Happy New Year From the IMF
In the churning river of dialogues, political readjustments and constitutional reforms, all the advantage has been for the “fishers” of the IMF, who got what they wanted.
(Note to our readers: This month we are dedicating this space exclusively to the implications of a new agreement package brought to Nicaragua by the International Monetary Fund and World Bank mission. For a summary of the major political and other events in Nicaragua, see the "Very Briefs" section, which is less brief this time.)
The first emissaries of the International Monetary Fund and World Bank missions arrived in Nicaragua on November 15. Their visit, and that of the officials who followed them, was cloaked in secrecy, save for the eternally optimistic statements of the Nicaraguan government ministers. The only piece of information made public was that the IMF was urging a more austere budget than the one already presented by the finance minister.
The unhappy ending of this mission will probably be the government's capitulation to the IMF demands so it can go to the Conference of Donor Countries in Managua on December 14 15 with IMF backing. There the government could seek support from the friendliest countries for another round of negotiations with the IMF and World Bank in January 1994.
When the mission of international financiers left the country on December 3, Minister of the Presidency Antonio Lacayo announced that the accords will be signed in 1994, declaring that "our positions come closer together each time." The government has presented the negotiation of the mission's Extended Structural Adjustment Fund (ESAF) and the Second Economic Recovery Credit (ERC II) agreements as a success. It also says it was successful in obtaining between $700 and $900 million in international loans, and has emerged from the hard currency crisis it suffered in 1993. Yet again the official images are upbeat. But, what does it mean for the country to sign the ESAF and ERC II? Did the government truly negotiate with the IMF and the World Bank or simply cave in to their requirements? Is the foreign aid crisis really solved now?
The ESAF: More of the SameOnce the Extended Structural Adjustment Fund agreement is signed, the IMF will lend Nicaragua $20 million, conceived of as an extended "service" so Nicaragua can adjust its productive structure to make it more competitive in the international market.
If the ESAF were to produce this result, the austerity it proposes would be worth it. But behind the free competition and free market rhetoric are the hidden mechanisms in our own economy that turn the ESAF, however well intentioned it may be, into a program acting upon an administered market. For that reason, it only benefits a minority of national groups together, of course, with the financial bodies promoting the agreement.
In this setting, the IMF's offer of the ESAF "service" is made with the full knowledge that Nicaragua cannot pay back the money already borrowed. The strategy behind its offer is to plot financial earnings for the IMF and the World Bank. These earnings, nominally for Nicaragua, will have to be used to pay the country's debt interest over an extended period.
The IMF is an astute banking institution. Its goal is not to recover the principal from its loans but to charge interest, and also to make new contracts to assure that the flow of money from Nicaragua to it and the World Bank is greater than the flow of new loans it provides to Nicaragua. In 1994, we will get a $20 million loan from the IMF and a $130 million one from the World Bank, but, in exchange, we will pay them $226 million in interest payments, leaving them with a $76 million surplus.
The IMF is not only astute; it is also powerful. If Nicaragua does not sign the ESAF, the IMF will not give it the green light to sit at the table of the Donors' Club to renegotiate its debt with the World Bank, the Interamerican Development Bank and its bilateral debts so it can get the new financing it needs to keep the economy's head above water one more year.
In the ESAF agreement, the IMF imposes conditions on Nicaragua to assure that it earmark its surplus for debt service instead of spending it on the needs of production and the population. All this gives the IMF the image of a loan shark that lives off the misfortunes and needs of its clients, but this usurer does not force poor countries to accept its "service." It makes a legal offer and lets the potential recipient take it or leave it.
The problem is that the poor country does not even have another noose to hang itself with.
The IMF itself always responds to these arguments by stating that its programs produce economic growth and that the bitter medicine it prescribes leads its sick patients to the health of structural adjustment, economic reactivation and greater international competitiveness. If that were true in Nicaragua's case, signing the ESAF would indeed be a service to the country. But after two years of the first structural adjustment program, as we argued in detail in the November 1993 envío, monetary stabilization and inflationary control have not been accompanied by any sign of adjustment and reactivation, much less greater competitiveness. The Extended Structural Adjustment Fund agreement will only be more of the same, which is no structural adjustment, and, hence, no service. But it will certainly be "extended": it will extend unemployment and the national economy's stagnation.
The World Bank provides the Economic Recovery Credit (ERC II). But it cannot be a fundamental support to economic recovery because it is conditioned by the ESAF.
Negotiated Agreements?An agreement signifies negotiation, but up to this point there has never been negotiation between Nicaragua and the IMF and World Bank. Few expect it to happen now. The responsible parties are the government and Nicaragua's political opposition, not the IMF and the World Bank. These multilateral lending agencies are willing and able to negotiate, but in Nicaragua they find no willing and able counterpart.
What should be on the negotiating table? On the IMF and World Bank side is the logical desire of any banking institution: to recover their loans. On the government side is interest in assuring a continual financial flow. But that only makes sense if it can be used to invest in production and not just stabilization, as the IMF wants. If the government does not defend Nicaragua's right to more foreign resources for production, it will only lead us into greater indebtedness, thrusting the economy into structural, permanent and damaging dependency.
Government IneptitudeThe government has no capacity to negotiate. It isn't even capable of presenting financial programming for 1994 that is an alternative to what the IMF and World Bank propose. Financial programming is the critical point of the ESAF agreement, the IMF's main instrument to guarantee that Nicaragua can pay on its foreign debt. The financial programming written into the ESAF guarantees an austere public budget, and allows no flexibility other than to get more austere.
Why can't the government negotiate that version of financial programming? First because it has not prepared a solid national budget on which to base alternative programming. The IMF's own advisers know that the budget the minister of finances presented is elastic, that it will change according to the country's economic ups and downs. They also know that the finance ministry is still not operating with sufficient openness. Obviously, the IMF doesn't care about this problem, as long as the budget assures government spending cuts and tax increases. The IMF is delighted that the National Assembly has no real authority to modify the national budget; such authority could open the door to a more expansive budget, which would endanger Nicaragua's debt service payments.
Second, and perhaps more importantly, the government is hostage to its own neoliberal ideology. It believes that the market does everything by itself and that it is unnecessary for a state to guide the structural adjustment process. With dangerously blind faith, this government holds that the IMF's economic reactivation and adjustment prescription is as miraculous as the one it already applied to control inflation and stabilize the economy, which worked. With such faith, the government delegates its responsibilities to the IMF, which does guide the country and the economic Cabinet by the laces of the straitjacket it has put them in.
The opposition has shown as little interest in negotiating these accords as the government. The conflict over fiscal policy, brought to the forefront by September's transport strike, is at the center of the agenda for negotiating the accords, but neither the National Assembly representatives nor the other politicians challenged that aspect of the budget presented to the Assembly by the finance minister in October. They got so worked up over the issue of privatization that they almost completely forgot about this central theme. Today, as three years ago, both the FSLN and UNO are putting more emphasis on the property problem than on the issues of unemployment and development.
For these and other reasons, the multilateral lending agencies have a very easy time of it at the negotiating table.
Nicaragua's "Market"Reality flies in the face of the government's dogmas. The reality is that our market is critically constricted, segmented, lacks free access to information and is weakened by oligopolist controls. The state as facilitator, which has been a fundamental factor for the relative successes of the structural adjustment in Chile and, to a far lesser degree, in Mexico and Costa Rica, simply does not exist in Nicaragua.
Constructing that state is a long term task here, one the current government has not even begun. The political conflicts have given it an excuse not to, but the essential cause is the scarcity of human capital with which to build an efficient and politically coherent state, with its own project. The government has been negligent in spearheading programs to prepare this necessary human capital.
A Drama in Five ActsThe drama that preceded the mission's visit and is now preparing Nicaragua for the signing of the ESAF and the ERC II has had a number of acts.
ACT I: Foreign Exchange Crisis. Foreign aid dropped drastically in 1993. Even more important was the change produced in the composition and the sources of the aid Nicaragua was receiving.
With regard to composition, the amount of hard currency which the government uses to pay on the foreign debt, accumulate net international reserves and finance imports, particularly petroleum and consumer goods was significantly reduced. The government's squandering of large quantities of cash from 1990 to 1992 is one of the roots of the current economic crisis (see envío September 1993). Without such liquid foreign exchange, any government is weakened in its dealings with the IMF, because it can't pay the interest on its debts, maintain the stability of its national currency or control inflation. And without it, the government is also weakened in the population's eyes, because it can't guarantee the supply of petroleum and its derivatives or import the other production inputs and consumer goods the country needs.
The sources of foreign aid also changed significantly in relation to the first three years of the Chamorro government. Between 1990 and 1992, at least $200 million of foreign cooperation a year came in the form of bilateral donations, mainly from the United States. That is no longer true. Now the lion's share is made up of loans from the IMF, the World Bank and the Interamerican Development Bank. This new dependency gives these multilateral banks enormous power over Nicaragua. The government needs the new agreements the ESAF and ERC II to get access to continued IMF and World Bank financing, which is essential to maintain the flow of hard currency. That flow, in turn, is essential to keep its stabilization plan afloat. Without these loans, the government could not make its debt payments, accumulate reserves to maintain the current exchange rate for Nicaragua's currency or cover the import demand which is huge in a country with its own production in bankruptcy.
Act II: Near Collapse. The hard currency gap has been creeping up since the beginning of 1993, when it was already $140 million. The government began 1993 with no guarantee of the resources that would get it through the year.
The government hoped the gap would be filled by the Donors' Community in the Club of Paris meeting in April 1993. But its hopes were dashed. The only thing it got at that meeting was pressure to resolve its domestic political problems as a precondition for providing the volume of foreign resources it needed or perhaps even less.
Added to this crisis was the freezing in July of $48 million in US aid until the Nicaraguan government could demonstrate that it was not linked to international terrorism (a result of the arms cache discovery in Managua) and show civilian control over the military branch.
August passed with still no assurance of the conditions for the economy's current operations. The government was at a crossroads, and opted for the route of complying with its commitment to make debt payments at all cost. It would have to reduce imports and its reserves, which suggested a currency devaluation and an end to the era of shop windows full of imported goods.
Act III: The IMF Doesn't RSVP. Added to this constellation of unfavorable situations was the fact that the IMF ignored the government's request to send a mission to prepare a new agreement. There were two reasons for the IMF's disinterest. First of all, it was waiting for the fruits of Europe's pressures for political reconciliation and those of the US to displace Sandinismo and break with the co government. Second and most important, the serious cuts in public spending, money in circulation and domestic credit implemented by the government over the course of 1993 were still insufficient.
The foot dragging by the IMF and World Bank missions was thus mainly because these agencies wanted to assure more austerity and monetarist orthodoxy, but were not sure they could. The finance minister's attempt to implement the new austerity required more and new taxes provoked an uprising with September's national transport strike.
Act IV: Bring on the Independent Economists. To break through the circle of all these political and economic pressures, the government orchestrated a series of events to project an image of national unity around economic issues. When the tripartite dialogue fell apart, the government substituted it with a dialogue with nongovernmental economists. But none of those meetings were serious.
Desperate to get the IMF's technical mission to come and sign the agreement, the government invited 20 World Bank and IMF specialists to meet with the independent economists and the economic Cabinet. The scene was designed so that the World Bank would convince the economists of the need to accept the IMF's version of the ESAF. It was the first news of this agreement. Several independent economists refused to have any part of the encounter, indicating that they needed no lessons on IMF/World Bank recipes, but rather a space to debate. The multilateral agencies' message was just as unequivocal: more austerity in a period of shrinking foreign aid.
Act V: Selling the Bitter Pill. When the IMF mission finally came to Nicaragua, the government launched a publicity campaign to prepare the population for the new economic package and applauded the mission as an achievement by the country.
Presidential minister Antonio Lacayo announced that 1994 would finally be the year of economic "take off." Finance minister Emilio Pereira projected a 2.5% economic growth. Several other government officials referred to significant increases in production credits particularly to small and medium producers and the dedication of more resources to public investment and the creation of more productive employment. What is being called the "social agenda" was launched with great fanfare.
But nothing new will come out of this visit and these agreements. There will only be deeper austerity and three more years of the same recessive policies with which we are already too familiar. The conditions imposed in the agreements indicate that all the government's optimism is nothing but more candy coating to make this new bitter pill easier to swallow.
Monetarism: Three Years MoreThe very logic of the ESAF and the ERC II hinder compliance with all these optimistic promises. The accords consecrate the 1991 92 economic policy.
Unlike the previous agreements, which were for shorter periods, these new ones are for thee years (1993 95). They also come wrapped in an impressive crossed conditionality. This means that conditions imposed by the agreements with any one organization are, in turn, conditions for disbursing loans from another.
These agreements initiate a period of greater inflexibility in the course of an already hardly flexible economic policy, centered on monetary stabilization. In the IMF's conception, inflexibility means that the government will have to permanently adjust excess economic spending with austerity mechanisms: cutting public spending, investment and the population's consumption ever further. This will make the economy's financial asphyxiation even more oppressive and will mean that ever smaller groups from the big private sector are benefited.
What's to Applaud?The government stressed the value of these "negotiations" by saying that, without them, money will not enter the country. The loans associated with the ESAF and ERC II total $220 million ($130 from the World Bank, $70 from the IDB and $20 from the IMF), together with others ($30 million from Taiwan) that could start coming down the pipeline at the end of 1993 or the beginning of 1994. To this must be added the $48 million frozen by the US and released by President Clinton the last day of November, as well as the announced $65 million in new US funds for 1994, a huge reduction over previous years.
Although the agreements are onerous, the government applauded them: the flow of hard currency, though less than in 1992, is far greater than in 1993. According to the minister of foreign cooperation, the international aid that entered the country as liquid foreign exchange was $476.8 million in 1992 and $197.3 million in 1993. It is estimated at $350 million for 1994.
The government's euphoria is deceptive. Of this total, a full $220 million will to straight to debt payments, drastically reducing what will be available for reserves and imports. This is further aggravated by the fact that the loss of 1993 reserves, which could amount to $50 million by the end of the year, must also be replaced. That only leaves some $64 million for 1994, which is very little compared with the $200 million available to the country annually in 1991 and 1992. In addition, the accords stipulate that the government must again accumulate new hard currency reserves for 1994, equivalent to several months worth of imports.
The government's propaganda is triumphalist and deceptive. But the IMF speaks the truth; it has never hidden the fact that there is less international financing and this requires more austerity.
A Programming StraitjacketThe IMF's conditions impose a public spending cut for 1994 of 4.6% of the gross domestic product (GDP). Given the severe spending cuts already applied and the extreme levels of recession these cuts have brought by contracting demand, an additional cut of this magnitude will mean intolerable recessive pressure. Structural adjustment has been extremely recessive in Nicaragua, since it is based exclusively on slashing government spending. Central Bank calculations indicate that a 5% cut in the public sector's real spending will produce a 1.3% drop in the GDP, if all other indicators remain constant. Thus the first result of the agreements will be more recession and unemployment; it is estimated that there will be 13,000 new jobless people in the short run.
The agreements are pushing the country into a situation in which the acute shortage of money in circulation and the financial strangulation of the economy will continue. The accords will tightly lace Nicaragua into a straitjacket of financial programming. Government authorities are already obliged to accept domestic credit and government spending goals based on prognoses made as long as a year earlier. Now they will be forced to apply a much more restrictive policy and make even greater spending cuts over the course of the year should such projections fail to be accurate as they did in 1993.
The implications of strapping the country into this straitjacket are immediate. Should any event occur that varies the year's programming and means or even could mean a loss of international reserves, the government will be forced by the agreed upon financial programming to step up its austerity measures. The Central Bank will undertake a "compensatory" policy of contracting credit to producers even more than predicted, based on nothing more than a forecast of the loss of reserves that could occur. The government, too, will be forced to make additional spending cuts.
The absurd part of the ESAF is that it imposes an enormous sacrifice on the country, without accomplishing what it sets out to do: preserve the stabilization and achieve a fiscal adjustment that eliminates the external internal economic gap. The only result so far of the public spending cuts and the financial asphyxiation, prescribed from outside, is a widening of the external gap, more and more public spending cuts and, as a result, adrift and bankrupt production. The cynical cruelty of the ESAF is that it is medicine that does not cure the illnesses for which it is designed, but rather creates new ones. And the cynical irresponsibility of the government is that it is negotiating a accord so critical for the country in secret.
The Bitter Fruit of 1993By September 1993, the logic of the current financial programming, challenged by the shrinking foreign cooperation levels, and especially by the shrinkage of hard currency, led to:
1) A greater contraction of credits. The Central Bank's internal credit to the commercial banks shrank 50% with respect to 1992.
2) A greater reduction of public investment. It was cut by almost 40% with respect to 1992, while the state's current spending was reduced by almost 17%.
3) A greater contraction of money in circulation. There was 33% less than the amount circulating in December 1992.
All this has meant a massive, abrupt and dizzying aggravation of the recession and an increase in unemployment and underemployment levels, already estimated at over 60% of the economically active population. It also worsened the country's ungovernability, expressed not only in the sometimes artificial tensions of the political higher ups, but also in the dangerous processes of social decomposition. These 1993 results will be repeated in 1994, because the financial programming will be an even tighter straitjacket.
Social Agenda Beclouded By the Monetary AgendaThe crossed conditionality that characterizes the new accords allows the World Bank to review and control public investment programs, including social housing, as well as other programs. The World Bank is even given this control over what is being called the "Social Agenda," a series of social programs recommended by the United Nations Development Program (UNDP). The conditionality requires that these programs not be executed if they require a national monetary counterpart.
These same regulations were put into effect in Bolivia and Venezuela. To avoid any outbreak of inflation as a result of putting more currency into the population's hands, the World Bank saw to it that the UNDP's Social Agenda, a prop for economic reactivation and employment, never got off the ground.
More Credits: Another DeceptionThe fact that the government has been unable to disburse almost $200 million of the $600 million it had available in 1993 indicates that the principal limitation is not the lack of resources. It is the financial programming, which means that the disbursement of foreign resources that come linked to projects and financing for the project's local spending cannot count on the local monetary counterpart. Added to this limitation is the government's incapacity to design and execute projects.
The government's greatest enthusiasm has been expressed in stating and restating that there will be more credit for production in 1994. The new taxes on more than 200 luxury goods, decreed at the peak of the Christmas selling season, was justified by claiming that all these and other resources will now end up in the hands of small and medium producers.
It is just one more deception. The condition laid out in the agreements of "keeping the financial system free of directed credit policies" means that the state banking system must continue operating strictly on the basis of private commercial banking criteria. Under no circumstances can it operate as a development bank, directing credit to productive sectors of major importance or key from an economic or social point of view, or those with a great potential future but facing difficulties in the present. The private banks never attend these sectors since they are considered very risky, or are not profitable enough. The state banking system is obliged to act with similar criteria.
The assignment of credit based on such commercial bank criteria tends to concentrate credit in the more immediately profitable and less risky activities, in which rapid recovery is assured. This is the path taken by all private banks.
In 1992, the weight of credit to the commercial sector and personal loans in local money made up 61% of the credits provided by the private banks. Agricultural loans represented barely 2.8%. In addition, the private banks concentrated their loans in short term contracts. Only 1.3% of the total was provided for a term of longer than 12 months. A full 44% went to loans with a term of between 1 and 6 months.
The ESAF also has a condition that raises the Central Bank's interest rate. The Central Bank which receives foreign resources on highly concessionary terms can only make them available to the banking system at this exaggerated interest rate, which will even further restrict the Central Bank's contribution to overall credit availability. It will also raise the whole structure of interest rates, which are already at prohibitive levels.
The IMF and World Bank agreements also consecrate the current framework of a radical trade opening for imports. This framework makes it impossible to even minimally recover national production; it further obliterates it. It means the crumbling of prices for peasant production due to the neoliberal dogmatism of eradicating the buying, storing and wholesaling role of ENABAS, the state grains agency. It presupposes leasing public water, electricity and communications services to large private local and foreign capital. And it will definitively bring about a full "deregulation of the labor market," facilitating the layoff of workers and promoting their super-exploitation.
Any Good News?While this whole transcendental package was being debated or being accepted without debate in absolute secrecy, the political dialogues occupied more space than ever in the national news. But they were completely divorced from the critical economic reality and the interests of those who are suffering the crisis in the nation. In the turbulent river of dialogues, constitutional reforms and political realignments, the fisherman that caught the "big one" was the IMF.
The immediate future looks none too rosy. Will there be any consolation in the Social Agenda? It was pompously presented by the government on November 22 and has since been massively and very expensively publicized.
The government publicly defines this agenda as "specifically destined to protect the most vulnerable population, that which for certain reasons cannot satisfy its basic needs or does not in these moments have easy access to the means to do so," and as "supporting the productive sectors that are marginalized from formal market mechanisms."
This, in practice, means that it is aimed at the majority of the population. With the ESAF and the ERC II, it could come to mean the immense majority of the population. Almost everyone. Will the government's "national development project" thus be nothing other than public charity and the "relief" project that the Social Agenda represents?
The likely answer to this question is disquieting, although the Social Agenda may not even serve as a consolation. The financial programming of the ESAF and the ERC II blankets everything, even charity. This straightjacket also forecasts and orders cuts in the social agenda, if it becomes excessively "generous" to the poor.
It is hard to find anything happy or prosperous about the coming New Year.