Nicaraguan government pulls back attacks against microfinance institutions
Nicaraguan president Daniel Ortega’s first year in office (2007) did not bring any significant changes to the way the Nicaraguan economy operates, but his second year showed a surprising and poorly calculated attempt to force changes. Now, as Ortega starts his third year, it seems that the government’s strategy is to try to calm the waters after the storms they generated, which severely damaged the economic prospects of the country, which were already hurt by the current global economic crisis.
In fact, during 2008, the Nicaraguan government wrongly believed that because they had started to receive very generous support from the Venezuelan government, the time to make a radical change in the economy had arrived. However, the severe decline in the international oil prices at the end of last year suddenly dried up the generosity of the Venezuelan government.
There were three fundamental areas where the government tried to force changes. First, Ortega’s administration wrongly believed that it had enough funding free from any political control by the National Assembly to create a parallel national budget. Second, Ortega’s administration believed that the flow of money from Venezuela would allow a definitive shift from the dependence of resources donated by European countries and the United States, and of the attached conditions. Third, Ortega’s government believed that because they had cash available to fund some below-market credit programs they would be able to force a radical change in the credit markets by encouraging protest against microfinance institutions as a way to reduce interest rates. In this article, I want to elaborate on this last point, as it is closely related to WCCN’s work in Nicaragua.
The frustrated attempt to change credit markets through violence
As we reported in our fall 2008 edition of our former newsletter Nicaraguan Developments, there were some mobilizations last summer against microfinance organizations in the northern municipalities of Ocotal, Jalapa, and to a lesser extent, in Estelí. From day one, it was clear that the mobilization was politically motivated and completely orchestrated by the ruling Sandinista party. In Ocotal, some of the protests ended in violence once the riot police tried to remove the protestors blockading the entrance of Fundenuse, one of WCCN’s partner agencies.
Since protests against the microfinance industry had never happened in Nicaragua, ASOMIF, the umbrella organization of the main microfinance institutions, decided to conduct a survey in the most affected areas in the north of the country. As a result, an independent polling firm (M&R Consultants) was hired to conduct surveys in Ocotal, Jalapa and Estelí. The purpose of the survey was to have a more detailed understanding of the public perception of microfinance institutions and the protests against them in those three municipalities. A total of 606 people were surveyed; 31% of the respondents were current borrowers of microfinance institutions and 69% were not. However, most of them (78.1%) have received loans in the last five years, mostly from microfinance institutions (80.5%) and to a lesser extent from banks (16.5%).
Francisco Javier Perez Padilla and his wife serve a young customer through the window of their corner store. They are borrowers from PRESTANIC, one of WCCN’s partner agencies in Nicaragua. Photo by Mark Aumann.
There were two main findings from the poll. The first one is that microfinance institutions are a very important component of the economic life in three municipalities that were included in the survey. When people were asked how important it was to have access to credit and other financial services through a microfinance institution, the responses were overwhelmingly positive: 91.6% in Jalapa, 85.4% in Ocotal and 93.8% in Estelí (Table No.1). When the respondents were asked if they were aware that microfinance institutions provided funding to small and micro entrepreneurs without access to banks, 86.8% of the respondents in Jalapa strongly agreed or agreed, 81.1% in Ocotal, and 93.8% in Estelí.
A second main finding is that the three municipalities were impacted differently by the protests. Jalapa was the most affected according to the people surveyed there (70.1%), followed by Ocotal (60.2%) and Estelí (22.3%). However, there was a sizable number of people surveyed in Ocotal that seemed to have a negative perception or resentment against microfinance institutions. In fact, 20.1% of the respondents in Ocotal answered that they approved of the protests, in comparison to 12.9% in Estelí, and 11.8% in Jalapa (Table No. 2). This is an issue that should be taken seriously by microfinance organizations operating in Ocotal, because it seems that something needs to be changed in the way they are operating in that community. However, it is also important to highlight that at the same time Ocotal was the municipality that had the highest rate of disapproval for the protests, with 66.9%, and the lowest rate of people indifferent about the situation, with 11.5%. This could be explained by the fact that Ocotal suffered the most dramatic episodes of violence during the protests, so people might have stronger opinions and could have taken sides in favor or against the protestors.
Last January, at the time of our study tour of Nicaragua, the movement against microfinance institutions suddenly reappeared. They were more aggressive that ever, and had the idea of shutting down the entire financial system. However, the protestors did not expect that the government was no longer interested in supporting them. This change was due mainly to the fact that President Ortega’s economic team strongly advised against continuing to create instability in the credit markets. In fact, last year’s protests resulted in some funding sources for the microfinance industry to stop lending in Nicaragua, so the cost of capital went up. To make things worse, the unresolved allegations of fraud during the municipal elections last November resulted in the freeze of needed donations from several countries from the European Union. Those donations every year allow the Nicaraguan government to balance the budget. The same happened with the Millenium Challenge Account from the United States. Additionally, the global economic crisis created new challenges that needed to be seriously addressed. As Mark Aumann writes in his article, our delegation was trapped in the middle of the road blockade for approximately three hours. We were finally able to turn around and return to Managua, as the riot police arrived to remove the protestors from the road. Several days later President Ortega publicly rejected the protests against microfinance institutions and stated that the times of not paying debts were over in Nicaragua.
On February 8, 2009, representatives from the regulated and non-regulated microfinance industry met with Bayardo Arce, the most important economic advisor to President Ortega, and Antenor Rosales, the President of the Central Bank, perhaps the most independent figure in the current administration. According to Bayardo Arce, “we are going to work on an agreement between the government and the microfinance sector to unite and defend the economic growth during 2009.” As a result, representatives from the government and the microfinance industry agreed to work together with the aim of creating a climate that would allow that external funding to continue arriving to the microfinance industry in Nicaragua and be channeled mainly to the agriculture and livestock sector. A formal agreement was signed on February 26.
This is the first time that the Ortega administration has seriously reached out to the microfinance industry and shown interest in opening channels of communication and collaboration. There is little doubt that this is the right thing to do. Soon the government will learn that there is an enormous potential in this partnership. However, only time will show us if we are witnessing the beginning of a long term engagement, or only an ephemeral effort to escape from the current turbulent economic times.
By Carlos Arenas
WCCN Executive Director