Why Is CABEI Funding Nicaragua’s Dictatorship and What Can the United States Do about It?
Despite efforts to pressure the Ortega-Murillo regime to open political space and end its repression, Nicaragua suffers under continued crackdowns. Through several significant pieces of legislation, the United States has attempted to limit loans from multilateral banks to Nicaragua for Ortega’s abysmal human rights record; however, the Ortega-Murillo regime continues to receive funding from multilateral financial institutions. One organization stands out above all as a principal source of financing for the regime: the Central American Bank for Economic Integration.
Q1: What is CABEI?
A1: The Central American Bank for Economic Integration (CABEI) is an international financial institution and development bank which focuses on economic development, principally in Central America. The bank was founded on December 13, 1960, as a part of the General Treaty on Central America Economic Integration. The treaty’s original signatories are El Salvador, Guatemala, Honduras, and Nicaragua. Costa Rica later acceded to the group in 1962. CABEI has since then expanded the scope of its operations and new regional and non-regional members have joined its ranks over time. Although CABEI initially became the “financial arm” for the development of Central America, it has expanded much of its operations to include some of the Caribbean, particularly in Cuba. According to their institutional vision, CABEI seeks “to become the sustainable development and economic integration reference of the region, and to effectively impact in the well-being of the society.” Among their investments and key areas of development, CABEI specifically aims to reduce poverty and gender inequality, strengthen regional integration, competitively insert its member countries into the global economy, and provide special attention to environmental sustainability. CABEI is currently headquartered in Tegucigalpa, Honduras.
CABEI offers its member countries a variety of financial instruments and methods of financing regional development. For public sector development, CABEI’s financing includes direct loans, cofinanced loans, credit lines for central banks, development operations, and technical cooperation. For private sector development, CABEI offers similar loan programs as with the public sector but includes structured loans, financial guarantees, and public-private partnerships. During its 50th anniversary in 2010, CABEI noted that it had invested over $14 billion in the region. Since then, CABEI’s investments and financing capacity has increased drastically. For example, as a part of their Comprehensive Sectoral Program for Water and Human Sanitation (PISASH) in Nicaragua, CABEI, with its partners, invested over $322 million throughout Phase 1 of the water treatment program across 19 cities resulting in over $571.73 million in total investments across five initiatives in the sector.
Q2: How extensive is CABEI’s financial network and who are its principal partners?
A2: The financial network of CABEI has grown considerably over the years, as has their funding. Beginning with just five founding countries by 1962, CABEI now boasts a total of 15 member states, some of whom are extra-regional and outside the Western Hemisphere. Of the non-regional member states, Taiwan and South Korea are the two largest shareholders in CABEI with a subscribed capital of $776.3 million and $630 million respectively. The large presence of Asian financers in Latin America continues to grow and CABEI is one of the principal institutions through which it is made possible. Although it does not encompass all of their financing in Latin America, Taiwan and South Korea’s shareholdings in CABEI are dwarfed by China, which has lent over $137 billion to Latin American governments between 2005–2020. China’s attempts to isolate Taiwan are likewise complicating relations between Central America and Taiwan as CABEI member states Nicaragua, Panama, and Dominican Republic have recognized China in the last five years and severed ties with Taiwan. While Taiwan’s relationship with Latin America has grown more precarious, CABEI’s ties with Taiwan remain strong as the bank recently opened a new regional office in Taipei.
There are also many nonmember and private financers of CABEI, further extending its financial network outside of its member states. On May 31, 2022, CABEI accepted a $50.4 million issuance from a private Japanese investor, and the bank approved a total of $3.34 billion in investments over the course of the past year. This is part of a larger trend of CABEI engaging in nonmember state public and private fundraising. CABEI has also seen a large degree of American financing, notably receiving $100 million from the U.S. International Development Finance Corporation (DFC), together with financial support from the U.S. Agency for International Development (USAID), to support lending to micro-, small-, and medium-sized enterprises. The bank receives funding from 23 different markets, in 24 different currencies, and across four continents. Overall, the United States singlehandedly contributes the most of any country, both from the private and public sector. Other international institutions, such as the International Finance Corporation (IFC), have also partnered with CABEI to facilitate financing the private sector in Central America as well as CABEI’s larger goals in the region.
Q3: How is CABEI funding the regime and why should CABEI cease doing so?
A3: The Ortega-Murillo regime in Nicaragua is a brutal dictatorship that the Interdisciplinary Group of Independent Experts, an expert group from the Organization of American States, says has committed crimes against humanity. Among other crimes, the regime has seized political offices held by opposition parties, increased the number of arbitrary arrests and detentions, intensified repression against journalists, and forced the closure of non-governmental organizations, including the Catholic Church. A traditional pillar of Nicaraguan society, the Catholic Church was one of the only institutions that had largely escaped the regime’s attempts at dictatorial control. Last year on August 19, the Bishop of Matagalpa, Rolando Álvarez, was arrested by Nicaraguan police for preaching against the crimes of the Ortega-Murillo regime.
In tandem with religious repression and brazen violations of human rights, the Ortega-Murillo regime is extremely corrupt. In 2021, Nicaragua was found to be one of the most highly corrupt states in the Western Hemisphere along with Venezuela and Haiti. Through bribery, cronyism, and political manipulation, the Ortega-Murillo regime is keeping an iron grip on power, enforced primarily through its tight control and corrupt funding of the police and military. More than 130 critics of the regime have been arbitrarily arrested by police and many face abusive detention conditions, in part because of police corruption. Particularly apparent amongst these arrests are journalists and other members of the media, many of whom are being harassed by the police or fleeing the country, if not being arrested.
Considering the dictatorial Ortega-Murillo regime’s repression of democracy and human rights, CABEI should cease all financing of Nicaraguan projects. While most bilateral and multilateral credit providers have suspended their operations with Nicaragua in the face of the regime’s brutality, CABEI still has dozens of procurement notices and plans for future development projects worth hundreds of millions of dollars. And despite having a population smaller than that of Guatemala and Honduras, Nicaragua has received nearly 26 percent of CABEI’s lending portfolio, illustrating the major financial standing of the country within CABEI. In fact, Nicaragua has received more funding than Guatemala and El Salvador combined. Such lending, estimated to amount to $3.5 billion over the past few years, is disproportionate compared to that of other Central American countries. For this reason, at a recent CSIS event, one panelist referred to the executive president of CABEI, Dante Mossi, as the “banker to dictators.”
Mossi has continued to direct the funding of projects in Nicaragua and has deepened ties with Ortega despite the growing international condemnation of the crimes of the regime. Mossi has also been criticized in the past for raising the salaries of staff by over 25 percent during a period when CABEI’s profits fell over $40 million. Among other examples, CABEI’s involvement in Nicaragua has resulted in financing the National Police, sanctioned by the United States for human rights abuses, and opening a new headquarters in Managua in March 2022, which cost CABEI nearly $20 million. This came one year after the vote to suspend the project by most regional and non-regional member countries in an effort to avoid legitimating Ortega’s regime. Moreover, CABEI’s generous funding of Latin American nations with corrupt authoritarian governments only exacerbates high levels of corruption and governance challenges.
The lack of transparency from CABEI about how their funds are managed and distributed sows doubt about their intentions and integrity. Nicaragua’s low credit rating of B- also threatens the financial standing of CABEI by investing in a financially untrustworthy state with one of the lowest rankings in Transparency International’s 2022 Corruption Perceptions Index. Notwithstanding, CABEI has not been shy about supporting financially risky endeavors, such as when the bank affirmed its support to El Salvador in its implementation of bitcoin as legal tender (which has resulted in tens of millions of losses and a downgrading of El Salvador’s credit ratings).
Q4: What are U.S. policy options against CABEI and its continued oxygenation of the Ortega-Murillo regime?
A4: Through significant legislation such as the Nicaraguan Investment Conditionality Act (NICA Act, 2017) and the Reinforcing Nicaragua’s Adherence to Conditions for Electoral Reform Act (RENACER Act, 2021), the United States has already attempted to restrict financing from multilaterals to Ortega’s regime where the United States has a presence on the board of directors. The NICA Act restricts access to loans from multilateral financial institutions such as the World Bank, the International Monetary Fund, and the Inter-American Development Bank, until the government commits to advance democracy and the rule of law, hold free and fair elections, and protect human rights. The resumption of loans can only take place once the Secretary of State has certified that progress toward democracy has been made. Because the NICA Act was not enforced to the fullest extent of the law in recent years, Members of Congress passed the RENACER Act and urged a tightening of oversight on loans and technical assistance to Nicaragua from multilateral financial institutions. RENACER also advances targeted sanctions and visa-blocking sanctions on individuals involved in corruption and obstruction of democracy.
Given the United States has no presence on CABEI’s board of directors and has no shareholders within CABEI itself, curtailing loans to Nicaragua is much harder because neither the NICA Act nor the RENACER Act applies. To achieve the goal of bringing CABEI into closer compliance with the NICA Act and the RENACER Act, a ladder of escalation could be constructed wherein each successive rung increases the pressure felt by Mossi and his collaborators.
Option 1: No more “own goals.” The United States could begin by making sure that its development agencies such as USAID and the DFC, as well as those entities belonging to the private sector, suspend all dealings with CABEI as long as the bank is associated with funding dictatorships. The DFC gave approximately $100 million to CABEI for use in El Salvador, Guatemala, and Honduras in 2021, but without greater accountability mechanisms and given the fungible nature of money, there is no guarantee that U.S. taxpayer dollars have not reached Managua. The presence of such figures as the secretary of state on the DFC’s board should ensure that the institution’s giving aligns with U.S. strategy. This challenge also underscores the importance of a time-limited, special coordinator role for Nicaragua policy to ensure agencies are working in sync and not at cross-purposes with the overall goal of pressuring the Ortega regime.
Additionally, the House Financial Services Committee and the Senate Banking Committee, which have exercise oversight over international financial institutions, should hold hearings investigating CABEI and its practices.
Option 2: The United States should engage Taiwan, South Korea, and the European Union (especially Spain), as well as other stakeholders in CABEI, to help raise awareness over the lack of transparency within the organization. The European Union has held numerous hearings on Nicaragua and issued sanctions designations for human rights abuses. The next step is to cut off CABEI’s funding. Given the recent rupture in Nicaragua’s longstanding diplomatic ties with Taiwan and Ortega’s subsequent recognition of the People’s Republic of China, Taiwan is likely amenable to U.S. concerns and could use its leverage within CABEI to advocate for meaningful reforms. This is especially true in light of Ortega’s seizure of Taiwan’s embassy by Nicaraguan authorities. South Korea’s conservative government could also be convinced to cooperate. Together with countries of the European Union such as Spain, the United States should be able to impact policies with its “friends in high places.” The United States should also work with nonmember and private financers with a history of giving to CABEI to avoid doing so.
Option 3: The United States should call on the other founding partners such as Costa Rica, El Salvador, Guatemala and Honduras to carefully monitor CABEI’s decisions and performance. CABEI has not established a maximum amount of lending for each country, thus excessive lending to unstable Nicaragua not only reduces the availability of credit to other countries but also constitutes a regional risk as Nicaragua’s political and economic situation drive regional migration and increase instability.
Option 4: The United States could take actions that impact CABEI’s credit rating. Currently, CABEI has a sound and stable credit rating at AA, according to Standard & Poor’s. However, if the United States takes some sensible actions against CABEI or its leadership, it stands to reason that its current rating will at least go into review and be downgraded, something multilateral development banks seek to avoid at all costs. Telegraphing actions that may impact CABEI’s credit rating could incentivize core members to move quickly internally to preserve their funding streams from CABEI while curtailing funds to Managua.
Option 5: The United States could consider pulling visas from high-level officials at CABEI, and issuing travel bans to prevent them from attending recurring shareholder meetings that take place in Washington, D.C. and meeting potential investors in the U.S., until the bank agrees to cease lending to the Ortega regime.
Option 6: The United States could open an investigation of CABEI’s leadership, with the intention of placing sanctions on CABEI’s executives. Allegations already exist surrounding Mossi’s election to lead CABEI, as he is believed to have obtained support thanks to an agreement between Daniel Ortega and former Honduran president Juan Orlando Hernández, in return for increased financial aid to Nicaragua. In the face of Mossi’s implacable support for Ortega, the United States has a legitimate interest in understanding why CABEI’s board has remained silent, and should take the necessary steps to investigate the bank’s data and performance under Mossi’s presidency. Bringing transparency to CABEI’s decision making is in the interest of its members and all investors in CABEI bonds. Ideally, the United States might work with shareholders to stop the current president, Dante Mossi, from being reelected in November 2023.
Option 7: The United States could consider preventing CABEI from raising debt in U.S. capital markets and pressure the European Union to restrict such activity in its markets. Multilateral financial institutions often do this, leveraging their credit ratings to borrow money at lower rates than those at which they lend in turn. The “spread” allows CABEI to continue funding itself and new initiatives as an organization. CABEI relies on this ability to make many of its loans in Central America. For example, the U.S. capital market regulators might prevent CABEI from issuing bonds in U.S. markets, and U.S. financial regulators could forbid Wall Street banks from issuing such bonds. Such a move could force CABEI to cease lending over the long run as it would be unable to raise debt, or to look at raising capital in other debt markets, where rates could be higher, reducing spreads and thus capital for new lending projects.
Ryan C. Berg is director of the Americas Program and head of the Future of Venezuela Initiative at the Center for Strategic and International Studies in Washington, D.C.