The Central Bank of Nicaragua (BCN) notified commercial banks this week of the suspension of the mechanism to purchase dollars online. As of this Monday, they will have to request the purchase of dollars in writing, 48 hours in advance, stating the amount, objective and the persons involved in the transaction.
Sources linked to four banking institutions confirmed to Confidencial the change in the rules in the currency market. But, they excuse themselves from showing an official document from the Central Bank, because until now it is non-existent: “We have nothing in writing, we were only notified through a telephone call,” they stated.
Three independent economists consulted by Confidencial, indicated that the new measure that would have been dictated by the President of the Board of Directors of the BCN, Ovidio Reyes, can be considered some sort of financial “pre-corralito” (alludes to the restrictions imposed by the measure).
What is understood by “financial corralito”, the decision not to give all their dollars to customers who have their deposits in that currency, and offer them “cordobas” in exchange.
That type of measure means a great risk of devaluation of the cordoba, if citizens fearful of the devaluation run to purchase dollars, which would raise the price of that currency.
Customers who have their deposits in dollars are offered “cordobas” in exchange.
“This is a de facto “financial corralito”, it is an attempt (by the Central Bank) to initiate controls” over the withdrawal of dollars. But, it can be extended to control the accounts of individuals, warned Nestor Avendano, President of Consultants for Entrepreneurial Development (Copades), when interviewed on the television program “Esta Semana” (This Week) broadcasted on Sunday evening by Channel 12 TV.
Until a week ago, the purchase of dollars was done by the Automated Clearing House, with each bank buying online the amount of dollars required, and paying in the same way to the Central Bank.
It is not always necessary to send an armored truck to collect the cash. Partly, because bank customers do some transactions online, so those resources are “moved” virtually. In the case of purchases and sales made in cash, what banks do is to deduct from the amounts purchased from the BCN, from payments and deposits, to the Central Bank itself.
The decision by the BCN “changes the panorama because when there is a currency exchange desk, you only present your request, the Central bank would give you a price, and you buy or not. Everything changes with this administrative mechanism,” says economist Erwin Kruger, former member of the Board of Directors of the BCN, at the beginning of the 1990s.
The orderly modifications mean that “convertibility is no longer free. Now it is regulated.” It is a control over the purchase and export of currencies, which for now “only affects the banks, but not yet individuals,” added Kruger.
Dollars, for whom?
Like several of his colleagues interviewed, the economist Erwin Kruger believes that the message that emerges from this decision of the BCN is “of concern. This will drop like a bomb within the private sector, because now there is a control for transferring dollars,” he said.
However, a private banker said that the new mechanism does not imply that the BCN will control the sale of foreign currency, but that from now on, they will have to inform of any movements 48 hours in advance.
When we asked if the BCN could deny an application, or decide on another discretional form, the banker alleged “that is not possible. They should limit themselves to comply with the purchase requirements they receive, but you better ask the Central Bank, since it is up to them to explain their new regulation,” he suggested.
The Central Bank did not respond to our request for information and neither did it publish anything on its official webpage on this new “regulation” via phone call.
The economist Nestor Avendano questions the decision by the BCN, which in any case should be the result of a resolution by the Board of Directors of the institution, due to the negative impact it will have in generating uncertainty among economic actors.
“This is an extension of what we have been saying for months: trust must be created, but such a trust does not exist. We must restore confidence, or at least stop the level of deterioration of the distrust existing between the non-banking public and banks,” criticizes Avendano.
In September, the flight of dollars deposited in the commercial banks was in the order of US$187.7 million, with which “the deposits in foreign currency accumulated a fall of 971.1 million between April 12th, date in which its maximum of US$4,115.0 million was registered and September 30th,” added the economist.
The seriousness of the problem is manifested in a more diaphanous way, if withdrawals in foreign currency are added (dollarized) to the withdrawals in cordobas, it totals US$1.303 billion dollars that left the banks vaults to never return.
“This could lead us not only to a “corralito”, but to an expansion of the gap between the official exchange rate” and that of the banks. “It could lead us to a de facto devaluation in the financial market,” repeated Avendano.
Reserves continue to fall
The exit of deposits in dollars explains the fall of reserves, a fact about which there is no accurate information, after the BCN stopped publishing statistics. “From my experience as a macroeconomist, I can easily say that the fall in reserves in September was greater than the exit of deposits from the national financial system,” Avendano said.
“If as of August 31st there was a balance of gross international reserves of US$2.447 billion, I believe that at the end of September this balance would fluctuate between US$2.1 and $2.2 billion, due to the outflow of deposits and the payment of the external public debt,” he explained.
The economist Roger Arteaga, former Director of Revenues, said that he did not know the news, but considers that if it were true, the message that would be sent to economic agents (national and foreign) is that it is not safe to invest in Nicaragua.
It stops being safe, “because of the risk of devaluation that this implies when questioning economic freedoms. The one that is outside will not come to invest here, and the national is looking where his savings will be safe,” he expressed.
Speaking of distrust, another economist who requested to not reveal his identity, pointed out that “this measure will cause more panic because it tends to scare people so they do not ask for their money in dollars (so they will take it in cordobas). It is intended to restrict the exit of foreign currency, but that only creates panic.”
This economist admits that “it is not yet a control of currency. It is only a request, but the BCN will decide to whom to say yes, and if there is panic and the exit of reserves is accelerated, it will have to answer most of the time with no. When dollars are scarce, the reaction is to devaluate or establishing an exchange control in which the authorities determine what the priorities are, and to whom they are assigned,” he explained.
“It would no longer be the market that will decide what to do with the dollars circulating in the national economy, but it will be done by a bureaucrat, citing criteria that there are dollars only to buy medicine, and only for supplies of great importance,” he added.
In the same line, economist Alejandro Arauz says that the trend of imports shows that in the country will come the time when you have to choose for what kind of imports will dollars be given.
Very few options
The economists Arauz and Arteaga state that having to announce 48 hours in advance the need to buy foreign currency, and having to justify how it will be used, are symptoms of a serious lack of foreign currency.
“The BCN wants to have stricter controls,” in a scenario in which “the numbers go down, with the economy falling and exports that do not increase, plus the payment obligations the country has,” which represents a decrease of reserves in foreign currency, and obliges the BCN to “have a stricter control over the few dollars remaining,” stated Arauz.
“In a crisis situation, it is logical for any authority to think on such a decision. All the previous measures have been to stop the fall of deposits in dollars. If those measures have already been taken, logically, you can think that they are looking for new mechanisms to prevent the fall of deposits and the probable flight of capitals,” assured Arteaga.
That control—which Arauz also does not hesitate to call a “pre-corralito”—is inevitable, because if everything stays the same the country will run out of dollars, so the BCN must do this to back up the deposits and maintain the reserves. It is not a measure out of this world: it is something imposed by reality,” he affirmed.
“There will be free convertibility, but controlled by the BCN. Maybe they will have to restrict imports by taking out cordobas from the economy, but in that case consumption falls, so the market adjusts. Everything is getting worse because the government has not been able to get liquid resources to back up international reserves, its debt payment obligations, its commitments in dollars, and the payment of imports,” details Arauz.
“The Central Bank made another mistake by giving this warning, beginning in that it was done in an informal manner,” questions Avendano, recalling other decisions of the Central Bank—such as the attempt to break bank secrecy or the notice that the monthly exchange rate will be modified—that accelerated the withdrawal of deposits from banks.
“This must be supported by a resolution of the Board of Directors of the Central Bank. It is not anyone who is going to ask for a request in writing, 48 hours in advance, indicating the amount to be purchased and why. That undermines the Central Bank Law itself, which indicates that it must be done formally, such as a resolution of the Board of Directors,” specified Avendano.