Nicaragua: Surviving without the Venezuelan Slush Fund

Recommendations for Life Alongside an Ailing Ally

EspañolThe economic situation for the Sandinista government of Nicaragua compares favorably to that of the other Central American countries. Daniel Ortega’s administration is set to finish 2013 with 4.4 percent economic growth, and a recent report published by the International Monetary Fund (IMF) qualifies the Nicaraguan economy as “positive” in the medium and short term. The government, which professes to follow 21st Century Socialism ideas, has also just signed an agreement to consider IMF as a “trusted adviser” of the state on macroeconomic issues.

However, these and other reports affirm that the Nicaraguan economy is growing at a slower rate than last year. In fact, Nicaragua is suffering an economic slowdown with high levels of inflation, in addition to one of the highest rates of inequality in Latin America. There are several reasons for this emerging crisis — internal and foreign — but analysts have pointed to the significance of Venezuela’s decreased aid to Nicaragua.

Nicaragua and Venezuela have engaged in significant cooperation with implied loans and grants, and this grew significantly after Ortega’s arrival to power in 2007. Venezuelan aid to Nicaragua constituted one of her most significant, second only to Cuban and Venezuelan cooperation. However, both governments have faced warranted criticism over the lack of transparency that characterized this aid.

According to Nicaragua’s official data, “Venezuelan cooperative investment in Nicaragua, received between 2007 and 2011, totaled US$1.6 billion.” Political opponents claim, however, that these funds were managed “on a discretionary basis and outside the country’s budget, which is controlled by the National Assembly.” The Nicaraguan Foundation for Economic and Social Development (Funides) alleges that, between 2010 and 2012, Venezuelan aid reached 41 percent of total aid to Nicaragua; that’s 2 percent of its entire economy and an estimated US$10.5 billion.

The purchase of Venezuelan oil on preferential terms allowed Nicaragua to have an economic fund of approximately US$400 million annually through 2012. Venezuela charged Nicaragua 50 percent of the oil bill 90 days later, and the remaining 50 percent was due on negotiated terms of up to 25 years later and with a low rate of interest. As a member of Petrocaribe, Nicaragua could offset 10 percent of the Venezuelan oil bill with food. According to the Nicaraguan Energy Institute (INE), approximately 80 percent of energy in Nicaragua depended on Venezuelan oil.

Moreover, Venezuela became the second largest country with imports to Nicaragua. Information from the Center for Export Procedures (CETREX) of Nicaragua indicated in early 2013 that “Nicaragua exported a total of US$2,778 million in 2012, a record in its history.” The government exported to Venezuela through Nicaragua Alba Foods (Albalinisa), a subsidiary of the joint venture Albanisa.

Undoubtedly, Venezuelan aid was fundamental to Nicaragua’s macroeconomic stability during the 2010-2012 period — stability that was even applauded by the IMF. But as the economic crisis deepens in Venezuela, Nicolas Maduro’s government must reduce its economic aid, even though the food imports remain important.

During the first half of 2013, Nicaragua received US$314.3 million from Venezuela through loans and foreign direct investment, according to Funides — 4.3 percent less than the same period in 2012. At the same time, Venezuela imported US$288 million in Nicaraguan products during first nine months of 2013, 6 percent less than the US$306.7 million imported in the same period of 2012. Nicaragua also stopped receiving Venezuelan funding for its so-called solidarity bond, which had to be included in the national budget.

Surely, these losses will be exacerbated in 2014. The level of public spending in the Venezuelan government is unsustainable, and therefore the policy of cooperation and Chavista solidarity will be almost paralyzed. Consequently, Nicaragua, its government and its company should take more drastic decisions than those assumed so far.

Nicaragua needs to work seriously to address issues such as its legal security and institutions that discourage foreign investment, as well as cronyism and a lack of transparency in the management of its public funds. Additionally, though, the Nicaraguan government would benefit from getting closer to the United States, historically its most reliable partner, as well as to Europe and regional initiatives outside of ALBA, such as the Pacific Alliance and the European Union.

Nicaragua’s ALBA should change its economic and trade relationship with Venezuelan government. It is true that higher inflation now affecting Nicaragua is mainly due to the increase in world oil prices, but it is also the result of a monopoly controlled by the family of Daniel Ortega. The purchase and sale of Venezuelan oil and its derivatives through ALBA is big business for them.

This change in the relations with Venezuela should also go beyond economic and trade issues. Chávez and Ortega formed a natural political alliance since the Sandinista government came to power in 2006, due to their friendship and common goals. Through this relationship, they supported each other’s key strategic steps inside and outside their countries, and they even reached to extend cooperation over military issues.

Their military agreement, signed between the two countries in 2012, not only provides for closer ties between the Venezuelan and Nicaraguan armies, but also for aiding Nicaragua with the defense of its sovereignty. This situation rose in prominence when in November, 2012, the International Court of the Hague declared that Nicaragua had the right to a vast sea territory that traditionally belonged to Colombia. Colombia, however, refused to accept the sentence, so Nicaragua raised the need for greater military assistance, and the Venezuelan government said it would help if necessary.

If the Sandinista government wants to remain in power, this entire strategy of international alliances — which is beginning to backfire — needs to be reconsidered.

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