Nicaragua
The Foreign Debt: Lengthening the Chain?
Envío team
Late last year, the Nicaraguan government emerged from debt negotiations with 16 capitalist nations, known as the Paris Club, cheering victory and a 75% reduction in its debt to those countries. But while no one can deny that the negotiations were largely a victory, it is important to understand exactly what we are celebrating. It is true that the Paris Club nations agreed to reduce Nicaragua's debt substantially—though economic jargon makes it sound like an even larger ' reduction—and that their concessions went further than almost any terms previously negotiated with other countries. But, even so, Nicaragua's total debt payment for 1992 comes to more than half its export income last year. And the bottom line is that Nicaragua is now firmly locked onto the International Monetary Fund's neoliberal track for the foreseeable future and must accept the IMF's economic—and political—recipe in order to be eligible for new loans and for further possible reductions of its existing debt.
Untangling the Paris Club accordThe Paris Club countries include Western Europe, the United States, Canada, Australia and Japan. Nicaragua's debt to those nations totaled $860.2 million (see Table 1), including concessional (long-term, low-interest) and non-concessional debts to those governments, as well as "commercial" debts to private banks. Shortly before the multilateral negotiations with the Club, the US had pardoned all of Nicaragua's concessional debts, which came to $259.5 million out of the total $327.2 million owed to the US. This set an important precedent that emphasized continued recognition of Nicaragua as an exceptional case.
No other nation conceded as much as the US, nor did they all agree to the same concessions. Few, in fact, offered outright pardons for a portion of the debt, but, as a whole, the Club authorized greater concessions than any previously granted, except to Poland and Egypt. (The Nicaraguan government triumphantly called these concessions "the best authorized by the Club in its 35-year history." But both Poland and Egypt, largely for political reasons, had half their total outstanding debts pardoned.)
The Nicaraguan’s government's negotiations with the Club established a framework agreement, ratified unanimously, defining the minimum concessions that different countries will authorize in subsequent bilateral negotiations that must all take place between January and October of this year. Each country, however, did not agree to the same minimum concessions (see Table 2). Only France, Germany, Holland, Sweden and Great Britain pardoned a portion of the debt; most others were restructured to long payback periods. Although governments in bilateral negotiations do not normally authorize concessions significantly different than those already specified, the Nicaraguan government thinks it can convince certain countries to go even further.
The government clearly wanted the concessions granted to sound as large and exceptional as possible, but it is important to understand more precisely what the numbers mean. The touted 75% debt reduction figure, for example, is somewhat misleading to the general public. According to La Prensa, Minister of the Presidency Antonio Lacayo stated that 75% of $830 million had been pardoned, leaving approximately $207 million to be renegotiated. This would be the most obvious interpretation of a "75% reduction," but the reality is more complex, and Lacayo's assertion, if he in fact made it, is inaccurate.
Subtracting the US debt pardoned prior to the negotiations, the only other outright pardons total, at the very most, $190 million. The bulk of the "reduction" is not a cancellation of the principal owed, but is calculated by deducting the inflation rate of the dollar during the grace period, when no interest accrues and no payments are made. The value of those future debts are thus estimated at the dollar's current value. For example, at 6% annual inflation, $500 million dollars in December 1991 would be worth the equivalent of $470 "1991 dollars" in December 1992, $442 by the end of 1993, and so on. Concretely, however, the amount due would remain $500 million.
All these calculations, translated into plain English, mean that if the total debt Nicaragua currently owes to the Paris Club adds up to more than double its export income last year, it will still represent twice that income in the future unless export income rises. Export earnings would have to increase at least as much as the annual dollar inflation rate, during the grace period, in order for Nicaragua to actually enjoy the calculated 75% reduction.
The accord does leave open the possibility of additionally reducing the principal owed, based on three conditions. In three years, it says, such a reduction will be considered if Nicaragua "maintains satisfactory relations with the participating or observer creditor countries... fully implements all accords signed from this agreement on" and maintains "an appropriate arrangement" with the IMF.
Why the special treatment? Nicaragua was in the right place at the right time, with internal conditions the Paris Club nations found acceptable, and in some ways ideal. All players involved are fully aware that Nicaragua's foreign debt, like that of all third world nations, is unpayable. In fact, President François Mitterand of France had recently called for developed countries to pardon the majority of Third World debts. The value of Nicaragua's debt on the parallel market has risen slightly, because of the rising probability of payment by the new government due to the end of the war, the government's political ties to Western nations and its demonstrated ability to get new loans and donations from those countries and the multilateral banks. But that value—which reflects the amount market forces believe Nicaragua could actually pay—is still only about 5% of the total due.
In addition, Nicaragua's debt to the Paris Club is minuscule compared to that of larger nations like Brazil and Mexico. Economists admit that Western nations could pardon 100% of the debts of all small third world nations without making a significant dent in their accounts. The banks wrote off those debts years ago.
Nicaragua also had the backing of the IMF, which not only approved the structural adjustment process, but also, according to one government economic adviser, lobbied the Paris Club nations on Nicaragua's behalf.
At the same time, however, creditor countries demand, on principle, that debtors pay back some portion of their loans, even if only a symbolic amount. Nicaragua's creditors in the Paris Club chose to use Nicaragua as an example, granting exceptional concessions due to its post-war situation and demonstrating approval of the government's national reconciliation policy, while at the same time setting a precedent and sending a clear message to all other debtor nations—no matter how poor—that every country will have to pay something.
Ongoing debt payments and periodic negotiations, of course, also guarantee creditor nations the possibility of imposing their economic and political systems on their debtors. Most Western nations and lending institutions base their willingness to give loans on the IMF's approval of a country's economic plan. The US government, according to its own documents, clearly conditioned its aid last year and held up the disbursement of donations at will. The accord reached between the Nicaraguan government and the Paris Club states its conditions explicitly: stay on good terms with the IMF and us, and we may concede even more in three years.
The other $9 billionIn spite of these successful negotiations, however, the bad news is that the Paris Club debt is not even 10% of Nicaragua's entire foreign debt. Roughly another $3 billion is owed to the former Soviet Union, $1 billion to Eastern Europe (including what was East Germany), $2 billion to Latin American countries, over $1 billion to multilateral banks and almost $2 billion to commercial banks. The total is just under $10 billion (see Table 3).
Both the government and the far right blame the Sandinistas for "running up...a massive bill," as it is put in a monthly economic report published in the United States by Nicaragua's Central Bank. Technically, they are correct. Nicaragua's debt in 1979 was $1.6 billion. The Sandinista government accrued a debt that averaged some $700 million in aid per year for 10 years. And much of that aid came not in cash—which would have given the FSLN much greater flexibility in choosing how to spend it—but in poor-quality machinery and other products. But a much larger share of the blame for this debt should be placed on those who promoted the war and the economic embargo—not to mention billions' of dollars in direct war damages—that forced the Sandinistas to turn to massive foreign aid in the country's military and economic defense.
While the country's debts to the Soviet Union and Eastern Europe account for a higher percentage of the total, only the Western nations and multilateral financial institutions are able to offer new loans in the future and are therefore more important to appease.
Latin America. A precondition for the Paris Club meeting was that Nicaragua reestablish its credit rating with the multilateral lending agencies by canceling its arrears, which it did with the aid of bilateral donations and "bridge loans" that had to be paid back immediately upon receipt of new multilateral loans. A further Paris Club precondition was that Nicaragua be up to date on all outstanding payments—not just on the bridge loans—to the countries that had provided these bridge loans. This meant renegotiating debts with Mexico, Venezuela and Colombia.
Mexico's debt was reduced to 5% of its original value by exchanging half for Mexican capitalists' right to about $50 million of the stock in Nicaraguan state enterprises being privatized and restructuring the other half. (This reduction is not deducted in Table 2 because the mechanism for the acquisition of stock has not yet been established.) The debt to Venezuela was also reduced to a calculated 5% of its original value. Late payments, totaling $248 million, were exchanged for short-term US Treasury bonds that pay the present value of that debt restructured to 40 years; a 6-year grace period was established for interest payments, but Nicaragua will only begin to pay when its annual exports total $1.4 billion at the 1990 value of the dollar. Colombia's debt was canceled in full, in exchange for $3 million of US Treasury bonds. The Central American Presidents have agreed to resolve Nicaragua's outstanding debts on terms similar to those established with Venezuela.
Multilateral banks. The multilateral banks are much less likely to renegotiate debts. Those banks receive the majority of their funds from private financial markets, which they borrow at low interest and then lend to governments at slightly higher interest. Private investors would likely reduce lending, or at least raise their interest rates, if these organizations pardoned or renegotiated debts. Nicaragua reestablished its credit rating by paying off $316.6 million in arrears to the World Bank and Inter-American Development Bank (IDB) primarily through donations, concessional loans and bridge loans. (The government reported this figure incorrectly, according to government advisers, at $360 million.)
The first "new loans" authorized by the multilateral banks totaled $152 million, which was simply used to pay back the majority of the 120-day bridge loans. The only immediate result of these transactions was to restructure Nicaragua's debt and set it up to start making interest payments, as well as officially tying it into the IMF-backed structural adjustment program. A Ministry of Foreign Cooperation report calls these first loans "the first structural adjustment operation approved for Nicaragua."
It is worth noting that the total late interest payment made is equivalent to 40% of the total principal, $792.2 million, owed to the two lending agencies, which, of course, was not reduced by the payment. So new debts were incurred to pay interest on old debts that continue to accrue interest. Thus continues the vicious circle of the foreign debt.
The 1992 debt paymentWhat do all these negotiations mean for Nicaragua in the short term? One would expect that debt payments for 1992 would be minimal given all these reductions. But this year's payment to the multilateral banks alone totals $85 million; bilateral debts, primarily to Taiwan (for last year's short-term loan) and Venezuela (for petroleum), total $16 million. The total public debt payment comes to $148 million, and if the commercial debt is added, $179 million. Initial estimates of Nicaragua's total export income for 1991 come to $346 million. The debt payment, therefore, amounts to more than half of export income, while the generally accepted recommendation is that it not surpass 25%.
So is Nicaragua really much better off than it was, say, two years ago? What is the benefit to Nicaragua if so much of its scarce foreign exchange cannot be used for health or education, or to rebuild the country's productive potential?
In the 1980s, Nicaragua made decisions based on Nicaragua's needs. Cut off from multilateral banks and US government as well as some other key Western nations' aid, the Sandinista government was not party to the economic model being imposed all over Latin America within the framework of debt and new loan negotiations.
In addition, the Sandinista government received significant concessional aid and yet was not making debt payments. The Chamorro government, on the other hand, is getting aid but beginning to spend millions of dollars on those payments. While negotiations have restructured debts and reduced the amount to be paid per year, even a small amount is a strain on a country with such a small national budget and Gross Domestic Product (GDP). Nicaragua's per capita debt comes to $2,500; its per capita GDP is $360.
Some economists say that there is no reason to be concerned about the debt as long as the net flow of financial resources is positive—that is, that total income, including new loans and donations, is greater than total expenses. As of February, new loans for 1992 were projected at $340 million, and donations at $400 million. This total, $740 million, is slightly less than last year's $786 million, but donations are giving way to loans, and total aid will continue to fall in the future. Latin America finds itself in this current debt crisis precisely because new aid and loans slowed with the 1980s' world economic crisis and the US decision to raise interest rates. The net flow of resources to the Third World thus turned negative. There is no reason to believe that foreign aid to Nicaragua will continue at the current rate even in the medium term. The United States has already warned that exceptional treatment is coming to an end. The arrangement that brought Nicaragua up to date on its payments to the multilateral banks, making it eligible for their loans, was a concrete signpost announcing the imminent end of its semi-privileged road.
On the other hand, Eastern Europe and the Soviet Union are no longer in the position to aid other nations. Does Nicaragua have any choice now but to bow to the mandates of the IMF and the US government to get new loans? Can any significant changes be made in current economic strategy?
The search for an alternative While the IMF and US have their own clearly defined economic and political agenda, the primary problem in the fight for alternatives lies within Nicaragua. The Chamorro government has not resisted the imposition of the neoliberal model fundamentally because it agrees with it. And while the FSLN may disagree with some political elements of that model and call for softening the economic blow to the poor, high-level political and economic leaders within the party support the model, at least in its current form through the structural adjustment plan. On the one hand, these sectors believe there is no choice: we must get foreign aid, whatever the cost. On the other hand, government economists are closely tied to big commercial business interests and multinational corporations that benefit from neoliberal policies. Important sectors of the FSLN leadership are more concerned with guaranteeing the centrist Chamorro government's success, in part to prevent the population from turning to the far right out of economic desperation, than seeking a viable, popular alternative.
It would be idealistic to think that the IMF would be easily convinced to accept an alternative to its championed structural adjustment model, but it is also simplistic to believe that it is unwilling to negotiate. Given the high social cost of structural adjustment all over Latin America and its failure to reactivate new economic growth even in the medium term, the multilateral banks should be prepared to discuss the possibility that some variations on its plan, at a minimum, might work better. Even in Nicaragua, the bank accepted certain heterodox innovations of its orthodox model, such as the implementation of price controls and the concertación talks. The IMF has lobbied other nations to condone Nicaragua's debts and provide low interest, long-term loans for future development. Some economists close to the government believe the IMF sincerely wants to help Nicaragua succeed economically and only needs to be convinced that a different plan is viable. But unless Nicaragua develops a thoroughgoing alternative, it does not even have a solid basis from which to negotiate.
The Nicaraguan government could implement one very important change in its economic strategy: the use of the foreign aid for which the people have paid such a high cost to receive. As long as Nicaragua must continue to indebt itself to other nations and the multilateral banks, the new loans it receives should move the country toward greater self-sufficiency and less need for foreign aid in the medium and long term. Aid is currently being used primarily to import goods—undercutting local producers—and to promote commerce instead of production. One government adviser told envío that "the doors [to foreign aid] are now open, but the government doesn't have a briefcase full of projects There is no financing for project development." The dominant philosophy in the government is that the private sector will develop projects in the necessary areas, which will be defined by the free market. Aside from plans to the year 2000 for the renovation of the country's deteriorated electricity infrastructure, the FSLN left behind no plans and the new government has not developed any. There is talk of the importance of reactivating beef production, for example, but there is no diagnostic or plan for how to do so. The same is true for local industry. According to this adviser, "Aid will not continue to flow if Nicaragua doesn't develop projects."
US aid has gone primarily to imports and to finance its economic and political strategy in Nicaragua. If aid is not being spent correctly, the US government is an accomplice. One high-level US official reported privately that there would be a radical change this year in the use of US aid, with the majority going to promote production instead of balance of payments support. If this is true, it is likely that the beneficiaries will be large private producers, instead of the small and medium farmers that account for the majority of the country's agricultural production for both domestic consumption and export. Meanwhile, other economic policies are forcing small producers and artisans into bankruptcy. These include the reduction of tariff barriers on competing imports and the lack of technical support for small producers who cannot vie with these now lower-priced imports.
The same adviser pointed out another contradiction in economic policy. The government reports that there is no longer reason for concern over the fiscal deficit because it is being financed with "clean water"—foreign aid—instead of "dirty water"—printing money. But if the US does, in fact, shift more of its aid to production, Nicaragua will be hard-pressed to cover this year's estimated $140 million deficit. At the same time, the government has implemented numerous tax breaks and exemptions that could add up to a large portion of this deficit, but the total is not public information. Who is receiving these exemptions? Why is there privacy in public administration? Why is the Ministry of Finance not rectifying this?
Riding the neoliberal train The IMF's neoliberal formula is by now familiar to all, and while economic, it clearly promotes a certain political system, based on a strong private sector, a full, free market economy and a "trickle down" economic theory that prioritizes the wealthy. Virtually all resources are funneled into large business interests to encourage investment and spending that supposedly makes the poor better off. US aid last year was additionally conditioned to other kinds of political interests, but included the IMF's structural adjustment guidelines.
On US Secretary of State James Baker's recent visit to Nicaragua, Antonio Lacayo reportedly lobbied him for the US to facilitate its future aid disbursements. While the Nicaraguan government has repeatedly denied the existence of any conditionality, official US documents explicitly state that there are strict conditions, though it is not always clear what they are. For example, the May 1991 report from the US Congress' General Accounting Office states that disbursements during President Chamorro's first year in office were held up due to the concertación talks—"when the Chamorro government unexpectedly decided to present its proposed economic program to a national forum for review and approval"—as well as the implementation of numerous structural changes. It says, "[AID officials] cited several problems that impeded the government of Nicaragua's ability to bring about policy reforms and initiate development activities, some of which were preconditions for receiving US aid." It is not difficult to imagine the sort of "problems" to which they referred.
Nicaragua's official withdrawal of its World Court demand against the US for several billion dollars was clearly another condition for continuing aid; the US pardon of almost all of Nicaragua's outstanding debts came just days after the withdrawal. (The US pardon was insignificant if compared with the fact that the fulfillment of the Nicaraguan demand could have paid off the country's entire $10 billion debt and more.)
While the kind of specific conditions the US will require for aid disbursements this year it is not yet clear, all indications—the US pardon, the successful Paris Club negotiations, the US government's and Embassy's recent moves toward rapprochement with the FSLN, among others—suggest that the chain will not be as short as in 1991. The US has also warned that aid, especially donations, will decrease in the near future. Nicaragua is no longer a top agenda item.
This does not mean, however, that the US has no future plans for Nicaragua. AID published a 64-page document in June of last year outlining its "country development strategy" from 1991 to 1996. If this strategy—which includes increasing investment, greater democracy, increased economic competitiveness, etc.—is implemented, according to AID, "By 1996, Nicaragua should be well on the road to economic recovery. The private sector will regain its leadership role, traditional exports will rebound, non-traditional exports will be established. The United States will be Nicaragua's principal trading partner. By the time elections are held in 1996, the central values of democratic society will have been transmitted throughout the country, contributing to acceptance of democratic government."
It appears now that the US government feels there is no longer a major threat to the implementation of its strategy, that Nicaragua has been securely placed on the right track and is not likely to derail any time soon. The economy is safely locked into neoliberal policies, with the full backing of the Chamorro government. Even much of the FSLN leadership, as well as some of the base, has been "pacified" into outright support for the Chamorro government and reconciliation with the US. The unions have been devastated by massive layoffs, and many workers are now too concerned about losing their jobs to support a strike.
So while the chain of conditionality has been loosened, the structural chain has tightened. There may be more room for maneuver, but the economic situation and the "opposition" party's support for the Chamorro government reins in the popular sectors. But the new slack in the conditions offers possibilities for a concerted attack on the numerous weaknesses in current policy, and for the popular sectors to emerge as leaders in the search for a viable alternative.
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