What Must We Defend in Negotiations with the IMF?

On what terms should Nicaragua hammer out its new agreement with the International Monetary Fund? While bilateral cooperation is waiting for such an agreement to disburse some US$130 million in aid for the 2007 national budget, the new government blows hot and cold. What are the IMF’s conditions, what must Nicaragua defend during the negotiations and what maneuvering room does it have to do so?

Adolfo Acevedo

Nicaragua’s three-year program with the International Monetary Fund (IMF) in the framework of the agreement on Financial Service for Poverty Reduction and Growth—later extended to four years—terminated on December 15, 2006. With that, Nicaragua completed 15 years of relations with the IMF, during which it negotiated four programs.

What is the IMF basing the new negotiations on?

At the end of this last program, the IMF established the following starting points from which to begin negotiating a new one with the government elected last November:

* A reform of the Municipalities Law and the Municipal Transfers Law to “neutralize” such transfers once and for all. The July 2003 Municipal Transfers Law mandates increasing transfers of income to the municipal governments starting in 2004. The IMF mission, backed by the World Bank and the Inter-American Development Bank (IDB), urged the authorities to “match the income transfers to the devolution of expenses to ensure the process’s fiscal neutrality.” This presumes that the responsibilities assigned by law to the municipalities would be fully financed by existing tax potential, which is not the case. Contrary to national consensus, the IMF-World Bank-IDB base their proposed reform of these two laws on the idea that the Nicaraguan municipalities do not suffer from any fiscal deficit.

* An “automatic adjustment” of electricity rates and a reform of the Energy Stability Law to eliminate energy price controls.

* The implementation of a detailed “road map” for approving and putting into effect the Fiscal Responsibility Law, which would establish a series of permanent rules subordinating the behavior of the country’s fiscal policy. Nicaragua would only be allowed to stray from these “rules” during a national catastrophe that is duly qualified as such. In practical terms this would give the multi-year “ceilings,” rules and fiscal restrictions agreed with the IMF the rank of law. It would also eliminate the constitutional budgetary allocations automatically earmarked for public universities (the controversial “6%”), the municipal governments and the judicial branch.

* A “reform” of the social security system.
* A freezing of the government payroll in real terms. The fundamental reason for this lies in the IMF’s concern that public sector salary increases—above all in education and health—could have a “demonstration effect” on private sector workers and thus on the competitiveness of Nicaraguan wages, particularly in the maquila assembly plants for re-export that have been established here.

An unequal power relationship

What real negotiating room does Nicaragua have with the IMF? At the heart of IMF conditionality lies a negotiation process between the Fund and any member country requesting financial assistance that is based on power. Assuming that all other elements are constant, the greater the asymmetry of power between the member country and the IMF and the greater the country’s need for an IMF program to access urgently needed financial resources, the more likely it is that the conditionality will translate into the imposition of policies. The opposite is also true, as Ariel Buira points out: “The bigger the country, the stronger its financial position, the more financing alternatives open to it and the better the quality of its economic team, the less likely it is to have to accept conditions it doesn’t like.”

Is there no wiggling room?

Is Nicaragua a country with no room for maneuver? The Budgetary Support Group of donor countries—the European Commission, Finland, Germany, Holland, Norway, Switzerland, Sweden, the United Kingdom and the World Bank—finances nearly 9% of Nicaragua’s budget, and is the only part of the budget’s financing sources supposedly bound to the IMF’s green light. The main—almost exclusive—justification of the need for IMF conditionality is to guarantee this group’s disbursements.

Yet the agreement between the Budgetary Support Group and the Government of Nicaragua contains no clause establishing the existence of a program with the IMF as a requirement for the group’s disbursements. The Swedish Ambassador to Nicaragua, Eva Zetterberg, highlighted this in her response to President Daniel Ortega’s January 24 speech attacking the IMF and its policies: “In the case of Sweden and various other donors, the country is not required to have an agreement with the Fund.”

The United Kingdom’s Department for International Development has declared since 2005 that it will not support any program implemented by financial organizations that require developing countries to apply privatization and deregulation measures—which are typical of these organizations—and the United Kingdom suspended its contribution to the World Bank over just such demands. In 2006, the Government of Norway declared that it, too, would not support the programs of multilateral organizations that include privatization and deregulation requirements, and at the end of that year it sponsored an international conference on IMF and World Bank conditionality, to which I was invited, during which important criticisms were voiced.

Will we have a chance with the framework?

Given all of this, and bearing in mind that the new program will establish a framework that could very strictly delimit the margins for public policy action during the next three years, what must Nicaragua defend in the upcoming negotiations with the IMF? These negotiations will be decisive in determining whether Nicaragua will be able to achieve the Millennium Development Goals and its own goals on education, health, housing, access to drinking water and sanitation and basic infrastructure—goals that are considered basic and unalienable rights for all human beings.

In Nicaragua’s case, investment in human capital, which should ensure the right to quality education and health for all, takes on even greater importance because the country is going through a period of profound socio-demographic changes that will have critical and nearly irreversible repercussions on the country’s future.

Or will it be a social catastrophe?

The last census shows that the Nicaraguan working age population is growing very fast, quicker than the total population. This means there will be an increasing number of working-aged people in Nicaraguan households and fewer dependents—particularly children—to support. If these working-aged people could find decent, adequately paid jobs, it would provide the households much more income, implying greater investment in the education and health of each child or otherwise dependent person. If this growing labor force could find work in highly productive jobs, the economy’s growth potential would increase considerably, generating a virtuous circle.

For this window of opportunity to be beneficial, however, depends largely on existing job opportunities and the preparation received by those entering the labor market. If it can’t be guaranteed from this point onwards that young people enter the labor market with suitable qualifications, this opportunity will turn into a social catastrophe marked by high unemployment, public insecurity and undoubtedly increasing mass emigration in the future.

Another million young people
condemned to poverty?

Rather than generating highly productive, adequately paid jobs for this rapidly increasing workforce, however, the Nicaraguan economy is producing precarious ones frequently characterized by self-employment in the informal sector, which are marked by low productivity, require very low skill levels and provide very poor remuneration.

With access to quality education closed off all these years to children from low-income households—in other words, the absolute majority of the country’s children—the country has been condemned to a very poorly skilled work force that can only be absorbed by the kinds of jobs our economy is predominantly generating. The Nicaraguan economy can’t start to generate high-quality jobs because they demand a highly-skilled work force, which for the most part doesn’t exist in Nicaragua.

In the last 16 years, over a million young people with two, three, four or at the most five years of schooling, and poor schooling at that, have joined the labor market. This is well below the minimum needed to provide any real chance of not having to spend the next 50 years of their adult life below the threshold of absolute poverty. If the right efforts aren’t made and too little is invested, the faster growth of the labor force means we will very soon be witnessing yet another million young people condemned to enter the labor market with meager schooling. If that happens, our unique window of opportunity will have been lost forever, as it will only be open for a limited period of time.

Another factor that should be confronted during negotiations with the IMF is the need to ensure that the excluded and marginalized population—the majority of which is located in rural areas—has access to social services and basic infrastructure. This is a human right the state is obliged to guarantee.

What must we safeguard
during these negotiations?

When negotiating with the IMF, the new Nicaraguan government must represent the needs, concerns and interests of all Nicaraguans and make a firm and decided defense of the indivisible, inalienable and unrenounceable human rights of the over five million people living in the country. The following fundamental objectives must be ensured:

* That national education, health, food security and nutrition, housing and basic infrastructure budgets be increased to a level that guarantees compliance with both the Millennium Development Goals and the national goals in these fundamental areas.
* That salaries for workers in the areas of public education, health and public security be increased over the next five years to a level comparable with their Central American counterparts.
* That the onerous domestic public debt be restructured so that the public sector can earmark enough resources for the above-mentioned increase. That debt service is strangling any possibility our country has to invest in the human capital and basic infrastructure indispensable for its development.
* That a tax reform be promoted that increases the tax system’s efficiency and above all makes it progressive, ensuring that all sectors that concentrate income pay proportionately more, thus generating the necessary resources to invest in the future.
* That cooperation from the Republic of Venezuela support the budgetary efforts needed to achieve increasingly universal access to social and public services.
* That fulfillment of the Millennium Development Goals be used as the criterion for evaluating the “sustainability” of the public debt. A “sustainable” debt would allow these goals to be achieved, as former Secretary General of the United Nations, Kofi Annan, proposed.
* That state regulation of public services be preserved to ensure quality provision and stop the existing monopolies and oligopolies from using their power to harm the population.
* That these agreements strictly respect all dimensions of the autonomy of municipal governments and public universities and the constitutionally established budgetary allocations.

The essential nature of
participation and information

Any agreement with the IMF must be based on unconditional and nonnegotiable respect for Nicaragua’s Constitution and laws. The IMF’s demands can in no way be allowed to violate the principle of non-intervention in a state’s internal affairs, which includes any foreign demand to change the country’s self-established legal order provided that it does not violate human rights.

The government must take enough time not only to prepare an economic and social program in line with these characteristics and underpinned by sound technical arguments, but also—and this is fundamental—to build solid national consensus. This would make the negotiating stance presented to the IMF a national position. To achieve this, the government must open up a broadly participatory and fully informed national deliberation process, i.e. one that involves the majority of the national sectors.

Such issues can’t just be settled in closed-door sessions with the economic and political power groups. They affect each and every person living in Nicaragua. This is where participation and citizens’ democracy really begin to make sense.

Adolfo Acevedo Vogl is an economist who works with the Civil Coordinator of Nicaraguan civil society organizations.

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