..

February,
HYPERINFLATION AND

1992

STABILIZATION IN NICARAGUA
Josi! Antonio Ocampo

I.
INTRODUCTION
The Nicaraguan economy faced in the 1980s and early 1990s
massive macroeconomic disequilibria.
Economic activity never
recovered the large losses incurred during the 1979 revolution
which brought the Sandinistas into power. Moreover, GDP per capital
fell steadily from 1983 to 1991. As a result of production losses
and rapid population growth, by the late 1980s GDP per capita had
returned to levels comparable to the 1940s. Throughout this process
of economic collapse, private consumption per-capita and real wages
fell even more?
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c

This ,' process

was
accompanied
massive
external
by
disequilibria.
As a result of these imbalances, the. country
, I..
accumulated by the early 1990s a foreign debt close to $10 billion
(including interest arrears). more than seven times GDP, the worst
debt ratio in a heavily indebted region. Finally, the collapse of
real economic activity has been accompanied by equally massive
domestic
financial
disequilibria,
which
exploded
into
hyperinflation in 1988 and 1990. From January 1988 to January 1989,
and from March 1990 to March 1991, when this process was at its
peak, inflation reached 43,000 and 64,000% (equivalent to monthly
rates of 66 and 71%), the records so far in Latin America and some
of the highest rates in'world history.
Macroeconomic management faced a complex set of constraints,
quite different to those confronted by other Latin American

'/ Senior Researcher, FEDESARROLLO, Bogoti, Colombia. This

paper is based on the author's experience as member and head of the
SIDA and WIDER-SIDA Hissions to Nicaragua from 1989 to 1991.

2
countries in the 1980s. Through the 198Os, Nicaragua continued to
receive massive financing from abroad. Also, according to ECLAC
estimates, the terms of trade did not fared badly, either '/.
However, these favorable events were overwhelmed by the impacts on
production and resource availability of the revolution and the
contra war, the US trade embargo and veto on multilateral lending,
excessive reliance on relatively inflexible bilateral assistance
from the former socialist countries, and a series of natural
disasters.

m
I,
i

,The building up of macroeconomic disequilibria was also

closely associated to economic policy. In the first years of the
revolution,
the government adopted an expansionary
public
expenditure program, to improve the poor social record inherited
from the Somoza years and accelerate economic growth. These goals,
particularly the latter, were sacrificed when the government was
forced to increase defense expenditure to face the contra war. Up
to 1988, the central government ran massive budget ,deficits.
Monetary financing of the deficit, together with equally massive
subsidies on the use of foreign exchange and credit resulted, with
a lag, in hyperinflation.
The magnitude of existing disequilibria forced the government
to adopt more ambitious adjustment programs in 1988 and 1989. In
the former year, the program emphasized the correction of relative.
price distortions,
particularly the simplification of the
inefficient and costly multiple exchange rate system. In 1989,
continuing efforts to 'correct exchange rate overvaluation were
combined with a contractionary fiscal policy.
Adjustment efforts were completely abandoned during the first
months of 1990. The new Chamorro administration inherited again

_'
i.

'/ This is not true according to alternative estimates by

Bulmer-Thomas (1987), Table A.14.


.-

3
substantial macroeconomic disequilibria. Moreover, as opposed to
the pattern typical during the Sandinista period, it faced strong
trade union resistance. This factor, combined with increasing
dollar indexation, resulted, once more, in hyperinflation. In
March, 1991, a new stabilization program was put in place, with
strong backing from the major bilateral donors (particularly the
U.S.) and multilateral agencies. This program was able to build on
previous stabilization efforts and to stop inflation, though at the
cost of significant overvaluation of the cordoba.
Iah,ifls,,paper :, analyzes
m,acroeconomic
.,
,I policies and performance in
,,,. L I,,, .I ,I #..I . .i :: .:,',.5-..~ .',",
It is divided in
Nicaraqu&:in.
the 19.80s and. _ thg,onset
.of..I',the.l,,9:9$s.
w.n*'$t3&,&...
w &I,
:, \'i'.;... 7
,( ,.-l,t+ , :. \9 .:a.,.::*
nine sections, the first of which is this introduction. The second
summarizes some features of the Nicaraguan economy prior to the
revolution. The third considers the effects of revolution and the
period of recovery which followed it. The fourth analyzes the
building up of macroeconomic disequilibria during the transition to
and full fledged war economy. The fifth shows the characteristics
of the 1988 adjustment program and hyperinflation. The sixth takes
a close look at the 1989 stabilization program. The seventh
considers the 1990 hyperinflation and its relation to the political
transition from the Sandinista to the Chamorro administration. The
eighth summarizes the major features of the March 1991 program and
the post-stabilization period. Finally, the ninth presents the
major characteristics of the structural reforms underway.
~~?~.~~~rY.,t:.d~,:i,~.j~?~~,~~~~~~:~-.~e

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I.

II. THE NICARAGUAN ECONOMY PRIOR TO THE REVOLUTION

The recent study by Bulmer-Thomas (1987) indicates that there
was little growth in GDP per capita in Nicaragua from the 1920s to
the late 1940s (see Figure 1). This period of relative stagnation
was followed, however, by an export-led boom from the 1950s to just
before the revolution. GDP per-capita multiplied by 2.5 during this
period. As this process was matched by rapid population growth, GDP
expanded at an average rate of some 6% a year, the fastest in
Central America. The rapid growth of cotton exports was the initial

4
basis for expansion. Later on, the process was reinforced by new
primary exports (beef, sugar, shellfish, etc.) and a boom of
agroindustrial and other manufacturing exports to members of the
Central American Common Market, CACM (Bulmer-Thomas 1987, CEPAL
1981, Gibson 1987a).

c
'.I

Rapid economic expansion was not translated into an equally

rapid improvement of social indicators. At the end of the boom,
illiteracy, child mortality and life expectancy levels were among
the worst in Latin America --comparable, however, to other Central
American countries, excluding Costa Rica and Panama '/. Income
distribution remained highly skewed, at levels also similar to the
Central American neighbors (Brundenius 1987, Table 2). There is
little evidence on how distribution evolved during the period of
expansion. However, available data on labor incomes indicate that
real wages were basically trendless in the 1960s and 1970s '/. As
this was accompanied by widespread and growing informality in the
labor market (Gibson 1987a, Table 2), it may indicate that income
distribution deteriorated in the last phases of the boom. On the
other hand, the concentration of wealth in hands of the Somoza
family and his political clique was remarkable, as the data on
nationalizations following the revolution later revealed.
Economic management was fairly orthodox throughout the boom.
From the late 1950s to just before the revolution, the exchange
rate was pegged at a rate of 7 cordobas per US dollar. Since 1963,
the currency was fully convertible. Orthodox fiscal and monetary
policies guaranteed low-inflation rates but also the transmission
of external shocks to the domestic economy. As a reflection of
'/ See CEPAL (1988a), pp. 13, 45 and 50 and footnote 5 below.
'/ Using the average wage estimated by INSSBI, and the GDP
deflator as a price index, real wages (1981=100) increased slightly
from 1960-1964 to 1965-1969 (from 100.2 to 107.0) but then
stagnated and declined (106.0 in 1970-1974 and 103.2 and 19751979).

5
6
I.

limited fiscal and current account deficits, foreign indebtness

remained within close bounds (Gibson 1987a and 1987b).

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\:

The economy and economic management experienced, however,

increasing hardships in the 1970s (CEPAL 1981). Reconstruction
efforts after the 1972 earthquake broke the tradition of fiscal
conservatism. In the last years of the Somoza regime, budget
deficits increased to an average of over 5% of GDP (see Table 2
below). This was also refelected in increasing foreign indebtness.
According to ECLAC estimates, the external public sector debt
quadrupled from 1972 to 1979 (from $230 to $961 million). The
counterpart of this process was persistent current account
disequilibria, enhanced by the adverse effects of the 1973 oil
shock, the slowing down of growth of trade within the CACM, growing
overvaluation of the cordoba and capital flight in the months
before the victory of the Sandinistas (see below). To face growing
disequilibria, the Somoza government established mild exchange
controls in late 1978. In April, 1979, it devalued the basic
exchange rate to 10 cdrdobas per dollar and introduced a multiple
rate system.
III. REVOLUTION AND RECOVERY (1979-1981)

The economic legacy of the last years of the Somoza regime and
the revolutionary uprising was complex. Economic activity severely
contracted in 1978 and 1979, by an accumulated 32% (Table 1). The
capital stock was also severely affected. Losses associated to the
destruction of buildings, equipment and stocks, looting of
inventories, slaughter of immature beef cattle and smuggling of
herds were estimated by ECLAC at $381 million (CEPAL 1981),
equivalent to 18% of 1980 GDP. National Accounts records indicate
that the loss of inventories in 1978-1979 was equivalent to 14.4%
of GDP (see Table 1). To these, we must add capital flight for $535

.'

million in the 18 months preceding the revolution (CEPAL 1981),

portfolio losses by industrial and commercial firms and, of course,
the casualties inflicted by the war.

6
The revolutionary government brought with it some emergency
measures, a plan for economic recovery but, above all, an agenda
for structural change. The latter was presented as a program for a
"mixed economy", in which the State would assume control of the
properties of the Somoza family and his clique and some lrkeyrr
economic sectors, and considerably expand social expenditure and
its contribution to capital accumulation. The State would also
encourage the organization of the popular classes, through
unionization in urban areas and cooperativization in the
countryside. As a result of the enhanced role of the public sector,
new rules of the game for the private sector would be designed.

,:,

One of the first decrees issued by the government after

military victory on July 19, 1979, was the nationalization of the
properties of the Somoza family and his allies who fled the
country. It was followed by the nationalization of the financial
system, foreign trade, large scale (particularly gold) mining,
forestry and fishing. Few other important nationalizations took
place in the following years, but the government periodically
exercised the right to confiscate the properties of capitalists
suspected of counter-revolutionary activities or practices which
led to the decapitalization of their businesses (Stahler-Sholk &
al. 1989). Government's share in GDP rose from 15% to slightly
overs 40% in the early 198Os, but then stabilized. The private
sector retained a dominant share of agriculture, manufacturing,
domestic commerce and most services (World Bank 1981, Baumeister
and Neira 1986, Ruccio 1987, Brundenius 1987). In 1990, at the
onset of a new phase of structural change, government's share in
GDP stood at 47%, but this figure is not fully comparable to
earlier estimates '/.
'/ CORNAP (1991) estimates
enterprises, excluding utilities,
1990. On the other hand, 15.7% of
services, financial activities and
by the government in that year.

that the 350 public sector

contributed to 31% of GDP in
GDP was made up of government
utilities, all fully controlled

7
The initial nationalization decrees also brought some 20% of
land property under state control. Land redistribution accelerated
as a result of the Agrarian Reform Decree issued at the second
anniversary of the revolution.,As a result of both measures, more
that 50% of rural property was affected in the years following the
revolution. During its first phases, the government emphasized the
development of parastatals and cooperatives, but soon evolved into
encouraging small scale farming. The redirection of agrarian policy
was largely induced by the need to erode peasant support for the
Contras in some regions of the country. Nonetheless, it also
reflected the social programs of the revolution and the policy of
self-sufficiency in food staples (Enriquez and Spalding 1987, Neira
1988, Wheelock 1989).

.
L
\

L'

The nationalizations created a large parastatal sector. As in

most countries undergoing similar processes, the management
problems generated by such a sudden expansion of the state sector
were costly (Colborn 1990). On the other hand, the redesign of new
rules of the game for the private sector proved difficult and, in
fact led, rather early in the process, to violent confrontations
(Vilas 1987). At a purely economic level, the private sector
resented excessive state intervention in their businesses and
enterprises. More
government predilection
for public-sector
importantly, however, the exclusion of the bourgeoisie from
political power and the practice of intermittent political
confiscations generated a general sense of insecurity of property
rights.
state
enterprises
inadequate
functioning of
and
The
confrontations with the private sector may explain the failure of
economic activity to recover rapidly in the years following the
revolution. A partial recovery was, nonetheless, experienced, based
on an expansionary demand policy and an ample supply of external
1981,
central
government
(Fitzgerald
1989). By
financing
expenditure, as a share of GDP, had doubled with respect to levels

8
,
c

typical before the revolution. The initial fiscal expansion

included many social programs, --which induced a rapid improvement
in key social indicators "/--, but also defense and general
bureaucratic expenditures. A large part of this expansion was
financed by rising taxes. The resulting deficit, of some 9% of GDP,
was, nonetheless, reasonable in the short run, given the ample
supply of external financing (Table 2).

.
\
.,

In fact, other domestic macroeconomic indicators were not

particularly troublesome. As a result of the disruption of the
domestic distribution network during the last stage of the
revolutionary uprising, inflation peaked at 70% in 1979. As
supplies stabilized, this price surge was followed by moderate
inflation in the early 1980s --some 20% a year (see Table 1).
Domestic liquidity ratios increased with respect to those typical
before the revolution "/, but were stable (Table 2). Finally,
nominal wages increased, but there was no attempt to raise them in
real terms (see Table 1 and note 3). This required, in fact, a
significant political effort by the Sandinistas to control labor
demands (Vilas 1987). The policy strategy adopted by the government
thus implied that workers will receive increasing real income
through government services --a llsocial wage", a it was called--but
would contribute, through wage restraint, to the recovery of
economic activity.

"/ Life expectancy at birth increased from 56.3 years

1980 to 62.3 years in 1985-1990, as child mortality fell
to 6.2%. At the same time, the illiteracy rate fell from
1970 (and a similar figure just before the revolution) to
1985. See CEPAL (1988a), pp. 13, 45 and 50.

in 1975from 9.3
42.5% in
13.0% in

"/ Estimated on the basis of end-of-year monetary aggregates,

the ratio of M,/GDP increased from 13.1% in 1974-1978 to 22.6% in
1980, whereas MJGDP increased from 20.7 to 30.5% (see IMF,
International Financial Statistics). The methodology used in Table
2 puts such liquidity indicators at 20.9 and 33.0% in 1980.

9
The core external sector indicators moved, however, in the
wrong direction. Neither traditional nor non-traditional exports
ever reached pre-revolutionary levels (Table 3). The reduction of
exports was combined in the early years by a deterioration of the
terms of trade. On the other hand, the revolutionary government
inherited a clearly overvalued cordoba, and a rate of inflation
clearly incompatible with a fixed exchange rate. There was no
attempt to correct such imbalances. A steady real appreciation of
the cordoba then ensued. It was accompanied by a strong
depreciation of the black market rate (Figure 2). The political
climate generated by growing confrontations between the Sandinistas
and the private sector accentuated this trend.
Although strong import and exchange controls became a central
feature of external sector management during the first years of the
revolutionary government, the former were not particularly harsh.
Indeed, the import coefficient reached a historical peak in 1980
and 1981 (Table 3). Growing external imbalances generated by large
imports and weakening exports were financed by record' capital
inflows. Thus, as outstanding debts were renegotiated, the country
had ample access to new financing. Resources came from multilateral
agencies, bilateral sources, both in the developed countries
(including the US) and the Third World (Mexico, in particular), and
only secondarily from socialist countries (see Stahler-Sholk 1987,
Arana et al. 1987 and Table 3). The result of this strategy was, of
course, the rapid growth of the external debt. By 1981, the debt
had already reached extremely critical levels (Table 3).

10
IV. WAR ECONOMY AND MACROECONOMIC DISEQUILIBRIA (1982-1987)
A.
General features of macroeconomic manauement '/
The expansionary demand policy adopted during the first years
of the revolutionary government could be defended on the grounds
that the access to external financing should be used to ensure a
fast turnaround of economic activity and an equally rapid
improvement in key social indicators. On the other hand, as we have
seen, the macroeconomic package typical of the first years revealed
some prudence on behalf of the government, as reflected in its wage
and tax policies. Nonetheless, by itself, external disequilibria
would have called for a significant policy shift as early as 1981.
The government did not grasp the urgent need for action.
Indeed, the systematic lag in the adoption of the stabilization
policies and the partial nature of such efforts once they were
adopted became central features of Sandinista macroeconomic
management early in the post-revolutionary period. Expectedly, the
government was unwilling to give up what it thought to be the
essential goals of the revolution, or to adopt policies which it
thought would affect the economic recovery and, even more, risk
military defeat. Nonetheless, the political process worked in
peculiar directions. Understandably, defense and social expenditure'
became the most inflexible components of the budget. Paradoxically,
however, the government was at the end more willing to sacrifice
real wages and capital accumulation than to reduce the massive
subsidies to the productive sector. Its strong political control of
the labor movement and public-sector enterprises and, on the
contrary, its feeble relations with the private sector and the need
to guarantee the support of the peasants in the contra war, go a
long way to explain this paradox.

'/ For a more extensive analysis of this period, see Arana &
al. (19871, Fitzgerald (1989), Gibson (1987b), IMF (1988), Medal
(1988), Pizarro (1987), Taylor et al. (1989) and World Bank (1986).
Stahler-Sholk et al. (1989) presents also a very useful chronology,
which would be extensively used below.

11
Although the first signs of government concern for the balance
of payments --the adoption of export-promotion policies--came as
early as 1982, the expansionary of expenditure policies were in
full swing up to 1984. By then, domestic disequilibria had reached
clearly explosive levels. Forced by the circumstances, the
government adopted the first important stabilization measures in
1985, including cuts in non-defense expenditure, adjustment of
government-regulated prices and devaluation. This was followed by
similar steps in the subsequent years. However, the inconsistency
of the stabilization packages implemented from 1985 to 1987
enhanced
macroeconomic
disequilibria.
Particularly,
rising
inflation eroded the tax base, and attempts to repress inflation
and defend exporters against official exchange rate overvaluation
led to massive relative price distortions and booming black
markets. As a consequence of these imbalances, the government was
finally forced to adopt more drastic stabilization measures in 1988
and 1989.
..

On top of the dynamics generated by expansionary expenditure

policies
and
inconsistent
macroeconomic
management,
the
revolutionary government also had to face during this period the
destabilizing impact of the contra war and the US anti-Sandinista
campaign. The war had significant demand effects, as it forced a
further expansion of defense expenditure. However, it also had
important supply effects (Fitzgerald 1987, Gibson 1987b). Aside
from the destruction of resources and production, it created
multiple labor shortages, associated with the diversion of young
workers into military service, rural-urban migration, scarcity of
labor in some crucial (particularly coffee-producing) regions and
the flight of skilled workers abroad. On the other hand, the 1985
US trade embargo forced an inefficient substitution of trading
partners. Finally, the suspension of direct US aid soon after
Reagan was inaugurated in 1981 and the American veto on
multilateral lending in the following years, forced the country to

12
rely increasingly on inflexible bilateral assistance from socialist
countries (Table 3 and Stahler-Shock 1987).
B. Fiscal and nonetarv disecnailibria and the f&&
. .
.
Stabr&.zation efforts
As a reflection of policy decisions and defense needs, central
government expenditure continued to increase rapidly after 1981,
peaking at 58.7% in 1984 '/ l /. As Table 2 indicates, the most
dynamic element from 1982 to 1984 was the expenditure in
infrastructure and production (largely investment outlays).
However, all components of central government expenditure continued
to increase at rapid rates. Efforts to raise government revenues
were successful, and by 1984 the country had one of the highest tax
rates of Latin America and the Third World. Nonetheless, the growth
of expenditure clearly outpaced the tax effort. In the same year,
the central government deficit reached 23.5% of GDP --26.6% for the
consolidated public sector deficit,
according to a partial
estimate using IMF data lo/.
Growing pressures generated bymacroeconorPic disequilibria and
the contra war led the government to undertake significant
*/ As pointed out in note 2 of Table 2, total expenditure
according to central government accounts does not coincide with
data on destination of expenditure by ministries, which is used to
make up the breakdown shown in the second part of the same Table.
The former figures are used in the text when referring to total
expenditure.
'/ Total expenditure was actually higher, as not all military
expenditure financed bythe socialist countries was budgeted. IMP
(1991) estimates such expenditure at 13.4% of GDP in 1990, but the
figure for earlier years is unknown. Since 1991, al military
expenditure is budgeted.
lo/ We have excluded from this figure both unpaid foreign
interest and deficit estimates for the nrest of the public sector".
The former are unlikely to be ever paid. The latter have been
estimated by the IMF on the basis of domestic lending, which is a
poor approach in a highly inflationary economy. The estimates of
central bank losses may also subject to controversy.

13
expenditures cuts starting in 1985. However, the war forced a
further increase in defense expenditure, which peaked over 18% of
GDP in 1986-1988 'I/. Thus, the government was forced to
concentrate cuts in civil expenditure.
From 1984 to 1987,
expenditure in infrastructure and production fell to very modest
levels and foreign interest payments were all.but suspended, as the
expansion of public administration costs earlier in the decade was
reversed. Expenditure in social services was maintained, however,
at historically peak levels.

Overall, central government expenditure was reduced from 58.7%

to 44.1% of GDP from 1984 to 1987. Non-interest civil expenditure
fell even more, by some 18% of GDP, but remained slightly above
1980-1981 levels (Table 2). Unfortunately, most of the expenditure
cuts were defeated by the adverse Olivera-Tanzi effect on
government revenues "/. Thus, the central government deficit
remained at 16.5% of GDP in 1987. As we will see shortly, other
major components of the public sector deficit, particularly Central
Bank losses, were even more inflexible. Thus, the overall public
sector deficit never fell below 20% of GDP, even if unpaid
interests on the external debt and the deficit of several public
sector enterprises are excluded.
The monetary impact of deficit financing was dramatic.
However, up to 1984, the economy absorbed it through an impressive

-/ Or higher, as pointed out in footnote 9.

lz/ This was the dominant element in the erosion of tax

revenues in 1984-1987 and through 1988. Given a month's lag in the
collection of tax and other current incomes (a lag which seems to
have been reached by the end of this period), the 1984 share of
current government income in GDP would have fallen to 29.1% in 1987
and 22.4% in 1988 as a result of faster inflation. Thus, additional
effects on government income, such as domestic recession, had a
secondary role in the erosion of the tax base. They may be
important, however, is the more recent stabilization of the tax
rate at fairly low levels.

14
increase in liquidity, with only a modest acceleration of inflation
(see Tables 1 and 2). Although the lack of an inflationary
tradition goes a long way to explain this result, it was also
supported by a fixed exchange rate and strong price controls. The
importance of the latter factors is supported by the significant
role played by explicit adjustments in the official exchange rate
and other controlled prices in the inflationary dynamics after 1985
(see below).

Oddly enough, up to 1984, the demand for money grew faster

than that for term deposits (Table 2). Several factors may explain
this 'result. First of all, nominal interest rates were hardly
readjusted with inflation up to late 1988 13/. With rising
inflation, this meant that term deposits became a close, thouuh
illiauid, substitute for money. In a more orthodox pattern, excess
domestic liquidity was reflected in the increasing demand for black
market dollars, as the evolution of the relevant real exchange rate
indicates (Figure 2.C). The demand for dollars was enhanced by
political instability and the growing overvaluation of the official
exchange rate (Figure 2.A). The role of political factors may
explain why devaluation in the black market overshoot the rapid
increase in liquidity levels and monetary aggregates actually
collapsed, if measured in (black market) dollars.
By 1984 the official exchange rate was only a minimal fraction
of the black market rate (Figure 2.B). This finally convinced the
government to devalue the official rate from 10 to 28 cordobas per
dollar in February, 1985. As we have seen, the devaluation was
accompanied by some austerity measures in the fiscal area. The need
for fiscal austerity also led the government to massively readjust

1.

13/ The most important increase in interest rates took place

in early 1986. Most lending rates were then established in the 2030%. range. The highest rate (for loans to commercial firms) was
then placed at 45% a year. See Medal (1988), Table 32.

15
controlled prices (basic consumer goods and gasoline) at the same
time.

.L

In an attempt to regulate the wage structure, the government

decreed in 1984 a complete wage scale (SNOTS), to which public and
private firms should abide. As a result of the price adjustments
adopted in the first months of 1985, the government then attempted
to defend them against inflation and thus adjusted the scale three
times from February to May 1985, increasing the average wage by
146%. The adjustment was slightly higher than inflation during
these months, but not enough to compensate for the fall in real
wages in previous years. This and similar attempts in the following
years to index wages were soon abandoned. Thus, wage policy was
ineffective and in fact did not seriously try to avert the collapse
in real wages which accompanied the explosive inflationary dynamics
(Table 1 and 4, and Figure 3). Under these conditions and the
increased demand for labor generated by growing black markets,
incentives to work in the lVformalV' sector (including the
government) were reduced. The result of this process was a general
fall in labor productivity,
high labor rotation
and growing
payments in kind l'/.
C.

The outburst of inflationary Dressukes

The stabilization package adopted in early 1985 clearly

induced a f'regimell change: from an atypical excess liquidity/low
domestic inflation/rapidly rising black-official exchange rate
differentials, to a more 81classical" flight against the currency
and explosive inflationary effects of monetary expansion. The
former regime was undoubtly one of "repressed inflation" (m

l'(/ In 1986 labor rotation in the central government was 50%.

As a result, 44% of government employees in 1987 had one year or
less in service (SPP, 1989). For payments in kind in the
government, see note 18 below. In mid 1989, some private
entrepreneurs informed the SIDA Mission that the costs of different
payments in kind were three times the costs of the nominal wage
bill.

16
foreign exchange speculation). The fffundamentalsff were thus bound
to prevail at some point. However, in the transition from one
regime to the other, the exulicit pricing decisions adopted by the
government in the first months of 1985 played the crucial role. In
fact, as Figure 4 shows, the first dramatic acceleration of
inflation in the post-revolutionary period came as the direct
effect of these policy decisions.
After this turning point, the price-monetary dynamics became
explosive.
The average
monthly
inflation
rate constantly
accelerated until it reached hyperinflation in 1989 (Table 1).
Under these conditions, price controls became totally ineffective
and only led to widening differentials between the legal and the
free markets for goods subject to regulations "/. The monetary
fuel was provided by the budget deficit, but also by the losses of
the Central Bank in foreign exchange transactions and the need to
finance most of the nominal expansion in domestic credit through
money creation. The latter was made necessary by the decision to
fix nominal interest rates at artificially low levels. Moreover, as'
the basic official exchange rate was only devalued once more during
the period under analysis (on February 1986, when the official rate
was devalued to 70 cordobas per dollar), the costs of dollardenominated domestic debts (foreign trade financing) were also kept
at very modest levels. '
Accelerating inflation was accompanied by a great variability
in monthly rates. Moreover, as Figure 4 indicates, rather than the
step-wise
acceleration
ffinertialff
inflationary
typical of
processes, it adopted a neat cyclical pattern. The length of the
cycle was annual from 1985 to 1987. Hyperinflation was basically
15/ In May 1989, just before the major liberalization of
domestic prices (see part V), the ratio of black to official market
prices was the following for some important consumer goods: rice
5.5, kidney beans 5.2, soap 12.7, detergent 16.6, and toilet paper
2.4 (SPP, 1988b).

.17
associated with the dramatic shortening in the length of the cycle
to some 4 to 5 months in 1989. What is more interesting, some
turning points, but not the intensitv of the cvcles, were
associated with explicit decisions to correct basic pricing
imbalances: February 1985, the same month in 1986 and, as we will
see below, February and June 1988.
As traditional
monetary theory predicts,
accelerating
inflation was accompanied by falling demand for domestic liquid
assets. For reasons which have already been mentioned, the demand
for term deposits declined ahead of that for money. The latter
remained, in fact, surprisingly high even at fairly advanced stages
of
the
hyperinflationary
process
(Table 2).
The
strong
underdevelopment of the domestic financial market goes a long way
to explain this result. Finally, despite the gross and increasing
overvaluation of the official exchange rate (Figure 2.A) and the
dramatic widening in black/official rate differentials (Figure
2-B), falling liquidity was accompanied by an appreciation of the
real black market rate (Figure 2.C). Some policy measures may have
supported the process, particularly the creation of a rgreyff
(parallel) foreign exchange market in 1985 I"/, where foreign
remittances and a fraction of export earnings could be legally
sold. Massive US aid to the Contras may have also supported this
paradoxical outcome.
The parallel market was actually part of a more general
multiple exchange rate regime. Since 1982, this regime became
increasingly complex, reflecting the decision to defend exporters
against the growing overvaluation of the cordoba. It included two
basic mechanisms: exporters were authorized to keep part of the

16/ As part of the package of February, 1985, foreign exchange

houses were allowed to operate, under the regulation (and, in fact,
ownership) of the Central Bank. The first and most important of the
two existing houses, NECSA, started to operate in June of that
year. BICSA started to do so in August, 1988.

18
foreign exchange earned, and domestic support prices for export
crops were fixed at levels higher than those compatible with
prevailing international prices and the official exchange rate. The
basic difference between the two systems was the mechanism by which
the implicit "export incentive" was financed. In the first case, it
was paid by importers of goods and services who bought the foreign
exchange in the parallel market. In the second, it was financed by
the Central Bank.
As Table 5 indicates, both mechanisms were quite effective in
raising the average exchange rate for exports significantly above
the official rate (almost 100 times by January 1988). The latter
was increasingly relevant only for a few exports (mainly from state
enterprises) and most imports. Given the high import content of
some exports of Nicaragua, the multiple exchange rate system thus
operated as a mechanism to increase.effective protection to export
activities. Also, given the massive implicit subsidy on imports, .
the government had to rely on direct import controls to ration
import demand. As most imports were sold by parastatals, this
massive subsidy was largely passed on to the final user, subject,
in any case, to significant resource misallocation, rationing and
growing secondary black markets. Late in the process (June 1987),
the government adopted a surcharge for most imports (the tasa de
estabilizacion monetaria, TEM) to finance the foreign exchange
losses of the Central Bank. By January 1988, this mechanism had
raised the average import rate significantly above the official
rate; still, the average export rate was almost 13 times higher
than that applicable to. imports.
Given the features of the multiple rate'system, the collapse
of exports which took place through most of this period (Table 3)
was only associated in part to exchange rate policies. A myriad of
factors, affecting both the domestic supply and the external
demand, thus account for the evolution of exports: the effects of
war in some areas of the country; lack of confidence by the private

19
.

sector; stronger incentives (price and, particularly, credit) given

to food crops; inefficiencies of state enterprises; exodus of
skilled labor and other labor supply shortages; and the collapse of
the CACM, which was decisive for non-traditional exports. These
same factors were responsible for the decline in economic activity
since 1984 (Table l), as production for the domestic market
continued to grow at moderate rates up to 1987 (1.2% a year in
1984-1987).
Although imports fell with respect to the early postrevolutionary peak, they remained at historically high levels. In
any case, the country was able to finance its record external
deficits, despite skyrocketing debt ratios and the interruption of
capital flows (Table 3). Three sources were basically used to
bilateral
finance the deficits: mounting payments arrears,
.

assistance from socialist countries and pre-financing of export

crops.
V.

1988

STABILIZATION

AND

HYPWINFLATION

"/

By early 1988, economic conditions were critical. The most

transparent to all economic observers were the massive distortions
associated with the multiple exchange rate system (Table 5).
However, this was only a manifestation of generalized macroeconomic
Monetary and fiscal imbalances were already
disequilibria.
reflected in extremely high inflation rates --an average monthly
rate of 24.9% in 1987 (see Table l)--, which had led to the virtual
collapse of price controls. External deficits had also resulted in
near generalized moratoria on the foreign debt. Finally, the
country had already experienced a substantial fall in GDP per
capita and an even stronger contraction of real wages and private
consumption per head. This dramatic deterioration in economic

"/ For a more extensive analysis of the 1988 and 1989

stabilization packages, see Arana (1990), Ocampo and Taylor (1990),
Ocampo (1991a) and Taylor et al. (1989).

20.
.

conditions were combined by clear signs that the Contras were in

disarray, that the war was losing intensity and that peace talks
among Central American presidents were being successful, as
reflected in the Esquipulas I Accord of August, 1987.

-.
-\

These conditions were the background to the two massive

stabilization packages implemented in February and June, 1988. The
goals of these programs were multiple and ambitious (SPP 1988a).
They included: (1) the realignment of relative prices: (2) a
reduction of inflation rates by austere fiscal and monetary
policies: it was stated early in the year that the central
government deficit would be reduced to 10% of GDP in 1988 and
eliminated altogether by 1990; (3) reversing the deterioration of
the formal sector of the economy generated by price controls and
falling real wages; and (4) reconstituting the normal economic
functions of the wage payments system. Wage policy aside --which
was explicitly conceived as a suuulv-side policy--, the objectives
and instruments of the stabilization plan were fairly orthodox, as
the IMF (1988) acknowledged later in the year.
Although these stabilization packages were more ambitious than
any previous effort, they tended to reproduce patterns which had
been common to macroeconomic policy since 1984. Particularly, the
different goals were not pursued with the same vigor, nor were the
packages globally consistent. Emphasis was placed on relative price
realignment. This fact was reflected in the outcomes of the
programs, as we will see below. On the contrary, fiscal and
monetary policies were not made consistent with the inflation
targets. Also, as in 1985, the attempt to defend or even increase
real wages was soon abandoned, giving way to a different policy
later in the year.
The February package included five major provisions. The first
was a monetary reform, by which 1000 old monetary units were
This reform included the
converted into one new cordoba.

.
.

21

-.
-.

demonetization of some 20% of existing liquid assets, which had,

attached to it, explicit political goals lo/. The monetary reform
was accompanied by the consolidation of all explicit and implicit
exchange rates into two legal rates: 10 new cordobas in the
ffofficialff and 10.25 in the ffparallelff market. In relation to
January levels (Table 5), this implied that the official and
average import rates were multiplied by 143 and 19, respectively,
but the average export rate was devalued by only 46%. Thus, the
high rate of effective protection to export activities implicit in
the multiple exchange rate system was altogether eliminated and the
trade deficit of the private sector, measured in domestic currency,
massively increased. Nonetheless, the new legal rates were set
significantly below the black market rate. Thirdly, the government
decreed significant increases in controlled prices. This was
accompanied by a 675% increase in the average SNOTS wage level;
Finally, it announced a 10% cut in central government expenditure.
The major successes of this package were associated with
exchange rate policies: the official rate was massively devalued in
real terms, as the black market rate appreciated and exchange rate
differentials narrowed (Figures 2.A to 2.C). Nonetheless, the
official rate remained clearly overvalued and no mechanism was
adopted to avert its further real appreciation (only two minor
devaluations of one new cordoba per dollar each were adopted in
April and May).
The major weaknesses of the February package were related,
however, to fiscal and, particularly, monetary policies. The
initial cut in central government expenditure was clearly

l*/ The short period to make the conversion in the banks (3

days) was planned to leave the contra with a sizable stock of
useless bills. It was also determined that households converting
more than 10 million old cdrdobas had to leave their money in
deposit at the banks for 12 to 14 months. This was aimed at
speculators and black market arbitreurs holding sizable amounts of
cash.

.
.

22
insufficient to reach the target deficit, as the Olivera-Tanzi
effect was eroding the tax base at a fairly rapid rate (see
footnote 12). On the other hand, the maximum domestic lending rate
was kept at 45% a Year and the government decided that the
devaluation of the official rate would not be passed on to dollardenominated
liabilities. Under prevailing conditions,
these
decisions were equivalent to a generalized debt forgiveness. They
also implied that the Central Bank had to incur in very large
losses in foreign exchange transactions (Table 2) and that any
nominal increase of domestic credit had to be financed by money
creation.

-.
-.

The mix of massive exchange rate, price and wage adjustments

and weak demand policies initiated a new inflationary cycle, more
intense that those experienced in previous years (Figure 4). Under
these conditions, price controls were totally ineffective and real
wages soon fell (see Table 1 and Figure 3). The government then
abandoned any attempt to arrest the collapse in the real income of
wage labor. In the second semester, real wages were only a fourth
of its 1985 level (one-sixth in the case of central government
employees), if the GDP deflator is used to estimate them (Table 4).
The June package liberalized most prices and wages, decreed
large increases in those prices which remained under the
government's control (particularly gasoline) and deepened the
exchange rate reforms, but did little to make the global
stabilization policy more consistent. The official exchange rate
market
was then devalued by 700% and the parallel/black
differential considerably narrowed. In the following months, the
parallel and, since late August, the official rate were devalued
more frequently (the latter five times between August 31st, 1988,
and January 4, 1989). As a result, the overvaluation of the
official rate was considerably reduced. Although the black/official
exchange rate differential remained substantial, it narrowed
considerably with respect to previous years.

23
Nonetheless, fiscal policy was not significantly affected by
the June decisions. There was also no attempt to control the growth
of domestic credit. However, two important reforms in monetary
policy took place in June. First, the government did not assume the
exchange rate risks on dollar-denominated domestic debts. Given
devaluation policy, this decision considerably raised the costs of
such liabilities, if contracted after February "/. Secondly,
authorities decided to index domestic interest rates. However, the
"indexing rule" used was imperfect, particularly in the first few
months 'O/. Thus, from mid-June to mid-September, the maximum
effective lending interest rate was set at 14.9% a month. Since
mid-September, the rule was improved. Still, in the last months of
the year, interest rates ran significantly below inflation levels
(see Table 6).

In June, government wages were adjusted by 30%. Given massive

price increases accumulated since'February (790%), this was an
extremely moderate rise. They were adjusted more frequently after
September (monthly, except in December) but systematically below
inflation rates. To compensate for this fact;government employees
were granted a food subsidy (AFA) in August 'I/.
The series of maxi-devaluations and massive adjustments in
regulated prices, together with the inability of the authorities to

19/ For a debt contracted just after the February devaluation

and paid in mid-January, 1989, the monthly interest rate was 61.9%,
somewhat below inflation (63.7% a month in the same period).
However, the closer the debt was contracted before the June
devaluation, the higher the implicit interest. rate. Thus, a
liability contracted just before that devaluation and paid in
January 1989 had a monthly cost of 107.7% or 19.3% in real terms.
20/ An annual interest rate was determined by adding
monthly inflation rates.

UP

the

'l/ The subsidy took the form of the right to buy a basket of
basic food products (10 lbs, of rice, 10 lbs of beans and 5 lbs of
sugar) paying between 5 and 10% of their nominal wages.

.
.

-.

24
control the major sources of monetary growth were the fundamental
sources of the 1988 hyperinflation. As Figure 4 indicates, the
economy underwent three distinct price cycles between January, 1988
and the first months of 1989. The first two of them were clearly
unleashed by the adjustment programs of February and June. The
third was more closely associated with the effects of Hurricane
Joan, which hit the country in October, generating losses estimated
by ECLAC at $840 million (CEPAL 1988b). The third cycle was the
most intense. In total, the inflation rate ran close to 100% a
month between September, 1988, and January, 1989.
Overall, the monthly inflation rate was 62.4% in 1988.
Following a classical pattern, this process was accompanied by
rapid demonetization. By January, 1989, M, as a share of GDP had
fallen to 6.8% (Table 6). On the other hand, reductions in
aggregate demand (largely associated with the rising balance of
payments deficit of the private sector measured in domestic
currency, as fiscal policy was not contractionary), relative price
changes induced by the adjustment programs (real devaluation and
wage cuts, in particular) and supply shocks (the hurricane and
electric supply failures during the first semester) led to a 13.4%
fall in GDP. This was accompanied by a renewed deterioration of
exports, as the effective protection to export activities was
actually curtailed. The current account deficit improved somewhat,
however, as the result of rising external transfers and a moderate.
cut in imports.
VI.

THE 1989 ADJUSTXENT PROGRAH

If massive relative price distortions associated with the

multiple exchange rates and price controls were the dominant
economic feature of Nicaragua in January, 1988, hyperinflation had
taken over that place one year later. The urgent need for action
was reflected in the rapid pace of demonetization and the
generalized lack of confidence in government policies. Moreover,
the authorities had few instruments to handle the explosive price

25
..

dynamics. Price controls had collapsed in mid-1988 after several

years in which they had become increasingly ineffective. The
official exchange rate was still overvalued and too distant from
the parallel and black market rates to .be used as an antiinflationary weapon. Finally, scarce foreign exchange placed severe
restrictions on any attempt to fix the exchange rate or liberalize
imports.
Under these conditions, the government correctly understood
that a very orthodox policy was called for, combining fiscal and
monetary austerity with additional relative price adjustments. The
package adopted by the authorities in January included six major
re
provisions. First of all, central government e x p e n d i t uwas
massively cut to reach an expected deficit of 5.6% of GDP

-.

(Ministerio de Finanzas, 1989). In practice, expenditure was cut

even further by transferring to the Ministries in the first months
of the year less resources than were demanded according to budget
allocations z2/. As we will see below, an essential element of
fiscal austerity was a significant cut in public sector employment
(comoactacion).
Secondly, the government adopted a restrictive credit policy,
accompanied by active interest rate management. The authorities
aimed at keeping positive real returns on term deposits and real
Costs for all (or most) types of credit. Thirdly, a system of
gradual devaluation was adopted in late January. In practice, this
led to small or medium-size devaluations some three times a month.
This was accompanied by, important readjustment of real regulated
prices during the first months of the year. On the other hand, as

22/ Transfers were cut by 33% in January, 25% in February, 20%

in March and 18% in April. See SPP, Sintesis evaluativa de las
princinales variables economicas de abrilde 1989 Y urouramacion de
mayo 1989, May 1989, p. 6. Similar documents will be quoted
thereafter as Sintesis evaluativa.

.
.

26.
in 1988, the authorities stated the objective of arresting further
deterioration of public sector real wages.
In the speech in which President Ortega made public the new
program, he also announced the willingness to establish new rules
of the game for the private sector: as a first step in that
direction, he informed that expropriations would cease 2J/.
Finally, the government adopted a financial programming system
coordinated by the Planning Secretariat (SPP) and significantly
improved the data base for short term macroeconomic analysis.

--

In terms of some of its major targets, the stabilization

program was initially very successful. Inflation rates fell rapidly
(Figures 4 and 5). Actually, by March, the CPI increased by 8%,
excluding regulated prices (public utilities and bus fares --Table
6). On the other hand, the government was quite successful in
devaluing the official exchange rate in real terms and in
stabilizing the parallel and black markets. By March, differentials
between the different foreign exchange markets had been reduced to
less than 10% (Figure 6). The attempt to increase real regulated
prices was, on the contrary, short-lived. Since April, these prices
started to fall. The process accelerated in June, when the
government used these prices to repress inflationary pressures
(Figure 5.B).
In the face of falling inflation rates, demonetization ceased
in February (Table 6). The demand for term deposits also increased
since that month, but remained fairly low by historical standards.
The government cut and maintained central government expenditure at
low levels. Indeed, as Tables 2 and 6 indicate, such expenditure
stabilized around 22% of GDP, less than half its average 1988
level. Supported by some liquid foreign aid, since May, the

./ See "Esfuerzo National por la Paz y la Reconstruccidnf*,

Barricada, January 31, 1989, pp. 3-4.

.
.

27
government actually ran fiscal surpluses during a few months.
Finally, the fall in real wages was also arrested and partially
reversed (Figure 3 and Table 4).
The major initial cost of stabilization was a strong
recession. In the first quarter of the year, industrial production
fell by 17% with respect to the same period in the previous year.
However, it started to recover in the second quarter (Figure 7). In
with few exceptions
(agricultural foodstuffs and
general,
were severely affected,
inward-oriented
electrical energy),
(cotton), exportables
whereas, also with a few exceptions
experienced a boom (see Table 3 and below) 24/.

-.
-.

Hmployment effects were significant. By June, central

government employment had fallen by 14.3% with respect to the same
month in 1988 --11.000 employees approximately c-p, 1989).
Interestly enough, there were also a significant number of unfilled
vacancies in the central government, as the way budget allocations
were transferred to the different Ministries actually encouraged
this practice "/. In the same month, 16.500 civil employees,
including those in public sector enterprises, had been affected by
comnactacion. By October, this figure had increased to 17.000 26/.
This was equivalent to 2% of the labor force of the country.
Managua household surveys reflected this massive reduction of
public sector employment. However, they indicated that it did not
lead to increased open unemployment (which remain surprisingly low,
at 5 to 6% of the labor force) but to growing informality (rising
24/ SPP, Sintesis evaluativa, June 1989 and suceeding months.
25/ The wage costs of vacant positions were transferred by the
Ministry of Finance. The different Ministries used those resources
to selectively increase wages of existing employees.

"/ SPP, Sintesis evaluativa, August 1989, p. 21 and Decem&;

Nathan Associates (1991), Ch.2,
1989, p. 23. See also
alternative estimates of the effects of comuactacion, referring
exclusively to central government employment.

.
.

28
proportion of self-employment
and workers
enterprises) and longer unemployment spells 27/.

in

very

small

The major problems faced by the stabilization program in the

first months of the year were both related to monetary policy.
Aside from the central government, other domestic agents were
subject to a credit crunch. The most important exception were the
government trading companies which, at the same time, continued to
receive massively subsidized credit. The profits made by these
companies by the joint effect of credit subsidies and real
devaluation were transferred to the producers of export crops
(particularly coffee and cotton) by periodic resettlement of
accounts (reliauidaciones), fuelling the money supply.

-*
-.

Interest rate policy became ' also a major source of

complications. Nominal rates were raised effective February 15. In
the face of rapidly falling inflation, ex-post real rates were
extremely high from February to April (Table 6). Pure backward
indexation rules and significant lags in decisions --rates were
adjusted only once a month-- contributed to the same phenomenon.
Some of these problems were eventually solved: "forward" indexation
criteria were introduced in April and weekly readjustments in June.
However, the political opposition to high interest rates led the
government, in a meeting with agricultural producers on April 17
and 18, to agree to maintain lending rates stable, to establish
ceilings on lending rates and new subsidized long-term rates, and
to grant a mix of debt forgiveness and debt restructuring at low
interest rates for foodstuffs and cotton producers. Starting in
May, these agreements led to government to fix some and, in June,
a lending rates below deposit rates, thus creating new sources of
Central Bank losses (Table 6).

"/ SPP, Sintesis evaluativa, September 1989, Appendix II.

29

More generally, the authorities .were unable to control

sources of monetary growth different to the central government (see
the line "Emission - Deficit" in Table 6). From March to May, this
led to a sizable expansion of liquidity. Monetary expansion was
reflected in moderately rising inflation rates in May and,
particularly, in a wave of speculation in the foreign exchange
market. The latter process was interpreted in some parts of the
government as a sign that the official rate was still overvalued
and that a maxi-devaluation was called for. These sectors were
apparently successful in restricting the official supply of dollars
to the parallel market. Expectations of devaluation then became
generalized and were reflected in massive speculation in the
parallel and black markets. The authorities then decided to "follow
the market" and devalued the official rate by 111% on June 12.
The devaluation led to a rapid increase in gross international
reserves --from an average of USs71.6 million during the first
semester to US$116 to 135 million after August--and in private
sales of foreign exchange in the parallel market--from an average
of USs2.7 million during the first semester to USS5.5 million
during the second semester--. However, it was soon reflected in
massive inflation, which rapidly eroded most of its real effects
(see Table 7 and Figure 6). Five weeks after devaluation, nonregulated prices, excluding foodstuffs, had caught up with the
exchange rate. Devaluation was also fully reflected in food prices
with a somewhat longer lag (15 weeks); such lag may have been the
result of state intermediation in the food market through the
agricultural marketing board (ENABAS). Thus, some four months after
devaluation, it had been fully eroded, except for the incomplete
adjustment of regulated prices.
The June 12 devaluation also initiated a new "stop-go" cycle,
not unlike that experienced during the first semester. The recovery
of economic activity was temporarily arrested (Figure 7), as
inflation came down fairly rapidly, reaching 10.5% in August, if

30
regulated prices are excluded (Figure 5 and Table 6). This was
initially accompanied by a dramatic fall in liquidity. However, as
the government was unable to control all sources of monetary
expansion, liquidity, inflation and economic activity started to
pick up. Once more, this was reflected in speculation in the
foreign exchange market in November. This time, the government did
not cut the supply of dollars to the parallel market and maintained
the system of gradual devaluation, thus averting major foreign
exchange speculation and a new inflationary shock. However, it also
kept liquidity at high levels.

'.
I

Aside from this basic change in policy reactions, there were

also two important changes with respect to the inflation cycle
early in the year. First, the negative interest rate margins
widened (Table 6) and became a major source of distortions and
Central Bank losses (Table 2). Secondly, the size of the parallel
market doubled. This was equivalent, in fact, to an unplanned
import liberalization.
Overall, the 1989 stabilization program was somewhat less
contractionary and much more effective in terms of the inflation
and exchange rate targets than its 1988 predecessor. GDP
contracted, nonetheless, by 5.1% (Table l), or 3.3% if the strong
cut in government services (15.5%) is excluded. Such better
performance was solely associated with export dynamism, which led
to a 35% increase in the real exports of goods and services in the
year. On the contrary, domestic demand experienced a severe decline
(13.5%), inducing a strong recession of most inward-oriented
sectors.

Moreover, the inconsistency and fragility of the stabilization

program were increasing apparent to most economic observers (see,
for example, Fishlow et al. 1990). First of all, it was clear that
the cut in central government expenditure could not be indefinitely
maintained: in particular, the extremely repressed real wages in

31
crucial sectors (particularly education and health) could not last
for too long. On the other hand, as we have seen, monetary and
interest rate policies remained a source of considerable
difficulties. The sensibility of the foreign exchange market
continued to be a major source of instability. This reflected, in
turn, the inability of the government to raise an adequate supply
of liquid foreign aid. Indexation increased in 1989 to levels which
were incompatible with permanent reductions in the inflation rate.
Finally, although the room for private initiative considerably
widened, no major advance was made in terms of designing stable
rules of the game for the private sector.
VII. POLITICAL TRANSITION AND THE 1990 HYPERINFLATION

Stabilization
during the first months of
efforts
ceased
1990 '*/. This process had started before the victory of the United
National Opposition (UNO) in the February 25 elections, but
accelerated after the electoral results. From January to April, the
official exchange rate and government regulated price were
virtually freezed. The real exchange rate and real regulated prices
halved, totally reversing the results of the 1989 stabilization. As
a consequence, the differential between the black and the official
exchange rate rapidly widened, as the supply of dollars to the
parallel foreign exchange market fell. In an attempt to compensate
for the adverse effects of overvaluation on exports, the government
decided in April to pay exporters the parallel market exchange
rate, at the cost of increasing Central Bank losses.
became
rapidly
sector finances
Simultaneously,
public
expansionary. Taxes were cut as expenditure doubled with respect to

"/ Aside from official accounts of this process by the new

government (Republica de Nicaragua, 1990a), see the "Statement of
the IMF Representative at the Pledging Conference on Nicaragua in
Rome on June 6-7, 1990", Mimeo. The last Sintesis Evaluativa of SPP
(April, 1990) made also clear that major disequilibria were
building up.

32
1989 patterns (Table 8). In particular, a series of wage hikes
increased public sector real wages by 271% with respect to the last
quarter of 1989 (Figure 3 and Table 4). This was accompanied by a
new public service law, which significantly increased the cost of
firing government employees. By April, the central government
deficit peaked again at 35% of GDP. Despite the virtual freeze on
prices under its control, inflation followed with a lag. In April,
inflation, excluding regulated prices, was approaching the critical
levels which are used in the economic literature to define
hyperinflation --50% a month (Figure 5 and Table 8).

'.

'Interest rates also lagged, and turned again strongly negative'

in real terms in April (Table 8), inducing a reduction in the
demand for term deposits. Although the government eliminated the
negative spread between lending and borrowing rates in April, it
simultaneously decreed a series of domestic debt write-offs and
restructuring at low interest rates for foodstuffs and cotton
producers. Thus, the correction of the negative interest rate
spread did not eliminate Central Bank losses in 'financial
transactions.
As in 1979, the new administration, inaugurated on April 25,
brought with it an agenda for structural change (see part IX
macroeconomic
but had also to face the massive
below),
disequilibria inherited from the last months of the Sandinistas.
the Chamorro
during the
first months in power,
Indeed,
Administration was overwhelmed by the sheer magnitude of the
stabilization effort. The guidelines of the stabilization program
were summarized in the document presented to the international
community at the June Donors' Conference in Rome (Republica de
Nicaragua, 1990a). The implementation of the program was, however,
constrained by the unexpected magnitude of macroeconomic imbalances
and by the strong political opposition of the radicalized labor
unions to both the stabilization effort and the agenda of
structural change.

33
The basic element of the initial stabilization program was the
gradual introduction of a new currency, the cdrdoba oro, fully
convertible at a parity of one to one to the US dollar. Three
stages in the process were envisioned. During the first, the new
currency would only serve as a financial and fiscal unit of
account. During this stage, it was expected that the government
would correct most of the macroeconomic disequilibria inherited
from the previous Administration. During a second stage, the new
currency would be gradually introduced into circulation, at a
variable exchange rate with respect to the old currency. Finally,
once fiscal and financial discipline had been restored, the old
currency would be taken out of circulation.
Following the program, during its first days in power, the
Central Bank decreed that new deposits and loans would be
denominated in cordobas oro. Annual interest rates for a threemonth deposit in the new currency were set at 10.5%; those for
short-term loans fluctuated between 13 and 22%, depending on the
sector involved. The Bank also decreed that the exchange rate for
the old for the new currency would be that prevailing the parallel
market. Interest rates for old deposits and loans were placed at
levels which created strong incentives to transform them into
similar assets and liabilities denominated in cordobas oro.
No credit cealings were initially established. This was meant
to guarantee adequate incentives for plantings, as the new
government took over when the new agricultural season was starting.
In turn, given the dominant share of agriculture in exports, this
was thought to be an essential element for a strong export supply
response in 1991. Credit cealings were reestablished in August and
became more stringent since October. In any case, in open
divergence to the experience of 1989, the non-fiscal sources of
within close bounds since June
expansion
monetary
remained
(Table 8).

34
-

-*

An initial maxi-devaluation of both the official and parallel

market exchange rates was also adopted during the first days of the
new Administration (close to 50 and lOO%, respectively). The
differential between both rates increased as a result. This was
meant to facilitate a gradual adjustment of the domestic price of
importables tied to the official rate (gasoline, in particular), as
it placed the exchange rate for financial transactions (the
parallel rate) at what was thought to be an equilibrium level. In
the following weeks, the rates of devaluation were fixed so as to
eliminate the differential between the two official rates. This was
finally achieved in mid-June. With exchange rate unification, the
elimination of the negative interest rate spread in May and the'
firm decision not to decree additional write-offs and subsidized
restructuring of domestic debts, the sources of the quasi-fiscal
Central Bank deficit were thus eliminated. For the year as a whole,
Central Bank losses were only 2.8% of GDP, a significant reduction
with respect to previous years (Table 2) "/.

.-

Regulated prices were also massively adjusted during the first

two months of the Chamorro Administration. This process was
followed by similar efforts in later months (Figure 5.B). At the
same time, it implemented a major tax reform, which was effective
in the second semester of 1990. It included six major provisions:
(1) the indexation of taxes, by converting all tax liabilities into
cordobas oro; (2) the elimination of most exemptions; (3) the
simplification of the income tax, including the unification of
rates for corporations and major reductions in those for non-wage
personal income: (4) the substitution of the withholding income tax
system based on gross sales for more technically designed
29/ Some minor sources of Central Bank losses remained,
particularly high administrative costs and some subsidies on the
use of USSR loans, which tended to compensate for the overvaluation
of the ruble. More importantly, given the chaos characteristic of
Central Bank accounting during the Sandinista years, not all debt
write-offs, restructuring, etc., were fully reported. This has
generated continued accounting losses through 1991.

.
.

-m

mechanisms; (5) an increase of the basic sales tax rate from 10 to

15%; and (6) a reduction in most other taxes, including the
elimination of most selective consumption taxes for domestic goods.
Later in the year, a presumptive income tax system was also
adopted.
The net effect of the tax reform on government revenue was
expected to be positive (see Pardo and Perry, 1990). However, the
domestic revenue of the central government remained fairly low
throughout the second semester of 1990 and the first few months of
1991 (Tables 8 and 9). Indeed, domestic revenues during the second
semester were only 13.6% of GDP vs. 20.2% during the same period in
1989 (Table 6). What is equally important, foreign grants
contributed only marginally to the finances of the central
government and, overall, did not significantly increased with
respect to 1989 (Table 3).
Although government expenditure simultaneously decreased, it
remained above the levels which had been typical in 1989.' Two major
obstacles to a rapid reduction of expenditure were faced by the new
administration. The first was the strong resistance of labor unions
to real wage reductions. Attempts by the government to reduce real
wages during the first few months led to two major strikes in May
and July, the latter with major political implications. Agreements
with the Sandinistas after the July strike finally facilitated a
reduction in real wages in the following months: even then, real
public sector wages remained significantly above the levels which
had been typical in 1988 and 1989 (Figure 3 and Table 4). The
second obstacle was the large size of the Army --80.000 men in May,
larger in fact than the rest of the government bureaucracy--.
Thanks to the agreements reached with the armed forces, it was
possible to reduce it to 28.000 men in December. At the same time,
the government designed late in 1990 a voluntary retirement
program, the effects of which were only felt, however, in 1991 (see
below).

36
The resulting deficit has been incompatible with a rapid
reduction in the rate of inflation. Corrective measures adopted at
the onset of the new administration led to a major price shock in
May, which eliminated most the initial excess liquidity (Figure 5.A
and Table 8). After the initial shock, inflation rapidly declined,
if regulated prices are excluded from the calculations. The July
strike sharply reversed this trend. From August to October, it
remained at high though declining rates. Moreover, the substantial
reduction which it experienced in October and November (to 30% a
month) was not sustained, as the budget deficit continued to
exercise major expansionary effects.
The introduction of the cdrdoba oro may have accelerated the
generalized use of indexation rules and, particularly, dollar
indexation. This process was clearly discernible since 1988 and,
especially, 1989, when frequent correction of exchange rates,
government-regulated prices and wages became regular practices.
However,
since mid-1990
domestic prices were increasingly
denominated in the new currency (i.e., in dollars). This fact no
doubt arrested the real effects of nominal devaluation after an
initial spur which left, however, the cordoba overvalued; rather,
throughout the second semester the real exchange rate tended to
moderately appreciate, despite significant nominal devaluations
(Figure 6.A). Nonetheless, the exchange rate differential between
the black and the official markets remained at low and decreasing
levels since June (Figure 6.C). Indeed, the black market exchange
rate has appreciated in real terms since April. This behavior is
consistent with the close historical association between the real
black market exchange rate and liquidity levels (Figure 2.C).
Persistent high inflation was accompanied by a strong domestic
recession. In particular, the industrial recovery which had taken
place during the last months of the Sandinista Administration was
sharply interrupted (Figure 7). For the year as a whole, however,
GDP grew by a moderate l.O%, the first such positive rate since

37
1983 (Table 1). Such moderate growth was associated with the
continued export recovery (Table 3), as domestic demand remained
stagnant during the year.

..

In this unsettled macroeconomic environment, the decision

adopted in August to place the cordoba oro in circulation was
premature. In fact, in the last months of 1990, it was clear that
a growing proportion of the issues of the new currency were
returning to the Central Bank for conversion into dollars and,
thus, contributing to the drain in foreign exchange reserves.
Indeed, after peaking at USS182.8 million in June (USS124.3
excluding AID funds), gross international reserves experienced a
steady decline during the second semester of 1990 (USS74.9 million
in December) and, if AID funds are excluded, in the first two
months of 1992 (USS69.9 million in February). Under these
conditions, the convertibility of the new currency was suspended in
January, 1991, when it was decided that it could only be used to
pay for imports and some services (hotels and airline tickets).
More generally, persistent imbalances eroded the confidence of
the public in the capacity of the government to control the price
level and led to growing distrust of the multilateral agencies and
the donor community on the effectiveness of the stabilization
program (see, for example, World Bank, 1990). Indeed, by late 1990,
it was clear that macroeconomic conditions were out of control and
that the lack of confidence and overvaluation had extended to the
new currency (Ocampo, 1990 and 1991b). The success of the
tripartite negotiations.(concertacion) between the government, the
labor unions and the entrepreneurs which took place in September
and October (Republica de Nicaragua, 1990b) indicated, however,
that some of the social tensions and major political constraints
which had affected the stabilization effort and the speed of the
structural reforms in 1990 would be more moderate in the new year.

..

38
VIII. THE 1991 STABILIZATION PROGRAM
The urgent call for action was finally grasped by the
government on March 3, 1991, when a new major stabilization program
was adopted. The program included seven major provisions: (1) a
400% devaluation of the cordoba oro followed by a fixed exchange
rate system; (2) the conversion of the old currency at a rate of 5
million cordobas per cordoba ore; (3) a firm commitment to
eliminate Central Bank credit to the government; (4) a 160% general
increase in public sector wages, with additional hikes for
education and health workers (35 and 55%, respectively), which
raised the average increase to some 200%; (5) the backward
indexation of term deposits and loans to the dollar: this was
enacted by readjusting the former by 400% and the latter by 240% to
400% depending on the nature of the liability: (6) the adoption of
a new interest rate policy, by which term deposits rates for
maturities longer than a month were liberalized, that for one month
deposits raised from 9.5 to 12% and-indexed to the dollar, and the
traditional differentiation by sectors of the lending rates was
eliminated and a simple system of dollar-indexed lending'rates was
adopted --18% for short term and 14% for long term loans; and (7)
the maintenance of credit cealings for commercial banks 30/.
The fixed exchange rate system has been maintained since March
and, as we will see, fiscal accounts have actually generated a
surplus since then. Interest rate policy has been subject, however,
to important changes. In particular, on April 9, the Central Bank
implemented,
through the Banco Nicarautiense de Industria Y
Comercio, BANIC, a temp,orary savings plan, denominated "Plan 30",
in which deposits were not indexed to the dollar. The rate was set
at 25% for April and rapidly reduced in the following months, to
20% in May and 10% in June. This was a peculiar decision, as it

'O,/ Banco Central de Nicaragua (1991a), Ch. 1, and (1991b); IMF

(1991); World Bank (1991); for public sector wages, Nathan
Associates (1991), Ch. 1.

39
created a new source of Central Bank losses, at a time at which the
elimination of the public sector deficit (which includes the quasifiscal deficit of the Central Bank) had become the priority of
economic policy. It was, however, rapidly abandoned.
In June, BANIC was allowed to issue 15-day deposits. On the
other hand, in September, coinciding with the signing of the standby agreement with the IMF, the interest rate cealings were
transformed into floors. In December, reserve requirements for
dollar-denominated deposits were reduced from 100 to 25%; this
applied, however, as a marainal requirement on deposits above those
outstanding on October 1, 1991. Although this liberalized for the
first time the use of dollar deposits, stringent conditions on
their use were maintained: in particular, banks cannot use them to
finance cordoba-denominated debts. Reserve requirements on domestic
deposits were maintained at 10% (a,level which had been fixed in
late 1990), but such provision remained largely nominal, as
commercial bank discipline in this area has not been established.
Finally, the January, 1992, Letter of Intent expressed the
willingness to liberalize interest rate intervention altogether,
except of the regulation of lending rates for rediscount
facilities, including those financed with external funds.
Contrary to what the World Bank (1991, p. 7) has argued, no
"cash budgeting" rule has been followed by the central government.
Moreover, expenditure has remained rather high: it fluctuated since
April around 24.5% of GDP, a level only somewhat lower than that
typical during the second semester of 1990 and above that of 1989
(26.1 and 21.9%, respectively --see Tables 6, 8 and 9).
Nonetheless, the elimination of the extra-budgetary military
expenses financed by foreign aid implied a significant reduction of
military expenditure (some 13% of GDP according to IMF, 1991, Table
3). This had been made possible by the massive cut in the army
throughout 1990 (see Section VII above).

40
Moreover, through 1991 the government implemented a major
voluntary retirement program,
which reduced public sector
employment, including the military and parastatals, by 20% --from
156.600 to 124.700 =/. Estimates using INSSBI (Social Security
Institute) data are only slightly different. They indicate that
public sector employment (central government, public sector
enterprises and autonomous institutes) decreased from 165.275 in
February to 131.284 in December, i.e, by 20.6%. Together with the
estimated cut in the army in 1990 (70.000), this implies that over
100.000 persons --equivalent to 8% of the economically active
population of the country-- have enlarged the private labor supply,
at the time when creation of formal jobs in the private sector has
remained rather limited (some 4.400 new jobs between February and
December, 1991, including mixed enterprises, according to INSSBI
statistics). The major reduction in formal sector employment
generated by the structural adjustment in the size of the public
sector has, thus, shifted macroeconomic disequilibria to the labor
market. Unfortunately, the lack of recent household surveys do not
allow us to analyze the implications of this process J2/.
Part of the resulting cut in government expenditure has been
passed on through higher real wages, which after bottoming in
April, recovered during the rest of the year. By December, real
central government wages were more than twice the level reached
during the 1989 stabilization (Table 4). After March, only a
moderate wage increase was decreed in June (some 20%); more
selective wage hikes have taken place in other months. The AFA food
subsidy created in 1988 was eliminated in September, 1991. Finally,
in the Letter of Intent presented to the IMF in January, 1992, the
government announced than no general wage increases would be

"/ See Letter of Intent of January 31, 1992. See, also, Nathan
Associates (1991), Ch. 2.
32/ See some considerations (no doubt imprecise) on this topic
in FIDEG, Observador Economico, No. 1, January, 1992.

41
negotiated in 1992, but selective hikes might be granted on the
basis of savings generated by a more moderate retirement program
which would be implemented in the year.
The decisive factor in the turnaround in central government
finances and the elimination of Central Bank budget financing, was,
nonetheless, the increase in revenues. Domestic tax revenues
experienced, indeed, a strong recovery in the post-stabilization
period, particularly during the second semester of 1991 (See Table
9; Ministerio de Finanzas, 1991; and Nathan Associates, 1991). Much
more important, however, massive foreign aid allowed the government
to run budget surpluses from March to October (Table 9)

..

The strong external support to the stabilization program was

also reflected in the significant increase in official transfers:
from USS201.6 million in 1990 to USS528.1 million in 1991 (Table
3), equivalent in the latter year to 38.6% of Nicaragua's GDP. In
April, Taiwan lent the country US$60 million. In May, firm
commitments by the donor community to facilitate the country a mix
of grants and a bridge loan to repay arrears to the World Bank and
the IDB were finally made. Arrears were finally cleared in
September. In December, the Paris Club refinanced arrears and the
principal and interest due through March, 1993, on extremely
favorable terms (approximately equivalent to a 50% debt service
reduction). Moreover, a different times in 1990 and 1991 a virtual
write-off of debts with Venezuela, Mexico and Colombia had been
agreed and the U.S. wrote off AID debts. Despite that, a
significant debt burden,remains (see part IX below).
Generous external financing was obviously crucial, not only to
eliminate Central Bank budget financing but to improve the balance
of payments and to sustain a fixed exchange rate. Indeed, despite
a significant reduction in export revenues, the large magnitude of
external transfers was reflected in a current account surplus in
1991, if unpaid interests on the foreign debt are excluded (Table

42
3). Gross international reserves improved by $97.8 million. This
figure is only slightly lower than the total monetary base (highpowered money) of the country in December, 1991 --CO$547 million or
$109 million. It thus indicates that reserve accumulation played a
crucial role in the rapid remonetization which took place in the
post-stabilization period (Table 9). Nonetheless, as in the 1989
stabilization, net domestic credit to the private sector continued
to be a major source of monetary expansion. Indeed, the 1992
monetary program implies that the public sector would generate a
massive surplus to finance a persistent and even growing deficit in
the domestic financial system (Table 10).
Given strong dollar indexation, exchange rate stability was
also the clue to the sudden interruption of hyperinflation. After
a very large initial spur during the week after devaluation,
inflation was very moderate in the.following weeks and was followed
by some deflation since May (Figure 5.A and Tables 7 and 9).
However, this exclusively the result of a reduction in real
regulated prices (Figure 5.B). Indeed, as Table 7 indicates, the
inflationary effects of the exchange rate adjustment were faster
than those of the June 12, 1989, devaluation, confirming that
dollar indexation had significantly increased since then. One week
after devaluation, it was almost fully reflected in non-regulated
prices, except foodstuffs. In the latter, it took about 15 weeks to
do so, no doubt as a result of state intervention through ENABAS.
The same factors which made the fixed exchange rate extremely
effective as a price stabilization devise thus made the March 3,
1991, devaluation almost totally'ineffective as a way to correct
the overvaluation the cordoba. Figures 2.A. and 6.A indicate,
indeed, that the real exchange rate has stabilized at a level some
25% below that achieved during 1989 and only slightly above the
1980 (overvalued) level. Moreover, in terms of relative prices, no
major advance took place over the second semester of 1990. This
implies, in turn, that the real exchange rate is likely to hinder

43
rather than contribute to export dynamism, which will then have to
depend on other factors ("crowding-in" effects of public sector
investment, positive effects of the structural reforms under way
and special supply-side programs).

Contrary to the previous stabilization experiences (see parts

v to VII), the 1991 program was expansionary. This is clearly
reflected in the monthly evolution of domestic sales and production
of the industrial sector (Figure 7). For the year as a whole, GDP
declined by 0.7% (Table 1) but this was the effect of a strong
contraction of exports (13.6%). The domestic sources of demand
experienced, on the contrary, a moderate recovery (3.6%) and
private consumption a very strong one (Table 1). Although exchange
rate overvaluation may have adversely affected export performance,
other factors were also present, including, in particular, adverse
climatic effects on coffee production, excessive meat and shrimp
extraction in previous years and, perhaps, disruptive effects of
the structural reforms underway on sectors where public enterprises
are still dominant.
obtained in 1991 without
thus,
Price stability was,
significant contractionary effects, thanks to massive external
support and significant public sector reforms undertaken since
1990, but at the cost of persistent overvaluation of the cordoba
and the significant cuts in formal sector employment. On the other
hand, as in previous stabilizations, the expansionary effects of
private domestic credit have not yet been brought under control;
this thus remains the major area where major stabilization efforts
still lie ahead.

IX. STRUCTURAL REFORMS

As in 1979, the structural reform program adopted by the
Chamorro Administration is an ambitious one, but it aims at
reducing rather than strengthening the role of the State in .
involves:
particular, in
the
activity. In
economic
(1)

44
.

reestablishment of solid private property rights: (2) a major

restructuring of the public sector: (3) the redesign of the
domestic financial system; (4) the definition of new institutions
to manage the social costs of the transition to a more liberal
economy; and (5) a major trade reform "/. Other areas of reform
are probably less important. In particular, since price controls
collapsed in 1988 and have not been reestablished since,
deregulation is mainly a by-product of the redefinition of the role
of the State and the trade reform. Indeed, in some specific areas -foreign investment, in particular--, it has meant the preservation
of rather large public sector involvement (the prior authorization
of ail new investments).

..-

Actions with respect to property rights were a response to the

private sector's frontal opposition to intermittent political
expropriations during the Sandinista years. The issue figured
predominantly in UNO's political platform and in the first decrees
of the new Administration, and was brought by the government to the
tripartite concertacion in September-October, 1990. Although the
legitimacy of the expropriations of properties of Somoza and his
allies was recognized "/, a system to revise confiscations was
instituted. It was determined, however, that land given out in land
reform would not be returned, even if the revision of the
expropriation process is favorable to the original owner. In such
case, the government would compensate him in other ways.

"/ See Repliblica de Nicaragua (1990a and 199Oc), World Bank

(1991) and the Letter of Development Policy, dated July 25, 1991,
included as an Appendix to the latter document. For the nature of
the trade reform, see also Lankes (1991).
"/ It must be recalled, in this regard, that President Violeta
Chamorro had been a member of the first Council of the Government
of National Reconstruction in 1979, which had decreed the
nationalizations. The assassination of his husband, Pedro Joaquin
Chamorro, in January 10, 1978, had been a detonator of the
revolution. Many members of the new government had also been in the
opposition to Somoza.

45
.

.-

The magnitude of the cut in the size of the army and the state
bureaucracy and the nature of the tax reform adopted by the new
government have already been summarized in parts VII and VIII. The
restructuring of the state apparatus also involved a major
reorganization of public-sector enterprises. During its first weeks
in power, the Chamorro Administration centralized the management of,
the some 350 state enterprises, excluding public utilities, in a
holding company, Corooraciones Nacionales de1 Sector Publico,
CORNAP, under the Ministry of the Presidency. The privatization
process was initially slow, due to the frontal opposition of the
labor unions, the need to organize the new entity and the legal
complications associated with the process by which the different
companies had become state enterprises. The concertacion paced the
way to a more rapid implementation of such reforms in 1991,
including the elimination of the government monopoly on financial
services and some foreign trade activities, set out in the 1985
Constitution.
On the basis of this political agreement, privatization
speeded up in 1991. By August of that year, 86 enterprises had been
either returned to previous owners, liquidated or privatized, and
the government declared the intention to do so with at least 90% of
CORNAP enterprises by the end of 1993 3s/. At the same time, the
government has been transferring the regulatory functions which
some enterprises had to the Ministries and reorganizing and the
redefining the role of those firms which will remain under public
property for the foreseeable future (utilities, the agricultural
board, etc.).
As a part of the initial reforms, the Chamorro Administration
also decentralized, under the Corooracion Financiera de Nicarauua,

"

"; See the letter of CORNAP's President to the World Bank's

Task Manager of the Nicaragua Economic Recovery Credit, dated
August 9, 1991. See also CORNAP (1991).

46
CORFIN, the management of public sector banks, which had operated
in previous years as mere dependencies of the Central Bank. A
Superintendency of Banks was also created and began operations in
mid-1991. In the Letter of Development Policy, in July, 1991, the
government also established the guidelines for the restructuring of
state banks. Such reform implies that CORFIN would be dissolved and
that three public commercial banks would remain: Banco National de

_"

Pesarrollo and Banco Pooular, as agencies in charge of providing

financial and technical assistance services for rural and small
scale enterprises, and BANIC as a typical commercial bank, subject
to the same conditions as competing private sector institution. The
Fondo Nicaraatiense de Inversiones (FNI), a development bank, would
become a second-tier banking institution, but may continue to
depend on the Central Bank. On the other hand, six private
financial
institutions
began
operations in
1991,
and a
comprehensive Law of Banking and Financial Institutions is expected
to be presented to Congress in early 1992.
Two new institutions were set up to manage the social costs of
the structural reform program. The first, a Fund for Emergency
Social Investments (FIX), began operations in November, 1990. It
is expected to generate in 1992 some 40.000 man-years in temporary
jobs in infrastructure. The second, a Fund for the Attention of the
Oppressed Sectors (FASO), has not yet begun operations. It is
expected to provide basic social protection to the most vulnerable
grows, through special food programs, occupation training for
unemployed and credit for micro-businesses. As similar Funds which
operate in other countries, both will operate through both public
entities, particularly those at a local level, and NGOs.

The trade reform involved a series of interrelated actions.

First of all, in January, 1991, state trading monopolies were
eliminated, except in a few areas (notably oil imports), and
substituted by a system of registration of foreign trading firms in
the Ministry of Economic Affairs and Development. During a

47
transition period, the government would maintain a dominant
position in some sectors (e.g., sugar and meat), which would only
be lifted as a result of the privatization process.

.I
b

Secondly, most quantitative restrictions on imports and.

exports have been eliminated. Import QRs were mainly associated
with the foreign exchange allocation process and had been
considerable eased since 1989. Free access to foreign exchange for
imports from the U.S. and Central America was guaranteed by late
1990 and for the rest of the world one year later. Thus,
significant import restrictions remain only for food grains, sugar
and the products of the poultry industry: they are expected to be
lifted in early 1992 and, in the case of grains, to be replaced by
a system of variable levies (price bands). Export restrictions
remain for basic grains, sugar and some natural resource-intensive
goods (gold and silver, timber, fish, shrimp and lobster, and live
cattle). The former are expected to be lifted when the system of
variable levies is adopted, whereas the latter would be managed in
the future as controls on the exploitation of the said resources.
Third, an encompassing import tax reform --including tariffs,
stamp and selective consumption taxes (SCT)-- was adopted from
August, 1990, to August, 1991. During this period, the average
unweighted tariff was reduced from 47.9 to 14.7%, the maximum rate
from 303 to 60%, and the standard deviation of the tariff structure
from 53.0 to 9.2%. There are, however, a few exceptions to maximum
rate: the fiscal industries (soft drinks, beer, liquor, cigarettes
and matches) and firearms, both with a global rate of 83%, and
automobiles, which are subject to progressive rates of 53-133%
depending on the price of the vehicle. The effects of the reform
were much more moderate as, due to widespread exemptions, only 16%
of legal tariffs were actually collected in 1989. Thus, the reform
included the elimination of some exemptions (Lankes, 1991).

48

.
f

At the end of the process of gradual tariff reduction, in

1994, it was expected that global import taxes would be brought
down to a lo-20% range, according to the schedule adopted in June,
1991. However, with the adoption of the Central American Common
Tariff in January, 1992, which contemplates a 5-20% range, the
minimum rate will have to be increased from lo%, at which it was
fixed in August, 1991, to 5% in 1993. Transitional protection is
basically provided by the selective consumption tax, which also
applies to imports from Central America.

_.

By January, 1992, most competitive manufacturing goods were

subject to a global tariff of 28 to 38% (a 15% SCT), but
"sensitive" industries were subject to higher rates --43 to 53% (a
20 to 30% SCT). They include a few processed foodstuffs, cotton
textiles, apparel, leather and leather manufactures, all types of
shoes, some plastic manufactures, furniture and domestic appliances
made of aluminum. Given the long list of sensitive industries and
the 10% rate which currently applies to basic inputs, the resulting
effective protection rates are still high. Given the deep
deterioration of the productive base of the country, transitional
protection is, nonetheless, justified. As a matter of fact, given
the conditions of the country, the adjustment period may be too
short, particularly if, as it is most likely, the exchange rate
continues to be overvalued.
The fourth component of the trade reform is a new system of
export promotion. It includes a free trade status for & exporters
--through exemptions of,both import and sales taxes for machinery
and intermediates used in the production of exports--, and their
guarantee of access to the foreign exchange earned to pay for
needed inputs. On the other hand, it includes two types of special
benefits for non-traditional exporters J6/: (a) an exemption of the
"/ For that purpose, traditional exports are defined to
include cotton, green coffee, sugar, molasses, lobster and shrimp

.
.
49
income tax for profits earned in export activities, equivalent to
80% in 1991-1992, which will gradually decrease to 60% in 1996 and
will be eliminated in 1997; and (b) a tax subsidy equivalent to 15%
of the f.o.b. value of exports in 1991-1993, 10% in 1994-1995 and'
5% in 1996, which will also be eliminated in 1997. These benefits
will only apply, however, to companies which export at least
$250,000 or 25% of their production outside Central America.
This system of incentives is deficiently designed. The
determination of which machinery and intermediates are used for
export rather than domestic production, and what share of profits
are made in export activities, will prove difficult and will
certainly become a mechanism for tax evasion. On the other hand,
the special incentives for non-traditional exports discriminate
against small producers and domestic value added (Ocampo, 1992).

,I'

w*

Even if the structural reforms underway are effective in

generating the basis for economic recovery, the sizabl,e initial
trade imbalance and the overwhelming debt overhang will continue to
adversely affect economic activity and make the country dependent
on foreign assistance with a high grant component. The trade
imbalance (including non-financial services) is actually increasing
in the short run: from an average of $335 in 1989-1990 to $459 in
1991 and a projected $555 in 1992. On the other hand, the nature of
the debt overhang is shown in Table 11. As indicated, the external
debt of the country in June, 1991, was $10 billion, or 7.3 times
GDP. By December of the same year, some $200 million in new loans
and close to $70 million in interest arrears had been added. Under
these conditions, even very ambitious renegotiations will leave the
country with a high debt burden. Table 11 contemplates two such
possibilities. Even if Paris Club debts and those with multilateral

(except if cultivated), hides, gold and silver. Among the most

typical exports of the country, only bananas were thus given a
"non-traditional" status.

50
.
Central American Institutions were written off by two-thirds, and
those with Latin America, former socialist countries and commercial
banks by 95%, the debt would still have been some $2 billion at the
end of 1991, or 1.5 times GDP. A more likely but equally ambitious
renegotiation would have left the country with a debt of some $3.2
billion or 2.3 times GDP.

,'

-*
e
e-

Under these conditions, the current trade deficit cannot be

financed to a large extent by new debt, as such situation would not
allow even a very gradual phasing out of the current overhang. This
implies that most of the financing needs, estimated by the World
Bank (1991) at an annual average of $648 million in 1992-2000,
would have to be covered by official transfers. This implies, in
turn, that reduced reliance on aid would only be possible if the
gains in per-capita GDP are transferred into higher domestic
savings, thus postponing a significant improvement in the current
standard of living to the next century. The trade-off between
improvements in the standards of living and phasing out of heavy
reliance on foreign aid would thus turn out to be a very difficult
one in the foreseeable future.

.
e

<

51

.
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c
_"

Brundenius, C., 1987, "Industrial Development Strategies in

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Colborn, Forrest D., 1990.,Manauinu the Commandinu Heiuhts:

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52
Enriquez, L. J. and R. J. Spalding, 1987, "Banking Systems and
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Gibson, 8, 1987a, "A Structural Overview of the Nicaraguan

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1991, Nicaraoua: Reauest for Stand-Bv Aureement, Washington,

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Lankes, H. P., 1991, "Informe sobre las medidas de la reforma

arancelaria de julio de 1991 a diciembre de 1993 y acciones
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w-w , 1990, "Presentation a 10s honorables miembros de la Asamblea
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53
Neira, O., 1988, "La reforma agraria nicaragiiense: Balance de echo
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1991a, Yollapse and (Incomplete) Stabilization of the

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estabilizacao
1991b,
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, 1992, **Andlisis de 10s resultados de1 plan de estabilizacion

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--- and L. Taylor, 1990, "La hiperinflacion nicaragtiense", in Jose

Pablo Arellano, ed., Inflation rebelde en America T,atina, pp. 71108, Santiago: CIEPLAN-HACHETTE.
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Pizarro, R., 1987, "The New Economic Policy: A Necessary

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ante

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Ruccio, D., 1987, "The State and Planning in Nicaragua", in R. J.

Spalding, ed., The Political Economv of Revolutionarv Nicaraaua,
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e-e 1989, "Situation de 10s salarios en el gobierno central",
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54 '
Stahler-Sholk, R., 1987, "Foreign Debt and Economic Stabilization
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Political Economv of Revolutionarv Nicaragua, Ch. 7, Boston: George
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C.Lopez, G. Vunderink and M. V. Frenkel, 1989, La politica

ecoA6mica en Nicaraaua. 1979-88, Managua: CRIES.
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Nicaraaua: The Transition from Economic Chaos toward Sustainable
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Weelock, J.,
adios d e transformacicjn
"Diez
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agraria

World Bank, 1981, Ricaraaua: The Challenue of Reconstruction,

Washington, October.
, 1986, Bicaragua: Recent Economic Develooments and Prosoects,
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B-B

B-w 1990. Nicarauua: Economic Situation and Prospect. Washington,

Nov&nber.
---, 1991, Ricarauua: Economic Recoverv Credit, President's Reoort,
Washington, September.

TABLE 1

GDPGrowth
Rate

1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991

-7.9 z

-26.5

4.6
5.4

-0.8
4.6

-1.6
-4.1
-1.0
-0.7
-13.4
-5.1
1.0
-0.7

GDP
GDP
Investment as %
Fixed
(1977=100) per capita
of GDP
Investment
(1977=100) (Constant prices)

92.1

61.1

70.9

74.1
74.0
17.5
76.3

89.4
65.0
64.9
66.2
63.6
64.3

61.2

73.1

12.4

56.7
54.3

71.9

52.1

62.3

59.1
59.7
59.3

l/ January+Mober
SOURCE: BCN, SPP, IHSSBI and INK.

43.6
40.0

39.1

37.6

10.7t

-6.4
16.8
24.4
20.2

21.0
21.6

22.3
22.3

22.1
18.0
14.7
14.6
12.7

12.78
6.0

14.6

22.2

18.0
18.0
18.7
19.8
18.7
19.1
19.4
15.9
14.6
12.9

Change of
Inventories

-2.0%

-12.4

2.2
2.2
2.2
3.0
2.8
2.6
3.5
3.0

-1.3
-1.3
0.0

-0.3

Private Consunp- Real Wages (1985=100) Honthly

Inflation
tion per capita
(1977=100)
Using GDP Using
WI 1
deflactor CPI
90.4
65.2
13.3
60.9

51.4
46.9

43.0
38.3
33.9

31.1
38.9

33.2
29.6
34.2

139.9
126.7
119.4
120.8
116.9
114.6
112.0
100.0
101.4
73.9

50.5
33.6

71.6
48.9

4.0%
4.5

186.0
165.5
142.9
135.9
100.0
59.5

24.6

1.9 1.8
1.7

2.4
3.4

13.0
19.5
24.9

14.9
11.6

24.0

62.4
27.2
50.6

17.4

19.8

. .

.
,

TaBLK2

FISCALANDmNEYARYINDICAlm
(% of GDP at current prices)
1974- 1979
1978

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

Central government accouhts l/

Total revenues
12.5% 14.0% 22.2% 24.4% 25.7% 31.2% 35.23 32.3% 32.42 27.7% 22.2% 21.4% 17.7%
(Excluding foreign transfers)
22.2 19.1 16.0
Total expenditure
17.7 21.2 31.2 33.3 38.1 52.9 58.7 54.8 49.6 44.2 47.8 21.9 29.5
Surplus or deficit
-5.2 -1.2 -9.0 -8.9 -12.4 -21.7 -23.5 -22.5 -17.2 -16.5 -25.6 -0.4 -11.9

25.3%

18.0

23.0
2.3

34.5

39.2 61.0 59.7 55.6 50.0 44.3 46.4 19.6 27.1

9.5 11.4 13.0 12.1 11.9 10.9 11.2 4.8 10.7
7.6 10.1 24.7 16.9 9.5 6.7 4.8
4.9 2.1 2.6
7.4
11.0
12.4
17.6
18.5
18.1
18.5 8.0 8.0
7.6
9.1 12.2 14.0 17.4 16.5 12.9 10.5 11.7 4.6 5.7

26.7

10.2

10.4

-25.1 -26.6 -25.0 -21.6 -22.5 -33.9 -16.5 -16.7

-4.0 -5.5 -2.8 -7.6 -5.0 -8.3 -13.9 -2.8

1.9
n.a.

20.0 21.8 27.2 36.4 36.8 35.0 28.2 17.0 8.1 6.7
12.1 12.5 11.9 12.7 15.4 10.4 5.9 3.6 1.2 1.1 1.2

6.2

Central government expenditure 2/

Social services 3/
Infrastmcture and production
Defense
Public administration 4/
Consolidated public sector
surplus or deficit (IHF) 5/
(Central Dank losses)
stocks as proportion of GDP 61
of Payment
Quasi-money

1991

4.5
6.6
5.2

Honetary
Neans

20.9

l/ Patios of annual figures in 1974-87; average monthly ratios in 1988-91. Includes foreign grants received in 1989-91.
2/ Total expenditure according to these figures is based oh budgets and does not coincide with expenditure according to
the central government accouuts. The 1990 figure refers to actual expenditure according to Ninisterio de Finanzas
(1990). The GDP used to calculate shares in 1990 and 1991 are in dollars, and are amsistent with figures used to
estimate monthly expenditures as a share of GDP.
3/ Includes special programs for demobilized personnel in 1990-91.
4/ Includes transfers, subsidies and incidental expendes in 1990-91.
5/ Excludes unpaid foreign interest. Includes only public sector enterprises producing utilities (see text).
61 Average monthiy ratios.
SOURCES: BCN and IHF.

1.3

1 .

. .

8
T&3

, I

0CTERNAL SEClDR IHDICAlOB

(Hillion dollars unless otJnmise indicated)
1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986
Exports
Traditional l/
Non-tradional
Total

1990

1991

217.9 254.9 189.6 231.6 261.7

144.1 134.3 168.3 187.3 186.6 117.6 91.0 95.3 69.1 64.1 57.4 36.6 39.3
40.1 43.0 79.2 31 68.6
380.9 375.2 538.9 636.8 646.0 566.6 445.1 513.8 408.6 451.9 412.4 305.1 257.2 295.0 232.7 310.7 330.3

201.5
61.2

236.8 240.8 370.6 449.5 459.4 449.0 354.1 418.5 339.5 387.8 355.0 268.5

Real exports of goods

and services (1977=100)

92.2

Import weff icient

30.6. 22.7

Current Account Balance

Global
Excluding unpaid
interest
External debt (ECLAC) 2/
External resources contracted
(t frm socialist countries I

99.0 102.9 100.0 109.0 124.8 74.1 85.1 78.3 83.8 66.4 58.6 48.3

-257.2.-185.0

456

598

22.9

-39.3 -181.9 -24.9 180.2 -430.1 -590.6 -491.6 -507.4 -596.8 -725.7 -687.8 -679.1 -581.3 -361.6

-357.4

-357.5

655

864

114

130

l/ Coffee, cotton, sugar, neat, shellfish, bananas, sesame

2/ Excludes interest arrears and sane short-km debt.
3/ Includes saw US$lO million m-exports.
SOURCE: SPP, ECLAC and BCN.

* 50.9

25.1

961

1136

-391.8 -504.9 -448.4 -353.6 ,378.8 -500.1 -461.5 -450.7 -352.3

157.5

-136.1

13.3

4362 4936 5160

6270 7220
173 1197
518
386 802
(77.3) (89.3) (75.0) (69.2) (65.3

8079

8653

8570

135.4 189.1 168.9

201.6

528.1

118

82

85

seeds,

2566. 3139

3788
619
(1.8) (25.6) (23.0) (48.1) (50.6
363

1825

679

123.9
110 92

47.2 41.5 56.3 58.9

262.8

30.5 34.5 26.8

22.1 27.5 22.6 24.9 43.3 39.3 28.8 32.2 32.3 33.8 29.2

Official transfers
Terms of trade (KIAC,1980=100)

1987 1988 1989

107

803 598

10.3

51.5

79.3

90

85

82

100

molasses and gold

89.8 126.9 115.1

103

94

99

101

101

92

Table 4
REALWAGES,1985-1991(1985=X@)
Using CPI
-------~~~~~---~~~
National Central
average Government
YEAR
1985
1986
1987
1988
1989
1990
1991

-.
.

Using GDPdeflactor
-----~~--~~~~---National Central
average Government

100.0
59.5
24.6
14.9
11.6
24.0
17.4

100.0
56.3
16.2
9.5
5.8
15.3
11.3

100.0
101.4
73.9
50.5
33.6
71.6
48.9

100.0
95.5
48.5
32.5
16.9
45.7
32.0

QDARTER
1988-1
1988-2
1988-3
1988-4
1989-1
1989-2
1989-3
1989-4
1990-l
1990-2
1990-3
1990-4
1991-1
1991-2
1991-3
1991-4

28.0
16.0
7.8
7.9
10.0
12.7
12.1
14.8
19.1
36.9
23.6
16.5
15.8
15.0
19.2
19.7

16.7
10.7
5.6
5.2
5.2
6.4
5.8
6.6
9.5
24.2
16.0
11.5
10.0
10.5
12.2
12.5

94.8
55.4
26.5
25.4
30.2
36.5
34.0
41.4
53.6
103.4
66.2
46.3
44.4
42.0
53.9
55.2

56.9
37.2
19.0
16.9
15.8
18.5
16.4
18.5
26.7
68.5
45.3
32.5
28.4
29.7
34.6
35.3

1988-Dec.
1989~Dec.
1990-Apr.
199wec.
1991-apr .
1991~Dec.

6.7
15.4
37.7
16.5
12.9
19.8

3.4
6.7
24.3
10.5
10.5
13.0

21.0
43.1
105.8
46.3
36.2
55.6

10.9
18.9
68.8
29.8
29.6
36.6

SOIJRCE: Estimated using several series published by

INSSBI, SPP and Central Bank.

TABLE 5

DIFFERENTIALEXCEARGE RATES,1980-JARDARY 1988

1980

1981

1982

1983

1984

1985

Official
Black

10.00
17.33

10.00
28.47

10.00
55.40

10.00
l22.90

10.00
275.80

28.00 70.00
716.70 2183.30

70
12400

Exports:
Coffee
Cotton
Sesane seeds
Bananas
Heat
Shellfish
Other agricultural
Ha&a&ring
.Average export rate l/

7.18
11.79
5.59
10.00
10.00
10.00
10.00
10.00
8.89

8.40
11.19
6.96
10.00
10.00
10.00
10.00
10.00
9.64

9.79
12.28
8.35
10.00
12.00
10.00
12.40
13.20
10.64

16.82
12.50
7.73
10.00
12.00
10.00
12.40
13.20
13.15

25.25
12.50
13.58
10.00
12.00
10.00
12.40
13.30
16.03

179.89
733.32
177.70
70.00
70.00
70.00
70.00
70.00
267.63

1611
2118
2209
2021
70
70
3415
2021
1978

18400
10509
7158
5053
70
70
10035
5053
6840
70
269
21000
536

IBport%
Oil and derivatives
L Subje$ to TEH 2/
- Financed in the parallel market
Average import rate l/
.
Average exchange rate
Ratios:
Average export/inpoti rate
Average export/official rate
Average irportjofficial rate

l/ Goodsandservices
2/ Honetaq stabilization rate
SODRCE:BCH.

110.15
144.30
64.09
28.00
28.00
28.00
28.00
28.00
106.12

1986

1987

Jan. 1988
70
40000

10.00

10.00

10.00

10.00

28.00

70.00

70
306
7856
191

9.70 9.90

10.18

10.89

11.45

42.72 101.78

516

1920

3.82
3.82
1.00

10.36
28.26
2.73

12.76
97.71
7.66

10.00

0.89
0.89
1.00

0.96 1.06
0.96 1.06
1.00 1.00

1.32 1.60
1.32 1.60
1.00 1.00

3.79
3.79
1.00

TABLE6

1989 ADJlJSTHEBf PROCBAH

1988
Average

Central Government Budget

Domestic revenue
Foreign grants
Expenditure

47.8

Fiscal/Bonetary Connection
(I of GDP)
Central government deficit l/
Monetary Lission - Deficit
Total Nonetary Emission
Honetary aggregates
(0 of GDP)
Heans of payments
Quasi-Honey

1989

Last quarter January February Harch

22.2

20.1

0.0

0.0

April Nay

August

September October November December

23.1

2.5
18.3

15.7
4.2
21.3

4.3
21.2

2.0
6.7
8.6

-0.8

-1.3
14.5
7.2

1.5
8.8
10.3

-4.3
8.6
4.3

-2.9
9.4

9.2
1.2

7.2

7.3

1.0

8.9
1.1

0.9

0.9

22.0
26.0
28.0
23.6

14.0
15.0
19.0
16.0

14.0
18.0
20.0

14.9
18.0

86.3
55.1

52.4
54.0
68.9
51.6

28.9

0.1

15.4

40.4

10.9

-0.9

91.8
62.9

45.8
34.4

20.1
8.0

12.6
11.4

15.5
17.0

42.5

0.9

20.8

16.3
0.9
21.5

19.5
1.4
22.9

25.6
6.6
32.2

22.4
3.7
26.0

2.8
3.1
5.8

6.7
0.4
7.1

4.3
5.9
10.2

16.6
1.2

11.6
0.5

6.8
0.5

6.0
0.6

1.1

38.3
35.8
44.4
42.4

50.5
50.8
80.4
63.1

56.0
58.0

-29.3

97.7

Nonthly real interest rate,

term deposit 21

JOY

21.4
4.1

14.2
1.3
17.7

Nminal monthly interest rates

(short term)
Lending : Agriculture
Industry
Camerce
Tern deposits (3ms)

June

13.2

24.1

9.9
9.1

21.2

25.3
0.7
23.1

20.2

19.2
1.0

19.5

23.0

20.8

6.4
26.8

6.6

1.8
5.5
1.3

0.6
12.7
13.3

1.0
17.2
18.2

8.3
1.2

8.8
1.6

8.8
1.7

9.0

1.5

9.8
1.4

20.0
33.8

15.0
18.0
20.0
27.2

14.1
14.4
17.3
24.0

10.0
10.0
13.0
19.6

10.0
10.0
13.0

13.0
13.0
17.0

23.4

26.0

-27.8

-5.5

15.1

12.2

5.9

6.3

3.1

62.2
78.4

32.3
41.5

7.7
10.5

11.9
10.5

14.4
12.9

16.2
16.0

19.2

1.0

Monthly inflation (CPI)

Total
Excluding regulated prices

62.4
60.8

101.4

l/ Negative sign indicates fiscal surplus.

2/ Using monthly inflation excluding regulated prices.
SOIJBCE: SPP, BCN and INEC.

22.2

.
-c
.

Table 7
PRICE DYNANIC FOLUIWING
Weeks after devaluation

JUNE 12, 1989, AND RARCR 3, 1991, DEVALUATIONS

10

15

131.4 :
86.8
53.9
108.5
81.6

144.8 1
105.9
57.9
137.5
121.8

162.6 1
139.3
96.3
167.6
139.2

131.3

150.7

191.5

40

June 12, 1989, devaluation l/

Devaluation (official rate)
Total CPI
Regulated prices 2/
Excluding regulated prices
Foodstuffs and beverages
Excluding regulated prices
and foodstuffs

131.4 1
63.0
51.1
70.9
62.5

Harch 3, 1991, devaluation 31

Devaluation (official rate)
Total CPI
Regulated prices 2/
Excluding regulated prices
Foodstuffs and beverages
Excluding regulated prices
and foodstuffs

390.9 ;
253.9
230.6
281.5
219.5

390.9 I
296.5
279.7
316.3
290.4

390.9 1
262.1
202.4
332.5
319.5

390.9 \
248.6
165.3
346.8
347.1

390.9 :
281.0
206.8
368.5
345.9

359.7

349.0

348.9

346.4

397.1

78.1

l/ Comparison vith respect to June 1-7, 1989, week.

2/ Milities, transportation and couunications.
3/ Comparison vitb respect to February 22-28, 1991, week.

TABLE8

FISCALANDWETABYINDICAT0& 1990
January February Harch
Central Government Budget
Danestic revenue
Foreign grants
Expenditure

24.1

1.5

21.5

3.2

April Hay

19.9

16.3

3.3
34.2

2.2
53.6

June

July

August

24.7

16.1
1.1

22.2

12.8
1.0
23.9

14.5
1.4
15.9

9.0
0.9
9.9

5.0
6.4

4.5

14.2
1.2

30.0

13.5
1.9
30.9

13.8
1.3
29.6

14.7
13.4
28.1

15.5
1.1
16.6

6.6

14.7
1.0

September October November December

12.7

11.3

2.3
25.1

0.4
30.6

10.6

11.4

10.1
-0.9
9.2

18.9
-2.1
16.8

4.0

3.6

3.8

1.2

4.1
1.1

'4.3

1.1

1.2
1.4
1.7

1.2
1.4
1.7

1.2
1.4
1.7

1.2
1.4
1.7

21.4

21.5

1.2
10.6
11.8

-3.2
20.0

11.1

3.4

35.1
-9.7

16.7

14.5

25.4

Honetary aggregates
(0 of GDP)
Heans of payments
Quasi-Honey

9.3
1.4

10.3
1.4

11.6
1.3

11.3
1.0

8.5

1.0

1.0

1.0

1.3

Nominal monthly interest rates 2/

(Short tern)
Lending: Agriculture
Industry
Camrce
Term deposits (3m)

15.0
15.0
19.0
21.1

13.0
13.0
15.0
16.6

13.0
13.0
15.0
15.5

20.0
20.0
20.0
20.0

1.2
1.4
1.7

1.2
1.4
1.7

1.2
1.4
1.7

1.2
1.4
1.7

0.8

0.8

0.8

0.8

0.8

0.8

0.8

0.8

Honthly real interest rate,

term deposits 3/

-2.8

-1.8

-4.5

-18.3

-23.5

1.4

-14.3

4.0

-15.6

-0.2

0.5

7.5

25.9

14.7
18.7

15.0
20.9

36.2

116.4
107.1

100.6

86.4

82.5
67.8

58.8
56.1

30.5

33.0
30.3

47.5
40.7

Fiscal/Monetary Connection
(I of GDP)
Central government deficit l/
Honetary Bnission - Deficit
Total Honetary Emission

Honthly inflation (CPI)

Total
Excluding regulated prices

24.6

1/ Negative sign indicates fiscal surplus.

2/ Since Nay, monthly interest rate in amlobas om.
3/ Using monthly inflation excluding regulated prices.
SOURCE: SPP, BCN and MC.

46.9

53.7

79.9

31.9

4.4

15.0

1.2

TABLE 9

FISCALANDHOBETABYINDICAlWS,, 1991

Central Government Budget

Dcmest ic revenue
Foreign grants
Expenditure
Fiscal/Honetary Connection
(% of GDP)
Central goverment deficit l/
Honetary mission - Deficit
Total Honetary Bission
Honetary aggregates
(% of GDP)
Heans of payments
Quasi-Honey
Nominal monthly interest rates 21
(Short term)
Lending: Agriculture
Industry
Corrmerce
Term deposits (3ms)
Honthly real interest rate,
term deposits 3/
Honthly inflation (CPI)
Total
Excluding regulated prices

January

February

15.0
2.9
17.0

12.8

8.0

3.5

12.9
19.3

-0.9
6.9

19.3

3.1

5.0

Harch

April Hay

-1.6

June

July
20.4

21.3

25.7

14.2
21.1

1.6
27.2

-2.6
6.3
3.1

-1.9

-10.6

-1.6

13.0
11.8
21.1

16.2
10.4

24.0

-3.1
11.5
7.8

11.3
10.3

22.5
0.8
27.7

-9.1
11.4

-5.2
5.2

21.7

0.7
24.4

2.3

-0.1

6.9
1.6

7.3
1.5

7.0

7.6

1.9

1.6

1.3

1.4

1.9

1.4
1.4
1.4
0.9

1.4
1.4
1.4
0.9

1.4
1.4
1.4
0.9

1.4
1.4
1.4
0.9

1.4
1.4
1.4
0.9

1.4
1.4
1.4
0.9

1.4
1.4
1.4
0.9

-2.4

-0.7

-0.5

4.0

-1.2

1.0

-0.6

0.9

-6.4
3.4

-1.1
1.6

0.9
1.5

-1.1

1.2
2.2

5.9
-0.1

0.9
1.6

-0.1
0.0

8.1

4.1

3.8
0.1

4.5
0.7

4.9

5.4

1.0

1.4

6.1
1.5

6.4

1.0

1.2
1.4
1.7

1.2
1.4
1.7

0.8

1.4
1.4
1.4
0.9

1.4
1.4
1.4
0.9

1.4
1.4
1.4
0.9

-7.5

-7.7

29.2

-12.9

52.2

42.0
38.6

261.1
290.5

20.3

15.9

21.1
5.1
22.2

1.1

6.0

49.1

25.4
1.4
23.8

4.4
0.2
4.6

28.2
26.6

0.8

August September October November December

4.4
2.5

15.7
5.2

2.7

-3.0

l/ Negative sign indicates fiscal sup&s.

2/ Honthly interest rates in mrdobas oro. Since Harch, one-month rate, since for longer maturities, rates are free.
3/ Using monthly inflation excluding rquiated prices. Includes the effect of indexation in Harch.
SOURCE: BCN and INK

2.0
-0.2

1.8

Table 10
SOORCES OF GROWTR OF NET DOHESTIC CREDIT
(Hillion Gold Cordobas)
1991
WI

1992
(Honetary
RoqraB 1

Public sector
Net credit to the central governrent
Net credit to the rest of the public sector
Credit to other institution

-82.7
-127.7
27.2
17.8

-764.7
-644.8
-119.9
0.0

Financial system
Net credit to the financial system
Other net assets
Reserve requirements
Net medium and long ten foreign credit
to the Central Bank
Donations received by the Central Bank

417.0
660.1
384.6
-257.0

777.7
937.7
533.2
-235.0

-370.7
11

-208.2
-250.0

.
i,
I

otber

-0.5

Total net domestic credit

l/ Included in other items.
SOURCE: IHF and BCN.

333.8

0.0

Table 11
FOREIGR DEBT OF NICARAGUA AS OF JDNE 30, 1991
(Nillion dollars)

Debt, including
unpaid interest

Interest
due, 1992

1. Hultilateral, not regional

852.6

19.6

2, Paris Club
a. Typical Paris Club
b. Forner GDR

860.2
502.8

13.6
1.5

B
C

3, Latin Lerica
a. Uultilateral I/
b. Hexico
c. Other bilateral

380.8
1059.0
901.1

4.3
s-s
37.2

D
E
E

4, Former socialist countries

(excluding GDR)
a. Foner USSR
b. Other

2812.9
585.1

102.7
39.2

E
C

5. Other bilateral not being

served

117.6

0.2

60.0

3.6

1798.4

7.9

62.3

2.0

9992.8

231.8

Renegotiation
status

4
Y.

6
.

6. 1991 Taivan Loan

7. Conercial bank and suppliers
not being served
8. Suppliers and pref inancing
being served
TOTAL
TBEORETICALRENEGOTIATIONS
1. II.@ debt (lOOr A,D;
501 B,C; 101 E)

2998.7

2. Low debt (1001 A; 331 B,D;

51 C,E)

1773.3

IWO: GDP, 1991, in dollars

1368.0

l/ Basically with Central Lericdn rultilateral institutions.

FIGURE 1

PER-CAPITA GDP OF NICARAGUA, 1920 - 1992

(1977 . 100)

loo-

&30:

2 0 ~!-!
1990
1980
1970
1950
1920

b
,

.
!

FIGURE 2

EXCHANGE RATE POLICY, 1980 - 1990

A. Real Oficial Ram (l980 l lO0)

8. Offlclal Rate ar % of Parallel and

Black Market Rater

C. Real Black Market Rate and Ml

aa % of GDP

1200 40
1000 50

WO-

20
400 10

mo

0
le.1

lMr lmm mm ma6

lo86 #7 OM lbM

lsso

(99(

FIGURE 3
REAL WAGES, 1985 l 100
(using gdp deflator)
200

150

rotal

100

50

1982

1984

FIGURE 4
MONTHLY INFLATION RATE, 1984 - 1991

250

lllllllllll~lllllllllllllllllllllllllllll~llllllllllllllllllll~llllllllllu

1984

1985

1988

1987

1988

1989

1990

1991

6
Ju
b

FIGURE 5
A. Weekly Inflation Rate (vs. same week
in the previous month)

300

- Total
Wlthout regulated

2ooc

loo-

1989

1990

1991

L
t
c
.

t-

B. Real regulated prices (Jan. 1990400)

250
225
200
175
150
125
100
75
50
25
1989

1990

1991

1992

FIGURE 7

INDUSTRIAL PRODUCTION AND DOMESTIC

SALES OF MANUFACTURING FIRMS
140 (Million may 1988 Cordobas)
I

AProductlonh A

100
90
\ t ,I
Y

80

70llllllllllll

1988

1989

1990

1991

I]

FIGURE 8

AWeekly real offkhl exchange rate

(January 1890 n lO0)
(Cffkial Rale/CPI, excluding regulated pricea)

B.Weekly parallel and Black Market rates

(Cffkial real rate of January l990400)

C. Premiums in the parallel

Marketa

lea9

and Black

leQ0

nm

- Pualld/Otl kkl

-- - 8Iack/o(fkkl