in the lower ranks of the economic organizations.
Important Technocrats
Several notable technocrats provide guidance and advice to the decisionmakers
Ortega ... economics background, educated in the United States ... travels
abroad extensively ... .. age 39.
Alejandro Martinez. Minister of Foreign Trade. Reportedly has close ties to
... former corporate lawyer and finance minister ... age 68.
Joaquin Cuadra. President of Central Bank. National Planning Council member
in charge of financial sector ... very capable and experienced ... moderate views
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