[Congressional Record Volume 140, Number 52 (Wednesday, May 4, 1994)]
[Extensions of Remarks]
[Page E]
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[Congressional Record: May 4, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                     NICARAGUA'S ECONOMIC SITUATION

                                 ______


                           HON. DUNCAN HUNTER

                             of california

                    in the house of representatives

                         Wednesday, May 4, 1994

  Mr. HUNTER. Mr. Speaker, I wanted to take this opportunity to share 
with Members an update I received from the head of Meso-American 
Studies, Mr. Bruce Jones, regarding the current economic situation in 
Nicaragua. As Mr. Jones points out in his letter unemployment in 
Nicaragua stands at 60 percent and it is difficult for entrepreneurs to 
get loans. I encourage all my colleagues to read Mr. Jones' account of 
his recent visit to Nicaragua and the economic problems they are 
experiencing.

                                        Meso-American Studies,

                                       Reston, VA, March 23, 1994.
     Hon. Duncan Hunter,
     U.S. House of Representatives,
     Washington, DC.
       Dear Congressman Hunter: Since mid-November, I have spent 
     approximately six weeks working on a pre-feasibility study in 
     Nicaragua for a mid-west investment group. Due to their 
     interest in agricultural enterprises, including cattle, this 
     was my primary area of investigation. While Nicaragua has 
     made substantial progress from the state orientated policies 
     of the former government, much is yet to be done.
       As the failure of the Sandinista revolution became more 
     apparent internationally, their access to credits and 
     financing declined, as did their standard of living. By 1990, 
     Nicaragua had one of the lowest standards of living in the 
     Western Hemisphere. Due to both their failure to satisfy the 
     needs of the Nicaraguan people and international pressure, in 
     the elections of 1990, the Sandinistas were voted out of 
     power. Now the re-establishment of a free-market economy and 
     democratic pluralism is being slowly implemented by the 
     Chamorro Government.
       One of the sadder legacies of the Sandinista regime has 
     been the bankrupting of the Nicaraguan economy. Since the 
     taking of power in 1990, the government of Nicaragua has 
     struggled to restructure its debt and, at the same time, 
     reactivate the economy. While the IMF and the World Bank are 
     satisfied with the austerity program that has been 
     implemented, this program has hindered the economy. Nicaragua 
     has traditionally been an agricultural and beef producing 
     country, with between 24 to 31 percent of its GNP generated 
     through agricultural, cattle, timber and fishing 
     production.\1\
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       While often the new government's policies are not highly 
     visible, one example clearly shows the new orientation of 
     Nicaragua. In 1990, inflation was 13,490 percent, in 1992 the 
     inflation rate fell dramatically. This fiscal responsibility 
     has its social cost however, and now in 1994, unemployment is 
     estimated to surpass 60 percent.\2\ This can be a potential 
     social time-bomb if measures are not taken to alleviate this 
     problem. Perhaps the most important measure to defuse this 
     social problem--that is obviously also an economic problem--
     is to create a climate of confidence for foreign investment. 
     To its credit, the Chamorro Government has taken positive 
     steps to both attract foreign investment and provide 
     guarantees that these investments will offer the investor a 
     reasonable chance of success.
       Perhaps the two most important initiatives taken by the 
     Chamorro Government have been the Foreign Investment Law 
     (FIL), Law #127; and the Exports Promotion Law (EPL), Decree 
     Law #37-91. The FIL has been designed to attract foreign 
     capital for investment within Nicaragua and the EPL provides 
     further initiatives to promote the exportation of Nicaraguan 
     products, with emphasis on non-traditional goods.
       Never-the-less, the austerity programs have seriously 
     affected local Nicaraguan producers. In regard to bank loans 
     to the cattle industry, long-term loans for building of ranch 
     infrastructure are virtually unavailable and short-term loans 
     carry an onerous interest rate.\3\ Short-term cattle loans, 
     given in cordobas, the Nicaraguan currency, have been tied to 
     the relation of the cordoba to the U.S. dollar. This is to 
     say that if, during the course of a loan period, the cordoba 
     is devalued in relation to the dollar, the Nicaraguan 
     borrower, who borrowed in local currency, has his loan 
     readjusted to reflect this change. This is called 
     ``maintenance of value''. In January of 1993, the cordoba was 
     devalued 20 percent in relation to the dollar. Any loan 
     active at that time had an extra 20 percent, in local 
     currency, added to the loan value.
       Meso-American Studies examined, and possesses, copies of 
     two loan contracts active in that period. Above the 22 
     percent interest rate that BANIC, one of the two government 
     banks, charged to the borrower, 20 percent was added above 
     the original interest rate. Coupled to this is a 3-percent 
     bank charge for processing the loan, which gives an effective 
     interest rate of 45 percent a year. While the different banks 
     in Nicaragua charge different interest rates, they all share 
     the ``maintenance of value''. Prior to the examination of the 
     clauses in the BANIC loans, Meso-American Studies has assumed 
     that only the mafia charged this type of interest. Copies of 
     these loan contracts are attached to this letter. Clause #8 
     clearly states the relation between the cordoba and the 
     dollar.
       ``In agreement to the credit, changes, and monetary 
     standards in force, it is established that the amount of this 
     loan at the official rate of exchange today, corresponds to 
     the quantity of ------ dollars. It remains expressively 
     agreed that the debtor clearly assumes the risk for the 
     variations in the rate of change. Therefore, the debtor is 
     obliged to pay the Bank the quantity of cordobas that may be 
     necessary to cover the value, in the indicated dollars, at 
     the rate (of exchange) applicable in the moment of its 
     cancellation. The payments, or partial payments will be 
     applied at the rate (of exchange) applicable in the date of 
     each payment.'' Banco Nicaraguense, Contrato de Credito con 
     Garantia Prendaria, Clause Eight.
       Even though the Nicaraguan borrower receives cordobas from 
     the bank, is paid for his product in cordobas and repays his 
     loan in cordobas, governmental monetary policies beyond his 
     control may raise his interest rate, due to fluctuations with 
     the dollar, to an unacceptable level.
       Equally disturbing was the fact that few loans were 
     available for long-term ranch infrastructure. While Nicaragua 
     has the pasture capacity for maintaining 4,000,000 head, the 
     current cattle population is estimated at 1,500,000 head.\4\ 
     The lack of access to long-term credits and exorbitant 
     interest rates was the motivation of meetings between 
     representatives of cattlemen and members of the Economic 
     Commission of the Nicaraguan National Assembly on Nov. 3, 
     1993. These meetings ended without any solution to the 
     problem of access to credit.
       Because Nicaragua is literally living ``hand to mouth'', 
     long-term ranch infrastructure loans simply are not 
     available. Short-term loans are available, but at excessive 
     interest rates. These loans typically are one year loans used 
     to purchase cattle for fattening. Since a major portion of 
     the Nicaraguan cattle industry is dedicated to exportation, 
     this brings into the Nicaraguan economy hard currency. Yet 
     the cost of this policy has been the stagnation of the cattle 
     industry.
       This problem has no short-term solution from the private 
     sector, a change in foreign governmental and international 
     banking policies in regard to loans in Nicaragua is the 
     obvious solution. Yet changes could provoke an unwanted 
     inflationary spiral. However, loans targeting a particular 
     sector of the Nicaraguan economy could avoid this 
     possibility. If just one export oriented meat packing house 
     can generate over $34,000,000 in hard currency in a two year 
     period,5 given the present pasture under-utilization and 
     national herd size, what would the future bring with a robust 
     cattle industry?
       I bring this matter to your attention in the hopes that 
     either A.I.D. funds or Foreign Assistance Funds for FY95 be 
     targeted, in part, to provide reasonable interest rate loans 
     to the productive sectors of the Nicaraguan economy, which 
     obviously would include the cattle and agricultural sector. 
     Much of Nicaragua's resources go to service their 
     international debts, debts occurred during the last decade in 
     which the Nicaraguan people has no real opportunity to 
     express their political will. That they continue to suffer 
     the consequences of failed policies of the past is 
     unacceptable.
       I have no solution to this matter, it is my hope that you, 
     and other members of Congress will address this problem at an 
     appropriate time, and provide the necessary assistance to a 
     people who never lost their faith in the United States. This 
     is an issue that cuts across all political boundaries in 
     Nicaragua. The people are not asking for a ``hand out'', 
     rather a hand up.
           Sincerely,
                                                   Bruce B. Jones.


                               footnotes

     1Doing Business in Nicaragua. American Chamber of 
     Commerce of Nicaragua. Dec. 1993. Page 17, 1993 Foreign 
     Economic Trends; Nicaragua. April, 1993, Economic/Commercial 
     Section, U.S. Embassy, Managua. Page 5.
     21993 Trade Act Report; Nicaragua. November 1992. 
     Economic/Commercial Section, U.S. Embassy, Managua. Page 1. 
     According to this report the Nicaraguan Ministry of Labor 
     reported that unemployment in 1992 was only 18 percent, this 
     figure simply is not credible. Nicaraguan Government 
     estimates for 1993 do indicate 50 percent plus unemployment. 
     See also Doing Business in Nicaragua. American Chamber of 
     Commerce of Nicaragua. Dec. 1993. Page 61.
     3Interview with Maximo Huertado Aviles, Banco Nacional 
     de Desarrolo--El Muelle; Credit Director
     4Interview with Edgard Lacayo V., CORNAP, Executive 
     Director, Sector Pecuario
     5La Ternera; FAGANIC. 3rd Edition. 1993. Page 21.

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