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Interview with President of Nicaragua's Central Bank
Interviewed by Tortilla con Sal in mid-October this year, the president of Nicaragua's Central Bank, Dr. Antenor Rosales spoke about the effects of the international financial crisis on Nicaragua and the region. Dr. Rosales explains some of the challenges he and his colleagues face in order to keep prices stable, which is the main remit of the Central Bank in Nicaragua. The interview is an interesting portrait of a senior official in a revolutionary government working for change to benefit the majority, but faced with an opposition majority in the country's legislature. That adverse national context is now compounded by a damaging and uncertain international context.
Tortilla con Sal : When we have talked to other leading members of the government here, they have generally mentioned problems they encountered when they took over from their predecessors in the previous administration. What was your experience when you took over the Central Bank in January 1987.
Antenor Rosales : What I can tell you is that the process of taking over Nicaragua's Central Bank was linked to the vision we brought with us, after discussion with President Ortega that in the Central bank we needed to insert a mentality of change along with continuity. So we came to the Central Bank with the institutional aim of getting the best out of the staff and resources we had to work with, imprinting on them the philosophy of our government of Unity and National Reconciliation. So we worked along those lines with the outgoing president of the bank, Dr. Mario Arana, and given the Bank's organizational levels one has to remember that we as a political party were represented on the Board of the Central Bank prior to the victory of President Ortega by Dr. Silvio Conrado. So to that extent our work was made easier by an understanding of the Central bank's organic structural reality
TcS : In terms of what you found, do you think you were taking over a body that had been adequately fulfilling the role, objectives and mission of the Central Bank?
AR : The Bank is subject to its organic law. In fact, the previous administrations in the course of their work tried to abide by that law,. Obviously in doing so the bank authorities did not always count with the support of Nicaraguan society and that is an issue still pending, for example the notorious CENIs case.
What we maintained from the start is that in institutions like this one we ought to take a series of measures allowing us to strengthen the Central Bank's institutionality. So you could say that has been the main internal objective of the Central Bank and clearly of Nicaraguan society. What we want is that Nicaraguans feel this really is a Bank for Nicaragua, that it be a Bank of Nicaragua for all Nicaraguans to promote the particular national project that our country has.
So in that sense , when we took over the responsibility we did so convinced that the big decisions of political economy ought to serve the policies that we as a government of Unity and National Reconciliation have proposed, obviously in strict accordance with the law.
TcS : One of the issues that has been distorted a lot by people who criticise the government has been inflation. In the first part of the year inflation seemed as if it would take off out of control. But you and your colleagues managed to get a grip on it. Can you comment on the outlook for inflation in Nicaragua and the region now?
AR : Sure. The phenomenon of inflation, now, this year is a phenomenon that has hit the entire world. It's not just something relevant to some regional or national reality, as has been the historical experience of economic studies carried out of that phenomenon. In the US, in Canada, in Mexico, in South America, in Europe especially, in Asia too, in China for example. The levels of inflation reached in 2008 have been truly surprising.
At the beginning of the year we fixed a target that we had to change during discussions with the International Monetary fund (IMF) because in fact the basic function of the Central Bank is to maintain price stability. So for that reason with other government bodies we worked on an anti-inflation plan that might allow us to control inflation from shooting up to higher levels than we had, say, last year.
In that plan, basically, we insisted on the importance for Nicaragua of production. The base of our anti-inflation plan was production. So we had to ensure that Nicaraguan producers, small, medium or large, but especially small and medium producers who are the ones that produce most food in Nicaragua should be able to bring to market in Nicaragua beans, maize and those products which are the basic components of ordinary people's domestic economy.
We have made steady progress towards that. If you study our national reality, you can see that in July, August and September, we have had a real impact on the rhythm of inflation with important results. But here now we have a problem, we have to make clear.
Namely that the current heavy rains are going to have an objective effect on national production. What is that impact? We still don't know. But we think it is inevitable there will be one. We are certainly going to have less production than forecast. And that was the base of our anti-inflation plan.
TcS : You have mentioned that the main objective of the Nicaraguan Central bank is to guarantee price stability. That is very similar to the mandate of the European Central Bank. The United States on the other hand has a central bank institution, the Federal Reserve which also has the responsibility of promoting full employment. What are your thoughts on that issue here in Nicaragua?
AR : That is a discussion that has both defenders and detractors. What is the main function of a Central Bank. Some argue that it ought to be exclusively the control of prices. Others argue that it should have other objectives, as in the case you mention of the Federal Reserve, because they do indeed have a role in promoting full employment. It seems to me that the fundamentally important thing, even in the United States, is faced with this financial problem, to control inflation. And in fact in Nicaragua we are bound by the law as it stands and the Central Bank has as its basic objective to control inflation. So we would need a legal change that might lead to that matter of promoting employment being another of the main tasks of the Central Bank. So for now we do not foresee a proposal to that effect making the Central Bank responsible for promoting employment.
TcS : Staying with the issue of inflation. From mid 2007 the European Central Bank has injected liquidity energetically and from December 2007 the Federal reserve has opened various facilities also making available huge amounts of liquidity to their financial system. But even these measures have been superseded lately by coordinated measures at a global level to supply the global financial system with unprecedented amounts of liquidity. Do you and your colleagues not fear that this phenomenon might generate very complicated inflationary effects in months to come for regions like Central America.
AR : Certainly there is going to occur in Nicaragua and Central America an effect resulting from the international financial situation. But here we have to decide whether we are going to address the problem of today or the problem of tomorrow. It looks as though the decision of the big financial centres is to address today's problems. I think of today's problems as being a crisis by Cs. There's a Capital crisis, a Credit crisis, a crisis of Confidence and a crisis of Control. Why? Because despite the injection of capital you have just described, it is still not enough. Despite financial entities needing to again receive funds to capitalize themselves they have not been able to. It is the State, once more, that is playing that role.
There is a credit crisis because absolute mistrust exists as regards the real financial state of all those institutions. The banks don't want to lend to each other. Obviously that is going to have repercussions here in Nicaragua. That is beyond doubt. Where might the international financial situation hurt us? In various ways. I'll mention a few.
First, there was a tendency many analysts thought might last for many years, namely the rise in food prices. That tendency is now downwards. Nicaragua's main export products are primary products. So that tendency will certainly have an objective impact on the Nicaraguan economy.
We have important sources of employment in the free trade zones, regardless of whether or not we agree with the free trade zone employment system, regardless of that, objectively, there it is. A number of Nicaraguans work in those zones. Now then, the main market for those products produced on out national territory under the free trade zone regime is the US market. And the data show us very clearly this year there has been a drop of purchases in retail outlets for the products we make here by way of clothing and textiles.
SO a drop in US purchasing power, a drop in consumption in the US market affects Nicaragua because the maquila companies here.are going to have a drop in the orders their sales representatives get from the wholesalers that buy their goods.
We are going to be affected in the tourist sector. Some people, in Honduras too, I have read the Tourism Minister there, like our own, said it was an opportunity because we are going to see a kind of budget tourism appear now. Someone might say "Perhaps I cannot go somewhere else but I can choose Nicaragua "... that's possible but one has to look hard at the reality because it looks the way things are going that person won't have the resources to go anywhere, even for budget tourism. There is a great deal of uncertainty now. I am talking about the ordinary person, the ordinary citizen. So in tourism as well we could see things notably affected.
Let's talk too about foreign investment. How might one have a problem with foreign investment? In the sense that, in situations like this one, the capitalist system exacerbates the contradictions of the most needy and so, just as Nicaragua is a very impoverished country, there are a load of poor countries that could take measures to attract investment. And we know at what cost attracting that investment has to be done and Nicaragua is not necessarily going to be among the first places investors may want to come.
So it's not just whether or not the investor wants to come here but the competition the same countries in need of that investment engage in for that investment to come. Except of course, obviously, when we have a type of investment or trade adjusted to other criteria, like fair trade for example, or South-South investment.
But that is another thing we have not developed as much as we might although we have as horizon the importance of export diversification. But we are not right now going to diversify exports overnight. It is not true that overnight we are going to say about the free trade zone products or other exports, "no, those aren't all going North, now we'll send 50% somewhere else...."
Another problem that is certainly going to be affected - and I am not giving any of these in any special order - is linked to national banks financing from foreign banks. Somewhat. But also the finance from foreign banks to national producers. Because not all businesses based in Nicaragua fund themselves with resources from our own financial system. Some do so directly with foreign banks because they get cheaper interest rates. So the continuity of lines of credit entered into directly between those institutions and our banks and between those institutions and our companies cold be reduced. In fact they have been reduced.
Right now we are talking, at least with the most important companies in Nicaragua, so as to know what their obligations are and with the banks too to know what their short term obligations are that they all have to pay to those foreign banks and how their lines of credit are behaving. We are in daily contact because you can imagine what it would mean if one of these international banks suddenly decided to suspend a line of credit to one of our national banks.
And lastly, but not less important for that one has to explain that this situation will see us competing strongly also for international cooperation. We are going to be competing for investment. But we are also going to be competing for international cooperation. Why? Because to some degree we have, let's say some difficulties in relation to some other countries. we cannot receive funds that are not concessionary funds because we are members of the HIPC initiative for highly indebted poor countries.
And obviously that makes if difficult for us to get funds on non-concessionary terms that many countries, most western hemisphere countries can have access to at the moment. Whether its from the Inter-American Development Bank (IADB) or the Latin American Reserve Fund (FLAR) or the Financial Investment Corporation who have announced amounts of almost US$10 billion available for emerging countries and in this case the Latin American Countries with the IADB.
But there you are, one has to remember that in the Americas there are giants, one might say, like Brazil, Mexico, Argentina. And when they go to access that credit, they do so but it is not the same for Nicaragua or Honduras or Guyana. So there are some difficulties that are objectively present on the international financial scene that's despite instruments like the IADB in theory being our banks for facilitating development. So all that means we are looking very attentively and with much concern at developments in the international financial situation.
TcS : Has the mistrust between banks caused any significant problems in the national banking system so far?
AR : Among other things one would have to say that mistrust between banks in those rich countries comes about in proportion to the development of the inter-bank markets. For example the loans between banks made to be able to ensure liquidity for the following day and so forth. In our case the inter-bank market is very small and I think our main concern right now is to conserve the lines of credit our national banks receive from international funds. That is our fundamental worry.
Because remember that the rules that typify that capitalist financial world are different from the ones that result from relations with another type of State or with countries having a different vision, like solidarity, fair trade, a vision towards integration and so on. Because there in the capitalist system the great majority of lines of credit stipulate that they can be rescinded at any moment. You have no guarantee they are going to be on offer for ever. If there is any weakness in country risk, a weakening in the index of country risk or is they consider your cash flow is going to be affected or whatever other reason, that'll be enough to demand you give them their money back.
TcS : Do you see any chance here in the region or in Latin America generally the possibility that some country or group of countries might do the same as Ireland was the first to do and guarantee all deposits, something it was heavily criticized for?
AR : It was criticized but they immediately turned round and did the same! Even the Euro countries did after Ireland did so. But they did it differently. Because Spain said, "No, that doesn't suit me, I'm putting up more..." To give one example. Iceland said it would guarantee all deposits. Germany will probably do the same as did Greece and Portugal.
So here what we are watching are the contradictions of the capitalist system. Because what one is trying to make out are positions. here one sees US financial capital fighting against European financial capital. We cannot deny that. Prime Minister Brown's had one position to start with and now it's different. And the positions of Sarkozy and of Berlusconi are different in relation to Germany's position.
Here what we are seeing is that a genuinely coordinated strategy does not exist. That's why the annual meeting of the IMF and the International Financial and Monetary Council ordered a revitalization of the IMF, ordering it to play a better role in establishing a genuinely coordinated policy because capitalism as a system now requires that coordination because otherwise we are just going to have what we have always had : the struggle between different capital for hegemony.
TcS : Might something similar happen in Latin America?
AR : I think the major Latin American powers will propose a new design of international financial architecture.
TcS : And the Bank of the South?
AR : Not just the Bank of the South . Because right now for example, Brazil, India and South Africa are in a meeting. President Lula is there, demanding a new design of that architecture. Zoellick has clearly said the seven countries are no longer enough, we need 14 now . Let's include Brazil, Mexico, Russia as a full member, South Africa, China and India. Why? Because the system needs it and they too need it, a change. It is no longer possible to run international finance the way its has been managed up until now, that model of absolute deregulation.
And Sarkozy said a couple of days ago and said again yesterday that we need to regulate entities like hedge funds. Because that is part of the crisis, the crisis of control by the State. So I think we are approaching a position in which everything will be different. International finance is going to change. Now that absolutist vision that the United States were the only ones allowed to drive international finance policy, the way things are going I don't think that will return in the next few years
TcS : Returning to the matters here in Nicaragua, at a trade level, have you and your colleagues found any problems for the bigger companies with regard to letters of credit or other mechanisms for essential for facilitating trade.
AR : That's one of the issues we are researching with those companies quite deeply so as to understand what is the real impact on their lines of credit but apart from that, basically, and independently of the current crisis, over the last few months we have begun to pay much more attention to a problem becoming clearer in Nicaragua which is the growth of consumer credit. One example can illustrate the problem. If we have a drop in the sales of produce from the free trade zones that we export to the US that could lead to unemployment in the free trade zones. Have you any idea of the proportion of workers in the free trade zones with credit cards.? It is extremely high. What might happen to those workers who have been given credit cards is that they will not be able to pay it because they will be out of work.
So the policy of increasing consumption has been a concern of ours all through 2008. The Bank Superintendent's office and other financial institutions even issued a prudential notice aimed at strengthening credit for production. We think it is very, very important, obviously that Nicaragua has credit for production so as to drive greater levels of competitiveness in Nicaragua and thus its productivity. But th rhythm of consumer credit we have is a menace to Nicaraguans' capacity to pay.
TcS : So in Nicaragua the same phenomenon exists of predatory loans being made even though it is clear the recipients are unlikely to be able to pay....
AR : That phenomenon does indeed exist given that the profit level obtainable in that market mean one can accept as a lender a high level of non-performance so as to achieve a level of returns satisfactory for the business plan those lenders use. But more than anything right now it seems to me we need to be very attentive to international developments, very attentive to credit policies and very concerned about strengthening Nicaragua's position at a very difficult time.
You touched on the issue a moment ago of what should be the policy to guarantee deposits in Central America. We have already done some calculations and in practice the US$10,000 guarantee we have now covers very many of Nicaragua's depositors. And that is the main problem. What is that deposit guarantee fund able to protect. And here we are not talking about protection wholesale for protection's sake. We are already familiar with that policy of protecting all deposits 100%. rather what we want here is protection so as to ensure stability and confidence. Problems of confidence or systemic problems in the national banks would not be helpful to this government of Unity and National Reconciliation.
But now it does not just depend on us because everything is too interconnected. All the Nicaraguan banks, practically all, have a presence at a Central American level. And it is absolutely guaranteed that if a problem happens in another country here, that is going to have repercussions in Nicaragua. And it the problem happens in Nicaragua, it will have repercussions in Central America. So the most important thing here is to guarantee the stability of the financial system, to regulate prudently, to improve regulation of the financial system by the Nicaraguan authorities. We have to play a very active, strong role, determined to protect the national interest and even more so at a time as complicated as the present.
TcS : Changing the subject a bit. Presumably relations with the IMF are very important for you and your colleagues. I understand you had another meeting with them recently.
AR : We went to the annual meeting of the IMF. The President of Nicaragua's Central Bank exercises governorship in relations with the IMF. So we went to talk to them in a meeting with all the world's Finance Ministers and central bank presidents because that meeting is also a meeting of the World Bank. And we took advantage of the occasion to discuss with the IMF officials the establishment of a contingency line of credit in case Nicaragua needs help with its balance of payments, so as to protect our reserves if problems present themselves. And the IMF officials clearly understood that should that eventuality occur then rapid disbursement mechanisms would be necessary so that we would not have to be going through the whole process that generally characterizes that kind of disbursement.
So I think the visit was very positive for the Nicaraguan Central Bank, because it has allowed us to agree with the IMF that if a special situation arose we could get an increase of the current quota our country has within the framework of the Service, growth and Poverty Reduction quota that could be up to US$80million more, if we need it, only should we require it.
And secondly, we managed to set a date for the second programme review that will happen in November when the IMF will visit. So I see those as very positive results of that meeting.
TcS Does the approval of the IMF help Nicaragua in its relations with other international bodies?
AR : Look, to be honest, we have always maintained and with them too that while what you say is true, in the sense that many people seeing that we are in a programme with the IMF, the IMF has good relations with us and in so far as we reach certain agreements is is important for other relations, we have always maintained that these relations should be separate.
That is not easy, because some actors for sure want to deal with us on the basis that only if we have a programme with the IMF will they talk to us and release funds. A few. Not everyone. Because most of them understand that what is important for Nicaragua is to guarantee its macro-economic stability, to maintain healthy financial policies, spending controls and good results in poverty reduction so as to continue the cooperation that historically we have received.
So we are always somewhat firm on that matter. But realities sometime impose themselves. In fact when we have a programme with the IMF to some extent we find fewer difficulties in maintaining relations towards the things we want, which are investment, cooperation and increasing the country's productive capacity.
TcS : Going back to the issue of macro-economic stability, the case of the CENIs you mentioned at the outset has been very controversial. The Central Bank and the government have managed to stabilize the situation via a negotiation with the bank's concerned. Do you think that is a closed chapter now or could it again become problematic in future as the case being prosecuted by the Public Prosecutor's office unfolds?
AR : From the point of view of the Central Bank the so called CENIs case only need the approval of its Board. Once that has been obtained then from a financial point of view we can close that page. Because we think it helps Nicaragua to continue strengthening the credibility of the Central Bank. And this decision on negotiating the bank securities, in the Bank's judgement has helped strengthen the institution. It has helped maintain confidence in the government's bonds and the bonds of the Central Bank. That obviously has nothing to do with whatever developments there may be from a judicial perspective with regard to the authority or attributes to do with their issue or any other matter that is in doubt.
For us one can say that with that authorization from the Board we could say it is a closed chapter for the Central Bank.
TcS : And with regard to the formation of the new Board? Apparently that is being held up by the National Assembly. To what extent is that a political problem and to what extent is that problem holding up the normal work of the Central Bank?
AR : At the moment there is a series of functions that only the Board can carry out, for example approving the Central Bank's budget for 2009. Currently the budget review is not finished because we haven't been able to adjust some of the line items. Because only the Board can approve them, monetary policy review, review of legal arrangements. All these are components that require the presence of the Central Bank's Board
And too, in a situation like this imagine if we had to inject funds into a bank the way other countries are doing , under normal circumstances we would require the presence of the Board. Since it is not active then we have to assume that role and it will be another story whether we are authorized to do so or not. But for now the important thing is to manage and cope with whatever difficult case or problem we are confronted. So I think that yes we do need to get over that political hurdle because it is in the National Assembly and the deputies there should proceed with confirming the Board.
TcS : Are you optimistic they will?
AR : I think the Central Bank wants to think the deputies are serious and interested in strengthening its institutions and making them work. And furthermore it is a commitment we had with the IMF for September after a discussion, since we should really have done it beforehand. But we had a discussion and it was put back to September.
TcS : Obviously the international crisis has created a series of unforeseen challenges. Were it not for the crisis, what would have been your and your colleagues priorities in the Central Bank over the next couple of years?
AR : Our objective, our task and main function is keeping prices stable. That is a task to which we must pay great attention. Only via strict coordination with government policy between government and the Central Bank and with support across Nicaraguan society is it possible to achieve anti-inflationary objectives in Nicaragua. According to studies the Bank's technical officials have carried out, a large percentage of Nicaragua's inflation stems from inflationary expectations. Or in other words what people believe inflation will be is transmitted directly to the cost of products and services
So that can only be resolved through confidence, security via the transmission of that security and confidence in anti-inflationary policy not just from the government but through other economic agents and operators so it translates into a feeling among the citizenry, among the population diminishing those expectations to what one might call normal levels in a society as complicated as ours here in Nicaragua.
TcS : A final question, how relevant is the Bank of the South or the proposed ALBA bank?
AR : We have been working a lot on the ALBA bank. In fact, I can tell you the Bank of the South is an opportunity, an alternative for us to really make sure the resources we Latin American countries have and which we can obtain do in fact go into our development. In the case of the ALBA bank, which is a project closer to us, one of Venezuela, Cuba, Bolivia, and Nicaragua we are waiting for the ratification of the agreement to found the bank. And we have pending a meeting of the people responsible for the bank. We had envisaged it being on September 21st, but for numerous reasons the finance ministers and myself, the person responsible here for the ALBA bank, could not agree on a date to make the meeting happen. But it is more than an interesting alternative, it is important, necessary, vital to guarantee the development of our peoples.