Banking

Prior to 1979, Nicaragua's banking system consisted of the Central Bank of Nicaragua and several domestic- and foreign-owned commercial banks. One of the first acts of the Sandinista government in 1979 was to nationalize the domestic banks. Foreign banks were allowed to continue their operations but could no longer accept local deposits. In 1985 a new degree loosened state control of the banking system by allowing the establishment of privately owned local exchange houses.

In 1990 the National Assembly passed legislation permitting private banks to resume operations. In 1992 the largest stateowned commercial bank was the National Development Bank (Banco Nacional de Desarrollo--BND), originally established by Chase National Bank. Other state-owned commercial banks were the Bank of America (Banco de América--Bamer) and the Nicaraguan Bank of Industry and Commerce (Banco Nicaragüense de Industria y Comercio--Banic). The People's Bank (Banco Popular) specialized in business loans, and the Real Estate Bank (Banco Inmobilario-- Bin) provided loans for housing. Three foreign banks continued operations: Bank of America, Citibank, and Lloyds Bank.

The Inter-American Development Bank (IDB) was instrumental in restructuring Nicaragua's technically bankrupt banking sector. In December 1991, the IDB approved a US$3 million technical cooperation grant to restructure the Central Bank, and in March 1992, it approved a US$3 million loan to a new commercial bank, the Mercantile Bank (Banco Mercantil). The Mercantile Bank program was expected to make loans available to small- and medium-sized private-sector enterprises and to finance investments to bolster fixed assets and create permanent working capital. The Mercantile Bank was the first private bank to be established in Nicaragua since 1979. Three additional new commercial banks were scheduled to open in 1992.

Restructuring of the National Financial System (Sistema Financiero Nacional--SFN) was one of the key elements of the government's economic reform program. According to an agreement between President Chamorro and the World Bank, Banic was to be merged with Bin. The BND would handle only rural credit operations, and the People's Bank was to take over all credit operations for small- and medium-sized industry. International operations, which had been managed exclusively by the Central Bank since 1984, were transferred to the BND and Banic. The Central Bank would continue to handle operations pertaining to the central government, while the newly merged banks would be responsible for letters of credit, imports, transfers, and dollar checking accounts.

The Central Bank also auctioned off one of the government's largest exchange houses. This exchange house had been established in 1988 under the direction of the Financial Corporation of Nicaragua (Corporación Financiera de Nicaragua--Corfin). In 1989 the Central Bank authorized the exchange house to operate a foreign money exchange office as an agent of the bank. In May 1991, Corfin voted to turn over its shares in the exchange house to the Central Bank so that the exchange house could be sold.

Opponents charged that this sale was unconstitutional. They argued that the exchange house was the property of the Central Bank and could not be transferred. The Federation of Bank Workers also charged that the new government banking policy was weakening the state bank while giving the advantage to the private banks.

Currency

From 1912 to 1988, the córdoba was the basic unit of currency. Relatively stable during most of that period, the value of the córdoba was pegged to the United States dollar. One of the last economic decisions by the Somoza administration was a devaluation in April 1979 of the córdoba from US$1 = 7C$ to US$1 = 10C$, a value it held until 1985.

In 1985 mounting economic problems, especially the imposition of the trade embargo by the United States, forced the Ortega administration to opt for a multitiered exchange rate, with one rate for petroleum imports, one for agricultural goods, one for capital goods, and another used at government exchange houses. Amid this confusion, a black market sprang up offering significantly more córdobas per dollar than any of the official government rates. As inflation increased from 1985 through 1988, the value of the córdoba plummeted, and by mid-1988 the government exchange houses offered US$1 = C$20,000, while a United States dollar on the black market fetched 60,000 córdobas.

To curb hyperinflation, the government introduced its economic shock program in February 1988. Currency stabilization was an integral part of this package, and a new currency, the new córdoba, was introduced. Each new córdoba equaled 1,000 old córdobas, and the new currency's exchange rate was set at US$1 = 10 new córdobas. By the end of 1988, however, the rate at government exchange houses had dropped to US$1 = 920 new córdobas.

Devaluation accelerated in 1989 and 1990. Immediately after the 1990 elections, the currency lost four-fifths of its value. By the end of 1990, it took 3.2 million new córdobas to buy a United States dollar on the black market. The government was unable to print money in large enough denominations to make simple transactions convenient.

To help control inflation, the Chamorro government introduced a third currency, the gold córdoba, in mid-1990. At first used only as an accounting device, this new currency was introduced gradually to the general populace, and for six months both currencies were legal tender, with a conversion rate of 5 million new córdobas to one gold córdoba. After April 31, 1991, the gold córdoba became the sole legal currency and was pegged to the United States dollar at a rate of US$1 = 5 gold córdobas, a rate it maintained throughout 1992. By July 1993, the exchange rate had slipped only slightly, to US$1 = 6.15 gold córdobas.

Inflation

In the first half of the 1980s, the annual inflation rate averaged 30 percent. After the United States imposed a trade embargo in 1985, Nicaragua's inflation rate rose dramatically. The 1985 annual rate of 220 percent tripled the following year and skyrocketed to more than 14,000 percent in 1988, the highest rate for any country in the Western Hemisphere in that year. An economic austerity plan introduced in late 1988 caused the 1989 figure to drop somewhat, but inflation jumped again in 1990 to more than 12,000 percent. President Chamorro's economic plan and the resumption of trade with the United States had a positive effect on the country's inflation. Despite the abandonment of many of the points of the economic plan, the annual inflation rate dropped to 400 percent in 1991, and was estimated to be only 10 percent in 1992.

Tax Reform

The Chamorro government instituted tax reform in July 1990. New measures included lower tariff rates, lower income tax, and payment of tax in gold córdobas. The reform reduced top tariff rates from 61 percent to 20 percent and top income tax from 60 percent to 38.5 percent. Collection of tax may have increased because of reduced evasion, but tax revenues, reported to be 23.5 percent of GDP in 1989, fell to only 15 percent by 1990.

To encourage investment, the government eliminated a 2 percent export tax on coffee and cotton and lowered the general sales tax from 15 percent to 10 percent. The government also granted tax incentives for exporters of nontraditional products under a new export-promotion act. Like previous governments, the Chamorro administration announced it would extend preferential long-term credit for agro-industrial development.

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Source: U.S. Library of Congress