Development & Aid, Economy & Trade, Headlines, Latin America & the Caribbean

ECONOMY-NICARAGUA: Debt Forgiveness Has Its Price

José Eduardo Mora

SAN JOSE, Jan 20 2004 (IPS) - The write-off of 80 percent of Nicaragua’s debt, to be ratified by the multilateral credit institutions Wednesday, will be a Pyrrhic victory for the Nicaraguan people, say experts, warning there will be little or no benefit from the Highly Indebted Poor Country (HIPC) Debt Initiative.

President Enrique Bolaños made the debt relief announcement last week, but it has yet to be confirmed by the executives at the International Monetary Fund (IMF) and World Bank.

“This is just a political card played by the government,” says Carlos Pacheco, director of the Centre for International Studies, a Nicaraguan think tank.

“It is false that cancelling the debt (accumulated up to) 1988 will bring solutions for Nicaragua. That discourse has been used in order to force people to accept the structural adjustment programmes that brought the country privatisations and higher costs of living,” said Pacheco.

“The privatisation of electrical and telecommunications services took place while telling the people that this sacrifice was necessary so that the country’s foreign debt would be forgiven,” he said.

“If one analyzes the cost-benefit relationship of the debt cancellations, one reaches the conclusion that the social and economic costs have been much higher than the dividends that this measure can generate,” added the expert.

In his report to the National Assembly on his second year in the presidency, Bolaños said last week that, thanks to the HIPC Debt Initiative, 80 percent of Nicaragua’s 6.56-billion-dollar debt would be cancelled, paving the way for more investment in the social sphere.

Over the past decade, the country’s foreign debt has been through several restructurings and write-offs, after reaching nearly 12 billion dollars in 1990 – one of the world’s highest debts in terms of size of the economy and number of inhabitants.

However, the actual debt remains extremely high, the equivalent of three times Nicaragua’s gross domestic product (GDP) and with service payments worth more than half the value of the nation’s exports of goods and services.

In order to obtain the HIPC benefit, Nicaragua had to comply with a series of requirements from the multilateral credit agencies, which included reforms of state, social security, the financial system and education, as well as the privatisation of some public services, such as telecommunications, potable water and electricity.

The HIPC Debt Initiative was launched in September 1996 by the Group of Seven (G7) most powerful countries (Britain, Canada, France, Germany, Italy, Japan and United States) in conjunction with the international financial institutions, as a way to help countries unable to confront their enormous debts in exchange for implementing programmes to fight poverty and promote development.

There are currently 38 countries accepted into the HIPC plan: 32 from Africa, two from Asia and four from Latin America and the Caribbean.

Pacheco says the initiative is really just a tweaking of the poor countries’ debts.

“The HIPC at no point seeks to ‘forgive debt’, as some assert, but rather to eliminate the percentage that the poorest countries would not be able to pay anyway and which the creditors would not be able to collect.”

Nicaragua currently is indebted to what is known as the Paris Club, a group of 16 industrialised countries, and to several countries of Latin America and Eastern Europe, the IMF, World Bank and the Central American Bank for Economic Integration (BCIE), among others.

Pacheco is convinced that “when the results of the famous debt pardon are consolidated, the lies told by the current government and by those who came before will be revealed, because the positive impacts for the population will be imperceptible.”

Around 70 percent of the 5.4 million Nicaraguans live in poverty, their wages have been frozen for the past five years, and the privatisation of electrical services has driven rates up, he said.

As a result of the structural adjustment programmes implemented in Nicaragua, he said, in the last five years health services and education have deteriorated. In his opinion, these have been “privatised on the sly.”

“Medical attention in the hospitals is increasingly deficient and the children are asked to pay contributions to the schools, contributions that end up being obligatory. In implementing these (adjustment) policies they insisted to the citizens that they would be compensated by the cancellation of the debt.”

Carlos Sequeira, international manager at Nicaragua’s Central Bank, said in a conversation with IPS that this year, as the HIPC Initiative is implemented, the country will pay its creditors 100 million dollars in interest and amortizations.

In 1996, the country paid 229 million dollars in debt service; in 1997, 287 million dollars; in 1998, 231 million, in 1999, 168 million; and in 2000 Nicaragua paid 185 million dollars in debt service, said Sequeira.

“Some debts were reduced or pardoned after the tragedy of Hurricane Mitch, which devastated much of the territory” in 1998, he noted.

Nicaragua was include on the list of HIPCs in 2000, when its debt service payments began to decline, and the process will culminate Wednesday, when a sum equal or approximate to 100 million dollars annually will be fixed, explained the bank executive.

He also reported that “153 million dollars of debt were cancelled in 2001, in the following period 158 million, and last year it was 98 million dollars, which gives an idea of the reduction of payment of interests and amortizations to creditors.”

Sequeira recognised that for Nicaragua to join the ranks of the HIPCs it had to comply with a set of requirements imposed by the multilateral financial institutions. These included the privatisation of state enterprises, as in the case of Enite, an entity in charge of developing telecommunications, which was sold to private transnational corporations.

“The aim is for the resources freed up from foreign debt payments to be used in the strategy to fight poverty,” he said, adding that another advantage is that it would attract investment.

But Mayela Castillo, the government’s director-general for credit, explained to IPS that the negotiations with creditors, including the members of the Paris Club, will last at least six months, meaning it will be “very difficult” to see the direct benefits of the debt write-off.

Political analyst Alberto Saborío agrees with Pacheco that the debt relief will not produce tangible benefits for the economy.

“With the debt forgiveness we remove the sword of Damocles that is hanging over us, but it is not going to improve the country’s productivity or the living conditions of the people,” he said.

Nicaragua’s GDP growth in 2003 was 2.3 percent, while inflation was 5.09 percent, according to Central Bank figures.

“Going forward, the government will have a problem because all of its arguments to convince us citizens to tighten our belts are going to fall flat. They said they would give us paradise, but that paradise doesn’t exist,” said Saborío.