Chapter 2 – Economy of Nicaragua
2.5. Inflation Rate
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1900s when several initiatives, such as a railway or waterway that connect the Atlantic with the Pacific, have been suggested in Nicaragua. However, due to the Chinese stock market crash in 2015, Wang‘s initial wealth of US$10.2 billion has dropped to US$1.1 billion, and could not help finance the US$50 billion Nicaragua Canal megaproject.57 On June 14, 2019, six years after granting concession to the Chinese businessman to build the canal, in accordance with the clause 15.2 in Law 840 states that ―given the impossibility of achieving the financial closure of the project within seventy-two months (six years), the Government or the corresponding sponsor will have the right to terminate the concession for such project‖.58 In addition, according to multiple media sources,59 the HKND Group has abandoned the project, which is reflected on its lack of publicity surrounding the topic when asked by Bloomberg and its unreachable website.
2.5. Inflation Rate
In response to the inflation rate, it was kept relatively high and unstable under Ortega administration. According to the IMF data, the inflation annual rate since he took office in 2007 rose from 11.1 percent to 19.8 percent in 2008 (see table 11) due to the economic challenges encountered after the natural disaster caused by a Category 5 hurricane. Following was the global financial crisis in 2009, where it managed to reduce it to 3.7 percent thanks to the implementation of fiscal discipline under the IMF supervision, but then increased to 5.5 percent in 2010.
57 $50bn Nicaragua canal postponed as Chinese tycoon's fortunes falter. November 27, 2015. Retrieved in March 2018. https://www.theguardian.com/world/2015/nov/27/nicaragua-canal-postponed-chinese-tycoon
58 Canal law meets deadline to be repealed. June 14, 2019. Retrieved in February 2020.
https://www.elnuevodiario.com.ni/nacionales/494398-canal-interoceanico-nicaragua-ley-hknd/
59 Nicaragua‘s Chinese-Financed Canal Project Still in Limbo. August 20, 2019. Retrieved in February 2020.
https://thediplomat.com/2019/08/nicaraguas-chinese-financed-canal-project-still-in-limbo/
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In 2011 during his preparation for the next presidential election, inflation rate rose to 8.1 percent. The inflation rate would later reduce from 7.2 to 7.1 percent in 2012 and 2013, respectively, throughout his third term, and was kept under 6 percent for 2014 and 2015 (see table 11).
Table 11. Inflation rate and consumer price (annual change)
Year Inflation rate (%) Consumer Price60
Total Index Change ratio %
2007 (second term) 11.1 % 106.1 16.9
2008 19.8 % 127.2 13.8
2009 3.7 % 131.9 0.9
2010 5.5 % 139.1 9.2
2011 8.1 % 150.3 8.0
2012 (third term) 7.2 % 161.1 6.6
2013 7.1 % 172.6 5.7
2014 6.0 % 183.0 6.5
2015 4.0 % 190.3 3.1
2016 3.5 % 197.0 3.1
2017 (fourth term) 3.9 % 204.6 5.7
2018 4.9 % 214.8 3.9
2019 5.4 % 226.3 6.13
Source: Inflation rate from IMF; Consumer Price from BCN.
Available at: https://www.imf.org/external/datamapper/PCPIPCH@WEO/OEMDC/ADVEC/
WEOWORLD/NIC ; https://www.bcn.gob.ni/estadisticas/precios/IPC/2-1-06.htm
60 Base indices with reference to 2006 = 100 in accordance with the data from the BCN.
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However, the inflation rates started rising a little from 3.5 percent to 3.9 percent in 2016 to 2017, a recurring trend every time President Ortega prepares for the presidential election. The inflation rates for 2018 and 2019 have risen to about 5 percent due to the massive protests across the nation against the Ortega regime that caused the withdrawal of many foreign investments, which are expected to rise amid the coronavirus pandemic in 2020.
According to the Central Bank of Nicaragua, the consumer price index rose from 214.8 in 2018 to 226.3 in 2019, corresponding to the inflation rate increasing by 5.4 percent. The consumer price index is one of the main indicators of measuring inflation. It measures the average change of prices paid for goods and services by consumers over time, representing that the higher it is the more consumers pay. In relations to the inflation rate, a more than 3 percent indicates rise in prices for goods and services, and more than 5 percent indicates a more serious inflation. When prices increase, the currency purchasing power decreases. When the CPI increases, prices of goods and services become higher, this is specifically reflected on the rising inflation. It is recommended to evaluate the investment options, and vice versa.
As of the end of 2019, the BCN calculated an increase of inflation rate to 6.13 percent,61 marking its highest inflation rate yet seen in five years. Nicaragua and its finance heavily depend on donations and foreign aid from developed countries. According to official estimates, Nicaragua received donations from developed countries of approximately US$111 million in 2013, accounting for about 5 percent of the government‘s annual revenue. Therefore, if economic assistance from developing countries were reduced, it will most likely increase the risks of the government's medium-term fiscal plan, interrupting the efforts for the economic and social programs, such as the poverty and hunger reduction program in Nicaragua.
61 As of the late 2019, BCN estimated an increased inflation rate to 6.13%. Retrieved May 2020.
https://www.laprensa.com.ni/2020/01/21/economia/2631879-bcn-revela-que-nicaragua-finalizo-el-2019-con-un a-inflacion-6-13-la-mas-alta-en-cinco-anos
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On April 18, 2018, the Nicaraguan socio-economic crisis broke out, and people took it out on the streets to protest against the social security reforms regarding the 5 percent reduction to pension benefits, the land expropriations for the Nicaragua Canal under Law 840, or the
―Special Law for the Development of Nicaraguan Infrastructure and Transport in respect of the Canal, Free Trade Zones and Associated Infrastructures‖, plus many other injustices under his administration. The economy of Nicaragua was seriously affected by the unprecedented amount of violence acted upon the government forces under Ortega against the mass political demonstrations against his regime that resulted into ―300 dead, over 2,000 injured, and hundreds arbitrarily arrested and prosecuted,‖62 mostly comprising of students and young people. The act is considered to be the deadliest domestic conflict to date since the nearly three decades of war that ended in 1990.63 The overall economy turned from being the highest and most productive in respect to its annual GDP growth when compared to its neighboring countries to becoming the lowest in Central America. Among the three major international credit rating agencies in the world, Fitch Ratings and Standard & Poor's credit rating for Nicaragua has been downgraded from ―B+‖ before the crisis, down two positions to ―B-‖, and the outlook has been downgraded from ―stable‖ to ―negative‖.64 Moody's rating downgraded Nicaragua from ―B2‖ to ―B3‖ in February 2020, but the outlook was upgraded from ―negative‖
to ―stable‖ with the rationale that the credit profile remain balanced amid the financial shock due to the social unrest in Nicaragua.
According to the Doing Business report published by the World Bank in October 2018,
62 World Report 2019: Rights Trends in Nicaragua. Human Rights Watch, 17 Jan. 2019, www.hrw.org/world-report/2019/country-chapters/nicaragua.
63 As Nicaragua Death Toll Grows, Support for Ortega Slips. The New York Times. Retrieved on March 2020, www.nytimes.com/2018/05/04/world/americas/nicaragua-protests-ortega.html
64 Nicaragua - Credit Rating. Trading Economics. Retrieved on May 2020, https://tradingeconomics.com/nicara gua/rating