The Nicaraguan Central Bank (BCN) has announced it will end the progressive devaluation of the Nicaraguan cordoba against the US dollar as of January 1, 2024, freezing the exchange rate at 36.6243 córdobas to the dollar. With this measure, the government will save millions, while the population who receives dollars will lose the last few extra cents with which they could defend themselves against increasing prices, according to the explanations of economists consulted by Confidencial.
The State saves, because it no longer has to contemplate the depreciation currency in its contracts and social obligations. The measure will also make imports slightly cheaper, while exports will suffer a slight drop in value. However, the Nicaraguans who receive family remittances – which ascended to 2.215 billion dollars between January and June of 2023 – will receive a little less in cordobas for each dollar they change.
It’s the fourth time in the last four years that the BCN has intervened to reduce the rate of depreciation of the corboba’s exchange rate, which had been pegged at 5% yearly from 2004 until 2019, when it was reduced to 3%. The devaluation rate was dropped to 2% in December of 2020, and finally in February of 2023, it was dropped to 1%. The BCN has announced that it will now be set at 0.
Once again, the Central Bank argued: “the reduction of the depreciation rate will contribute to strengthening the national currency, and compensate the effects of the elevated international inflation on the national economy, thus favoring the population’s buying power.”
However, the measure seems to favor the government and the State more, since they will no longer have to include – and pay- the maintenance of value clause. “Instead, they profit from the depreciation of the currency,” explained economist Juan Sebastian Chamorro.
He recalled that the Nicaraguan State – like the rest of those actively involved in the country’s economy – set their transactions based on the depreciation of the currency, whether it’s a transaction involving a home rental or the payment of bills and bonds issued by the government institutions. However, beginning in 2024, by lowering the devaluation rate to 0, the government no longer has to recognize the maintenance of value of the cordoba with respect to the dollar, because the value of the dollar will continue unaltered.
That includes the pensions, salary adjustments, bonds, interest rates and all the financial instruments that will no longer be tied to the dollar. “Basically, it will be an enormous win for the Nicaraguan State in terms of money that it will no longer have to pay out,” Chamorro added.
Not everyone wins
On the contrary, the population won’t enjoy the same luck, since the rate of devaluation of the cordoba slightly offsets the inflation in daily life – the extra money that is received when dollars are exchanged for cordobas makes for a slight reduction in the weight of the monthly increases in the cost of food.
To illustrate with some numbers: a citizen that changed a hundred dollars on January 1, 2023, received – according to the official exchange rate – 3,623.33 cordobas.But by December 31, 2023, that same citizen would receive 3,662.43 cordobas for the hundred dollars. That difference of 1.08%, small as it is, would offset by that margin the increase in annual inflation. Beginning on January 1, 2024, this will no longer be true.
Going a little deeper into the topic, economist Enrique Saenz wondered what will happen to the pensioners, considering that “the remittances will be exchanged for a fixed rate in cordobas, while inflation will march at its own rhythm.” In addition, he recalls that previous reductions in the rate of planned devaluation didn’t stop Nicaragua from registering a higher rate of inflation than the rest of Central America.
Manuel Orozco, who directs the Migration, Remittances and Development program at the Inter-American Dialogue, notes that inflation in Nicaragua has increased more than in the other nations of the Central American region. “The reasons are mixed and have to do with the low productivity, which serves to make imports more expensive, given the lower capacity to generate wealth.”
An economist who asked to remain anonymous to avoid reprisals from the regime recognized that the ultimate goal of this measure is “to reduce the rate of inflation, which has persisted with no way of containing it.”
With respect to this, he warned that the economy is traveling down a path of major risks, most of them structural, productive, redistributive, social and in growth, with few or no tools to revert this tendency in the future. Inflation, migration, the cost of money, an increase in the economically inactive population, are some of the factors that lead the economy to show weak growth.
In that context, he observes that the measures adopted are monetarist, underlining the decision of the monetary authority to “establish a fixed rate of exchange, in an effort to cushion a “soft landing” for the economy in 2024. The measure of anchoring the exchange rate is just one element and only slightly contributes to the objective proposed by the BCN,” he argued.
Orozco’s initial impression that this decision is nothing more than “a modest control of monetary precaution in the face of the growing inflation and the effect of the remittances on the exchange rate.” It generates a small appreciation of more or less 0.2% in the cordoba, because the quantity of dollars in the economy (largely as a result of the family remittances) would tend to lower the value of the cordoba and make imports more expensive than they are with the global inflation.
Maintain a fixed exchange value, or devalue
An economist living outside Nicaragua, who also asked to withhold his name, believes: “the problem doesn’t lie in not allowing the value of the cordoba to float, it’s how to confront external shocks that translate into price changes in what the country exports and imports. The remittances help greatly with this, and that’s why expelling the work force out to other countries is a business,” he detailed.
Juan Sebastian Chamorro also identifies that problem, when he recalls that the fixed rate of exchange is arbitrary and defined at a specific amount – in this case, 36.6243 cordobas to the dollar.
“The government commits itself to maintaining that number for a determined time, although it’s not obligated to do so. That’s precisely the uncertainty that this can generate,” he explained.
Clearly, the problem that could arise is that conditions change and there’s a problem in the influx of foreign currency into the Nicaraguan economy. In this case, the government could have difficulties sustaining such a fixed exchange rate and would have to devalue, as occurred with Somoza in April 1979, when the number of cordobas to the dollardropped from an exchange rate of seven to one that had remained inalterable for 32 years, to ten to one, “because the economy by then resented the weight of the war, the insurrection, and the reduction in reserves during Somoza’s last year,” he recalled.
Establishing this type of fixed exchange rate, while it does bring a certain level of stability by promising to establish a clear fixed value for the US dollar, has the problem of being “an arbitrary figure that the government and the central banks find themselves forced to maintain, as long as they can sustain it. And if they can’t sustain it, they have to devalue,” he reiterated.
Chamorro stated that at this time he doesn’t see any conditions that would lead him to think about a devaluation, because Nicaragua’s international reserves are at a very high point, thanks to the growth in remittances received, “but that doesn’t discount the possibility that sometime in the future there could be changes in the monetary and financial situation, that could lead to that option,” he cautioned.