Military Mission in Bank Vault : Sandinista ‘Sting’ Aimed at Cooling Off Inflation

With Nicaragua’s currency in its last throes of death by inflation, word passed through the state-run banking system: 35 workers were needed for an undisclosed military mission.

Wearing army fatigues and backpacks, the volunteers reported for duty in early February. But instead of the jungle, they wound up in a vault deep inside the central bank, counting millions of new cordoba notes worth 1,000 times the old denominations.

Before the new cordoba was unveiled on Valentine’s Day, another 60,000 government workers were mobilized for training as cashiers and supervisors for the national currency swap--and sequestered to keep it a secret.

“I kissed my wife and three children thinking I was going off to combat,” said Ricardo Mojica Martinez, a Finance Ministry tax accountant. “In reality, it was combat. We took the enemies of the revolution by surprise.”

And so began the Sandinistas’ most jarring assault on inflation in their eight years in power. Because it is being conducted in wartime, the effort faces long odds and often borders on guerrilla conflict.

Consumer prices rose 1,800% in 1987 and were soaring in recent months at a five-digit annual rate. Turning some of its energy from the 6-year-old war against the Contras, the Sandinista government is now struggling to defend the new cordoba with a desperate mix of monetarism, stealth, consumer activism and paramilitary force.

The secrecy surrounding the new cordoba’s debut was aimed at reducing the hyper-inflated money supply at the expense of the Contras and unlicensed market vendors--those the Sandinistas blame most for the old cordoba’s collapse. One pro-government newspaper likened it to a “sting” operation.

For three days after the swap was announced, old cordobas were accepted for new ones at the rate of 1,000 to 1. Then the old notes became worthless. The new cordoba was pegged at 10 to the dollar, new wages were decreed and new prices set for hundreds of goods and services.

Under government rules, nobody could exchange more than 10 million old cordobas (about $200 at the old black market rate) without explaining how he or she got the money. Many merchants had more than that and chose to take the loss.

The Contras used to take the old cordobas out of Nicaragua, tie them in 80-pound bundles of 9 million cordobas each and parachute them back inside the country to their troops in the field. Those rebels then hauled the money on mules to buy food from farmers. While the three-day swap deadline made it impractical for the rebels to exchange this money, the currency reform has lightened their load.

Nicaraguan President Daniel Ortega announced that 116 billion old cordobas--11.4% of the currency in circulation--were not traded in. He asserted that this sum was lost by “counterrevolutionaries and speculators.”

Rebel forces claim to have recovered 10 million new cordobas by shooting down an army helicopter flying new bills to a provincial exchange house. Government officials did list seven Sandinista crewmen as dead but attributed the crash to mechanical failure.

The currency reform is the Sandinistas’ biggest test on the economic front since they came to power in the wake of a popular insurrection against President Anastasio Somoza in 1979. The cordoba they inherited at that time slid in value from 10 cordobas to $1 to 50,000 to $1 at the time the government performed euthanasia on it.

Some critics say the paramilitary style of the currency swap--code-named Martyrs of Quilali, for the victims of a Contra mine explosion--shows that the Sandinistas are still clever guerrillas but misguided economists.

“The way to fight inflation is to produce more goods,” said Enrique Bolanos, president of Nicaragua’s largest businessmen’s federation. “But since there is no production, what they have done is take money from the people.”

The one-time cut in the money supply is supposed to dampen inflation in the short run, allowing time for “shock” measures accompanying the new currency to take hold and make the economy more efficient. The plan was executed using fresh bills secretly imported from East Germany and unpublicized guidance from the International Monetary Fund.

Ortega ordered all government agencies to trim expenses by 10% and combined several of them into a single economy ministry under Luis Carrion, one of the nine top Sandinista comandantes.

In the sharpest deviation from socialist central planning, the Sandinistas decontrolled prices for imports and exports. Favored producers and Sandinista militants lost precious import subsidies, a mainstay of the centrally planned economy that had grossly distorted prices.

It used to be possible for an army captain or major, for example, to buy a $5,000 Soviet Lada for the equivalent of a mere $7, and it was cheaper to import a new tractor than to repair an old one. Gasoline sold for 10 cents a gallon. Such waste drained the treasury and fueled inflation.

“These measures will not bring more buses, tires, tractors or fertilizer,” said Vice President Sergio Ramirez. “But they will help us produce. They will create incentives.”

More than anything else, the measures seem to have created confusion, skepticism and economic disruption. Hundreds of farms and factories have suddenly been rendered unprofitable by the end of import subsidies. Strikes have shut down construction projects, auto repair shops and restaurants.

Most capital imports are now 147 times more expensive than before, and wages are 5 times higher. Yet government-controlled consumer prices are double to triple what they used to be and thus appear unsustainable. So does the official exchange rate, which is already being undermined by black market rates of 50 to 60 cordobas for $1.

“The Sandinistas have managed to create a capitalist economy in the worst sense of the word,” said Roger Cerda, head of a private company that makes plastic bags. “The new numbers are unworkable. It’s more of a jungle than ever out there, and you need a guerrilla mentality to survive.”

Many private economists predict that the new currency will be no more stable than the old one as long as the war goes on and deficit spending for defense continues to fuel inflation.

In a sidewalk poll of 16 Managua residents lined up at exchange houses, 11 said they expect harder times ahead. Two expressed faith in the new currency and three expressed uncertainty.

“The idea sounds marvelous, but like everything else the Sandinistas try, it will probably end up a nightmare,” said Carlos Mendez, a 36-year-old bus driver. “The only good thing is, we will not have to carry these bills around in a sack or the trunk of a car.”

The real test of confidence in the new cordoba will come in May when farmers must plant. An elusive goal for the revolutionary leaders of this agrarian nation is to deliver cheap food at stable prices to urban workers.

Many farmers were dismayed by the new prices, which reversed a trend toward free-market agriculture and in some cases fail to cover production costs. Officials admit having set some prices arbitrarily because the need for secrecy about the new currency kept them from consulting producers.

For now, food prices are being determined by clandestine warfare in the city markets, where new controls on beans, rice, soap, sugar and cooking oil met immediate defiance.

On one side are unlicensed vendors who pay producers or distributors more than official prices to dodge the corrupt state marketing system. For years, police and internal commerce agents have tried to shut them down.

Lately, the authorities have been mobilizing party militants from Sandinista unions and neighborhood defense committees to stage consumer boycotts of overpriced goods and help to police the markets.

Claudia Maltez, a neighborhood activist in Managua, explained that when a shopkeeper refuses to sell at official prices because he would lose money, “the people tell him: ‘Open your store, or else we will open it for you.’ ”

In one of the largest raids in years, 476 police officers and about 300 civilians swept through Managua’s Eastern Market before dawn Feb. 20 and emptied warehouses said to supply 3,000 illegal merchants. Armed with sticks, stones, machetes and a few rifles, they made at least 60 arrests.

In a speech that day, Ortega warned that a national security law, providing for prison terms of one to four years, will be enforced against vendors repeatedly caught violating price controls. Police have confiscated more than 30 taxis and trucks from drivers caught charging more than the legal fares for their services.

But the police measures seem only to make food scarcer. Rice that had sold for 12 cordobas a pound, triple the official price, vanished from the Eastern Market after the raid. Because rice growers need 7 cordobas a pound to break even on a harvest, the only rice sold legally there is rough grain left after sifting that commonly is used for chicken feed.

Having set unrealistic prices, the government has opened talks with farm groups demanding new ones. Already, 12,000 cattlemen have won a subsidy in the form of debt relief. After first declaring an end to all subsidies, Ortega announced that 55% of the profits from tourist hotels and other dollar-earning ventures of the state will go to hold down food prices.

These profits are thought to be a major source of wealth for top Sandinista officials. Their partial diversion to food subsidies, along with the end of special import privileges, indicate that austerity has hit the ruling elite.

Perhaps aware that old rules were soon to expire, a parade of army officers and other shoppers in official cars rolled into the Managua Commercial Center in the days before the currency swap to dump their old cordobas. They drove away with television sets, refrigerators and imported clothing.

“They bought everything,” said a shopkeeper who registered $16,000 in sales one day. “It was like Christmas.”