Sixteen Years Lost in Five Agreements with the IMF
A lot has gone with the wind in 16 years of IMF-imposed agreements and programs. Way too much. Unless we shake off the IMF’s one-track thinking, freely and democratically exploring other economic options, as other Latin American countries have already begun to do, Nicaragua will soon have mortgaged its entire future.
In September 1991, Nicaragua signed an 18-month “stand-by” program with the IMF in its first agreement with that institution after the FSLN’s 1990 electoral defeat. May 1994 ushered in the second program, this time a three-year one under the new Enhanced Structural Adjustment Facility (ESAF) service. Both were negotiated by the government of Violeta Chamorro. The third program, signed in 1998 by the Alemán government, was a new ESAF agreement and would be in effect until March 2002. The fourth three-year program, which ended up being extended to four, was signed by the IMF and the Bolaños government in December 2002, this time under the IMF’s Poverty Reduction and Growth Facility (PRGF) service. And the fifth three-year program, also a PRGF, was signed last year by the new Ortega government.
After war came adjustmentIn the early nineties, Nicaragua was emerging from a very destructive war with a profoundly deteriorated economy. In those conditions, what the country needed was an intensive investment process to rehabilitate and develop the country’s physical infrastructure and human capital, both of which came out of the war in tatters. There was talk of a “mini-Marshall plan.”
Instead, the IMF concentrated on imposing a drastic “standard” economic stabilization program followed by a structural adjustment aimed at quickly lowering the fiscal deficits to a minimum whatever the cost, even though the country’s fiscal income was extremely small. Meanwhile, it prioritized use of those limited resources to pay the foreign debt service, also at whatever cost; such payments absorbed an average 51% of the country’s fiscal income. These massive restrictions meant that Nicaragua had virtually no resources in that decade to make the indispensable investments to recuperate even basic future development perspectives and reduce its enormous poverty levels.
In that context of scant fiscal income and huge foreign debt payments, keeping the fiscal deficit at a minimum could only be done with absolutely rock-bottom per-capita spending on the state’s fundamental responsibilities: education, health care, drinking water and sanitation, housing and physical infrastructure.
Abandoning the countryside Economic theory recognizes public investment in spheres such as human capital, physical capital (infrastructure), and knowledge and technology as essential because they are prerequisites to and fundamental elements of development. But the severe fiscal restrictions and absolute prioritizing of public debt service promoted by the IMF in developing countries fundamentally restrict the possibilities of future development. The IMF’s conditionality not only imposes high short-term costs, further aggravating the countries’ initial economic difficulties and imposing high social costs on the population; it also means irreversible long-term costs.
and dismantling what industry existed
It has never been explained why the adjustment effort to ensure payment on the foreign debt in those years focused exclusively on containing spending in the other categories. Increasing fiscal income would have been a much more efficient and less costly way to adjust the economy given the country’s low level of fiscal income, particularly from income tax. It also would have avoided such an unhealthy redistribution of income in favor of the already wealthy.
At the same time as all this was happening, the rural zones, which had the most widespread and extreme poverty levels, were left to fend for themselves. The rural areas account for 43% of Nicaragua’s population and generate the most employment (agriculture absorbs 34% of total occupation). More than 75% of agricultural employment is generated by very small economic units with little land that employ between 1 and 5 people, almost always family members.
Those years also witnessed the dismantling of the institutions that traditionally promoted agriculture and supported small and medium producers (rural credit programs, technical assistance, the state grain storage enterprise known as ENABAS), pushing the rural population’s marginalization and poverty to the extreme. All this was done in the purely ideological belief that government interventions only distort markets, and that if left to act freely, markets produce a restructuring that favors greater “efficiency.” The IMF demanded the fastest possible privatization of public enterprises and the total opening, deregulation and liberalization of the economy rather than ensuring the country’s rehabilitation and the creation of basic infrastructure conditions and human capital with an eye to future development.
The rapid opening of the economy—whose factories had come out of the war extremely deteriorated, obsolete and lagging behind in every way—meant the dismantling of small-scale manufacturing and much of the country’s scant industry. Financial deregulation quickly concentrated credit in commerce and consumption by the wealthy, limiting to a minimum any financing for productive activity and drying up credit to small and medium producers.
The state was left with no instruments to implement any development policies for the selective promotion and protection of activities or productive rehabilitation and diversification.
A drastic drop in salaries:One of the main focal points of the IMF policy, consistent with its ideological skew, is the drastic reduction of state employment and of public sector salaries in real terms. This was achieved by “freezing” those salaries in nominal terms.
“The only way to think”
As a result of this policy, the government’s budget line for “wage and salary spending” fell from 30% of total central government spending in 1992 to only 17% in 1997. At the same time, the total salary mass executed by the government was reduced in absolute terms from the equivalent of US$157 million to US$105 million in the same period. According to data from the Treasury Ministry’s Public Function Division, the average monthly public worker’s salary—already only 74% of the national average—plunged from US$140 to US$93 in those years, leaving it at only 54% of the national average. Teachers, police officers and health workers, especially nurses and doctors, are still suffering the consequences of the enormous salary gap created at that time.
The country not only assumed the IMF’s positive conditionality, in other words specific things it had to do and quantitative targets it had to hit to merit the disbursements. Worse yet, it accepted a negative conditionality in which the mere consideration of policy options and development approaches not in line with the multilateral financing institutions’ prevailing visions and approaches were rejected out of hand.
The possibility of exploring other policy options is the only way to keep the future of the country and the millions of people living in it from being decided based on processes that close out possibly better approaches. Otherwise we buttress the perception that our future is pre-determined, with an imposed focus that is supposedly the only way to think. This leaves no room for the exercise of democracy, which is based on the ability to freely examine and choose among multiple options.
The long list of conditions of the first two ESAFsThe emphasis on IMF conditionality was reflected in the “structural performance indicators” of the successive ESAF programs. The following are only the most important 1994-97 performance criteria:
- Continue reducing the import duty barriers that protect national production.
- Avoid any recapitalization of the state banking system.
- Regulate the Privatization Law.
- Present a Telecommunications Sector bill permitting privatization of TELCOR, the state-run telecommunications monopoly.
- Put at least 40% of TELCOR’s shares on the market, including an administration contract.
- Offer the 38 remaining companies held by CORNAP for sale to the private sector (by that time CORNAP, a state holding company created exclusively to offload state-held enterprises, had privatized 300 companies; only these 38 plus the public utilities remained).
- Finish privatizing the mining companies.
- Present a bill allowing the private sector to participate in the electricity and hydrocarbon sectors.
- Privatize ENIGAS and LUBNICA (gas and oil).
- Privatize various activities of PETRONIC (fuel).
- Maintain the nominal freeze on public salaries (teachers, health workers and police) and continue reducing state employment.
- Apply “cost recovery” measures (fees) for secondary education.
In the 1998-2002 ESAF, these were the structural performance criteria:
- No use of directed credit policies. Credit was to be assigned according to market criteria.
- Reduce state employment by another 15,500 people.
- Pass a law to break up ENEL, the electricity utility, into separate entities: a regulatory entity that would remain in state hands and the rest into enterprises that generate and distribute electricity, thus permitting the privatization of these two latter functions.
- Sell or lease the electricity generation and distribution enterprises.
- Pass a law separating the public water and sanitation utility into INAA as a state regulatory body and ENACAL as the distributor of the drinking water service to pave the way for ENACAL’s privatization.
- Continue adjusting the electricity and water rates monthly.
- Establish a new rate system for water and electricity.
- Pass a law authorizing the privatization of ENITEL (telephone service).
- Privatize the port services.
- Pass a hydrocarbon sector law to allow private entities to explore and exploit.
- Liquidate at least 80% of the National Development Bank’s assets.
- Sell off 49% of the capital of the Nicaraguan Investment Fund (FNI), the state financing entity.
- Privatize ENABAS (the state grain storage enterprise).
Following that, the requisites to reach the “Culmination Point” of the Highly Indebted Poor Countries (HIPC) Initiative and thus write off a large part of the country’s foreign debt included privatizing social security and selling off all ENITEL shares still in state hands.
This was only possible by negotiatingIn this list of conditionalities, the most high-profile items were slashing state employment and nominally freezing the salaries of remaining state employees; introducing charges into social services such as health and education, adjusting public service rates to increase their profitability and thus their appeal to foreign investors, and privatizing the energy and telecommunications sectors and ultimately the social security system.
with the “upper echelons” of the opposition
One might wonder how such drastic conditions could be implemented in Nicaragua without greater obstacles, considering the strength of the Sandinista opposition forces and the energy of the social movements linked to the FSLN after the February 1990 electoral defeat, not to mention the weakness of the 14-party coalition that won those elections, which splintered within days and had little force to impose any conservative restoration project. It’s evident that this project could not have achieved its targets or even gotten close to them without political transactions at the highest levels. The leadership echelons of the party that directed the revolution and the different organizations linked to it negotiated the preservation of certain arenas of economic and political power and partial concessions that ensured them their own spaces for insertion in exchange for ensuring that the restructuring process would be politically viable.
In a country in which the unions could paralyze all economic activity within an hour in 1990, there was no real resistance to the privatizations because the Sandinista opposition’s political position was that they were “inevitable,” ergo the wisest thing was to get on board. The Sandinista union leaders decided to “trade unemployment for businesses,” in the words of one of them. This means they were fully aware of what was going down. Knowing these policies would result in enormous unemployment, they would wage no great struggles to prevent them; but in exchange would negotiate control of a number of the companies being privatized. This trade-off was given the politically correct sounding name of Area of Workers’ Property.
The FSLN’s responsibilityIt was also obvious that even if the union movement’s then still considerable strength was used to preserve some economic policies that ensured certain spaces of inclusion—for example, development promotion institutions, directed credit policies, temporary and selective protection of certain sectors—the massive unemployment to ensue would end up dismantling them. It was further evident that the imposed economic policy would asphyxiate whatever companies remained in union hands, and that a weakened union movement reduced to its minimum expression wouldn’t have the strength to defend them. Lo and behold, that’s precisely what happened.
A different kind of negotiation aimed at preserving institutions and policies rather than ephemeral pieces of the action would have better translated the real correlation of social and political forces at that moment in a society in which those who won the elections didn’t have the strength to impose themselves and those who lost preserved a huge social force.
Allowing the IMF policies to be imposed without even negotiating the preservation of certain margins of social inclusion meant that the impact of those policies disarticulated the social sectors that had supported the revolution. That drastic structural change in the correlation of forces in Nicaraguan society made it possible to reestablish an economic and social model that was even more exclusive than the one that had reigned during the Somoza family dictatorship. Apparently, however, all that really interested those in charge of negotiating on the Sandinista side was preserving political, institutional and economic spaces for them and theirs.
In 1994, the IMF said it would only approve the first ESAF if the program had the necessary “political consensus,” which obviously referred to the FSLN. And it got it. Several years later, an FSLN delegation accompanied Alemán government officials to Washington to facilitate approval of the 1998-2002 ESAF; FSLN legislators then voted in favor of all the laws mentioned in it with little fuss. As President Daniel Ortega has said, the FSLN has the merit of having “contributed to national stability,” in that its National Assembly bench voted for all the laws the financing agencies required to implement the regressive social restructuring and dismantling of the national state.
Without this system of top level transactions, which began as early as 1990 during the government transition period, the conservative restoration process would never have gone forward with the dizzying speed it did, nor would it have attained the same radical breadth and depth. Even the struggles by different sectors ended up being the subject of transactions that wore them down over time because the FSLN recovered negotiating power vis-à-vis the government in the top-level negotiations that took place after struggles that even included deaths. The interrupted system of transactions was renewed and the problems of the sector that had taken up the struggle were left by the wayside, unresolved. And so it went until the next crisis, which was handled in exactly the same way.
2002-2006: In the middle of the crisisThe IMF suspended the second ESAF in 2001, the final year of Arnoldo Alemán’s term as President, because the fiscal deficit had shot up drastically due to a massive increase in the domestic debt service combined with a reduction in fiscal income. This was caused by an economic deceleration provoked by the fall of international coffee prices, the banking crises (nearly half a dozen banks had failed by that year) and the lowering of the selective sales tax (ISC) in that period. But it was an election year and the government wasn’t about to implement the drastic additional adjustment measures demanded by the IMF. Had it done so, the PLC might well have lost the elections.
In 2002, the PLC’s winning presidential candidate Enrique Bolaños negotiated another three-year program with the IMF, this time under the PRGF service. The program’s measures put the brakes on all economic activity given that the economy was already suffering severe external terms of trade shock due to the plunging coffee prices and accompanying economic and social repercussions—including a major agricultural crisis—as well as the banking crisis and a 50% hike in oil prices. This economic recession, together with the implementation of the schedule for lowering the ICS for “fiscal industry” products, had already triggered a fall in fiscal income.
The heart of the new program: At the same time, public spending was skyrocketing, largely thanks to the new domestic debt service levels. The Central Bank of Nicaragua (BCN) had been abusing the issuance of Nicaraguan Investment Certificates (CENI bonds) to get the córdobas needed to buy foreign exchange on the currency markets to beef up its fallen international reserve rate as the IMF demanded. Making matters even worse, the nearly insolvent Central Bank then illegally issued an exaggerated amount of CENIs to cover the deficits of liquidated banks in favor of the “acquiring” banks. (For a detailed explanation of this controversial CENI issue, see last month’s edition of envío.)
Pay the domestic debt at all cost
This bond issue put the country at risk of a gigantic foreign exchange and financial crisis. By the end of 2001, the BCN had issued bonds valued at some US$790 million, even though it had only $320 million in gross reserves. The debt with a short payment deadline represented 95% of those reserves. At the same time, the BCN’s exaggerated over-indebtedness generated enormous fiscal pressures because the debt payment had to be assumed by the public treasury. The effective domestic debt service payment climbed to an equivalent of 64% of fiscal income in 2003 then to 86% the following year.
The government saw a violent rise in its cash outflows while fiscal income was falling, yet it nonetheless had to comply with its international commitments, protect “Spending on Poverty” and still transfer enough resources to the BCN to increase its net international reserves. All this involved unfinanceable fiscal deficit levels.
Worse yet, the IMF agreements usually prioritize fiscal restraint over fiscal adjustment measures such as increased tax collection. The government had two other basic options: severely restrict the growth of primary spending as a proportion of the GDP and reroute the “interim relief” from the foreign debt service resulting from the HIPC write-off. In fact, all of these measures were insufficient to cover the domestic debt service. To meet the fiscal targets negotiated with the IMF, the government had to cover the huge domestic debt using income from the sale of the remaining state shares in ENITEL and the auctioning off of assets held by the collapsed banks.
In sum, transferring resources to the BCN to recover its international reserve levels and covering the domestic debt service at all cost became the heart of the new “poverty reduction” program with the IMF, even though it meant restricting social spending even more severely. The following year, when there were no more assets for the government to sell off, it renegotiated the payment schedule and interest rates on the most recent CENI issue with the banks that held those bonds since they constituted a large portion of the debt. But this did not free up any resources for social spending.
Debt service leaves no way In the pre-HIPC period (1994-98), annual service on the foreign debt had averaged US$287.5 million. The portion financed with national resources used an average 51% of fiscal income, making it impossible to invest what was needed in human capital and basic infrastructure. Thanks to the HIPC Initiative, the debt service was reduced to $87 million in 2005, less than 9% of fiscal income, theoretically freeing up a significant amount for increased social spending, which was the creditors’ intention.
to invest in development
In marked contrast, service on the domestic debt was very low in the pre-HIPC period, but shot up to $367.5 million in 2003 and $354.2 million in 2004, equivalent to 46.3% and 39.5% of the tax income in those years. As seen above, the result has been that we still can’t invest what is needed to start narrowing the enormous social backlog in this decade. The fiscal resources freed up by the HIPC Initiative and even an important part of the verified increase in fiscal income have had to cover this enormous increase in both the domestic debt service and transfers to the Central Bank.
The involvement of the IMF program in this situation requires comment: it forced the rerouting of the resources freed up by the HIPC Initiative to payment on the domestic debt. In addition, as Nicaragua has a regressive tax structure, the payment of a large part of the debt with fiscal income collected by that structure reflects an unprecedented redistribution of income from the vast majority of low-income Nicaraguans to the country’s wealthiest sectors.
The IMF intervened in the municipalities… In June 2003 the National Assembly overwhelmingly approved the Law of Budgetary Transfers to the Municipalities, which established a national budget line called “Municipal Transfer.” Its funding would be calculated as a percentage of tax income, starting at 4% in 2004 and increasing annually by 0.5% as long as the GDP grows by at least 1% to reach a maximum 10% in 2010.
But as earmarking increasing resources to the municipal governments would endanger fulfillment of the domestic debt payment projections, the IMF introduced a new condition for 2004-2007: the central government would have to “neutralize” the municipal transfers by reducing its own spending by one córdoba for every córdoba transferred to the municipal governments. The IMF even required a change in the legal decentralization framework to force the municipalities to assume spending responsibilities that previously corresponded to the central government.
…but had to backpedal on social security In another important measure with the IMF’s approval, the government suspended the privatization of social security. That scheme, which involved replacing the public social security system with a private pension savings scheme, had been established in 2000 as a requisite for Nicaragua achieving the HIPC Initiative’s Culmination Point, having reached its Decision Point. Nicaraguan social security experts argued that such privatization would open an enormous financial gap in what remained of the previous system, endangering payment of pensions already contracted by the Nicaraguan Social Security Institute. The warnings were ignored and the critics of privatization shrugged off, although no serious estimation had yet been done of the fiscal costs entailed in privatizing social security.
With only 15 days to go before the new system was to go into effect, it emerged that the fiscal costs would hit US$9.35 billion over the next 27 years and, as they would have to be borne by the public treasury, the massive imbalance of the fiscal accounts would leave the country unsustainably indebted. There was no alternative to suspending implementation of the new system.
Nicaragua was on the brink of assuming an enormous cost thanks to a condition based purely on the IMF’s ideological preference. It was never explained clearly why the IMF hadn’t estimated the outrageous cost this would have burdened the country with.
More conditions and more debatable argumentsNicaragua finally reached the Culmination Point of the HIPC Initiative in January 2004. The FSLN opposition played a fundamental role in this, with its legislative bench voting in favor of all laws required by the IMF.
The following year, the IMF upped the ante on its conditionality, demanding a detailed agenda of Tax Code reforms, consensually agreed by the executive branch, the National Assembly and private sector representatives. It also insisted on reforming the recently approved Budgetary Regime and Financial Administration Law and the Law of Budgetary Transfers to the Municipalities.
The IMF suspended the PRGF that year, first arguing that the National Assembly had approved salary increases for teachers and health workers and increased transfers to the municipalities that broke with the program’s fiscal goals. Later, when it became evident that fiscal income had again been underestimated and would comfortably cover all these increases, the IMF maintained its suspension, this time blaming the delay in approving the laws the government had agreed to.
There was indeed a delay, due to the political crisis sparked by the constitutional reforms that shifted certain presidential powers to the legislative branch, passed by the FSLN-PLC legislators as part of the pact between the two parties. This crisis was so intense that the Bolaños government brought in the Organization of American States, alleging that democracy was in danger in Nicaragua.
Suspending the IMF program meant suspending US$115 million in disbursements from the Budgetary Support Donors’ Group (Germany, Finland, Norway, the Netherlands, the UK, Sweden, Switzerland, the European Community, the World Bank and the Inter-American Development Bank), which had tied payment to compliance with the IMF program. This link between the IMF program and the Group’s disbursements meant the country had no negotiating power with the IMF.
The IMF exacts its pound—or two—of fleshThe IMF finally agreed to reestablish the program after the FSLN promised the government it would approve both the pending laws and a special law postponing the controversial constitutional reforms until January 2007, once Bolaños was out of power. But the IMF didn’t back down without exacting its pound of flesh.
First it introduced the freezing of the government’s overall payroll in real terms as a new performance criterion: the payroll could only grow at the same rate as projected inflation. It’s rationale? Increasing the average public sector workers’ salary by a larger percentage than the average private sector one would risk triggering inflation and loss of competitiveness in attracting foreign investment. It was never made clear why raising the salary mass of teachers and health workers by a few hundred million córdobas (one US dollar was equivalent to roughly 17 córdobas at the time) financed with properly backed funds threatened to unleash inflation while the launching of billions of córdobas into circulation to pay off the onerous domestic debt didn’t set off alarm bells with the IMF, despite their even greater inflationary potential.
The IMF argued that a 20% increase in the salary of teachers and health workers could have a “demonstration effect,” sparking demands for salary increases by workers in the formal private sector as well, thus raising the cost of the Nicaraguan labor force and losing Nicaragua its main attraction to foreign investment: the bargain basement price of its labor force. The importance of decent education and health care to that work force didn’t enter into the IMF’s position, nor did the fact that the salaries of these public sector workers are far enough below the average private sector worker’s salary that a 20% increase wouldn’t even level the playing field.
The IMF also required the reform of the recently approved General Education Law as a condition for not suspending its program with Nicaragua anew. Concretely it insisted on the elimination of article 91, which established that the non-university education budget must grow annually by the equivalent of 5% of projected tax income. This article would permit the country, for the first time in its history, to earmark 6% of the GDP for public education spending between 2009 and 2010. Even impoverished Honduras had hit 7% of the GDP in 2001 and Bolivia did so in 2005.
Even more insistently the IMF demanded that electricity rates be automatically adjusted to the increase in international oil prices, but this was beyond the government’s power. In the same vein it demanded a reform to the Energy Stability Law, which regulated the profit margin the electricity distribution companies could obtain in the “spot market,” where electricity prices are established by supply and demand and reach exaggerated levels in the peak hours.
A new requirement with enormous repercussionsLast but far from least, the IMF demanded that a proposal be drawn up for implementation of the Fiscal Responsibility Law, which would introduce rules for the behavior of the fiscal variables, particularly those related to “zero fiscal deficit” and prompt payment of the public debt service. These conditions included establishing rigid payroll ceilings, which ALL public sector institutions at ALL government levels had to adhere to on pain of sanctions. As the IMF explicitly established, this meant reforming the Constitution to eliminate municipal autonomy and university autonomy.
It was a requirement of enormous scope. Eliminating municipal government autonomy meant attacking the state’s very political structure. According to the IMF, the proposal would have to include eliminating from the Constitution the assignment of 6% of the national budget for public universities and 4% for the judicial branch, and suspending the obligation to earmark a sufficient percentage for municipal transfers. It was the first time the IMF requirements included reforms to the Constitution on highly sensitive political issues.
Saved by the bellIn December 2005, just as the IMF was making all these demands, a genuine debacle began in which this international organization lost power and influence. It was kicked off by the departure of middle-income Asian countries from the IMF’s sphere of influence. Next came the confrontation between Argentina and the IMF: for the first time a middle-income country stood up to the IMF, achieving a slam dunk success into the bargain (see envío, November 2007).
The rest is history. In mid-December 2005, Brazil announced it would pay off its debt with the International Monetary Fund ahead of time. Two days later, Argentine announced it would follow suit. These two South American countries were copied by Serbia, Indonesia, Uruguay and the Philippines. When Indonesia added its name to the list, three of the IMF’s four largest debtors had squeezed out from under its thumb. Next Turkey, the Ukraine and Pakistan severely reduced their debts and then low-income Bolivia announced in March 2007 that it no longer needed IMF assistance after 20 consecutive years under the Fund’s iron rule. Ecuador also announced it would repay its small debt with the IMF and no longer require its assistance.
As a result of these early repayments, the IMF’s outstanding loan portfolio took a rapid and unprecedented nosedive, from US$114 billion in December 2003 to $55 billion in December 2005, $22 billion in December 2006 and on down to only $16.7 billion today. An 85.3% drop in five years to its lowest level in the past quarter of a century!
The IMF’s only clients now The loss of its main middle-income clients means that the income the IMF receives through interest payments has dropped just as precipitously. Service charges and interest payments are projected to fall from US$3.19 billion in 2005 to $635 million in 2009, a shrinkage of nearly $2.5 billion in only four years. If Turkey finally decides to cancel its debt ahead of time, the IMF’s projected interest income for 2009 will plunge even further.
are poor and irrelevant
Given such a drastic reduction in its main source of income, by 2007 the IMF could no longer meet its budget of nearly US$1 billion and maintain its staff of almost 3,000 people using the payment of interest and charges from borrowing countries, even with the additional income from the financial investments it has been making with resources idled by the lack of borrowers. It will be forced to offload part of its gold reserves to get the resources needed to continue operating over the coming years, a move that requires the approval of the US Congress. Lacking clients to loan to, the IMF will increasingly turn into a stock market investor and financier.
Its difficult financial situation is the price the IMF is now paying for having abused the countries that sought its assistance. As former World Bank chief economist Joseph Stiglitz says: “IMF debtor countries have been financing this institution through the spread they pay on the money they receive as loans. The problem now is that nobody wants IMF loans anymore. Usually banks try to be friendly to their clients, but the IMF’s history hasn’t been stellar with respect to client relations. It thus comes as no surprise that the IMF has lost nearly all of its important clients and only one country (Turkey) represents half of the IMF’s open loan portfolio. And I ask my friends in that county: “Have you really decided to keep on sustaining that institution?”
IMF now reduced to only concessionary creditsFrom being at the commanding heights of world power before the crisis of the Asian tigers, the IMF now finds itself rapidly losing influence and increasingly viewed as irrelevant. It no longer has relations with heavyweights such as Russia, Poland, South Korea, the Philippines, Indonesia, Thailand, Mexico, Brazil or Argentina. With ever fewer exceptions, the main clients it has left are the planet’s poorest countries, particularly extremely poor African and Asian ones that are part of the HIPC Initiative together with Haiti and Nicaragua in Latin America—in other words, countries with ever less relevance on the world stage.
Right now, only 8 of the 32 countries that have open programs with the IMF are not low-income and receive non-concessionary credits from the Fund’s General Resources Account—actually 7, because the program with the Dominican Republic ended on January 30 this year. Of these countries, just one (again Turkey) accounts for 95.6% of the resources committed by the IMF in these non-concessionary programs. The remaining 24 countries with IMF programs are extremely poor and receive concessionary PRGF credits.
These concessionary credit operations, such as the IMF’s current one with Nicaragua, don’t represent income that could help finance the IMF’s budget, but rather net costs to the institution. The loans it grants to countries such as ours are subsidized and both the subsidies and administrative costs of the loans must be covered with the increasingly shrinking contributions of the wealthy countries. For obvious reasons, then, the IMF as an institution isn’t very enthusiastic about continued involvement in concessionary credit operations with countries like Nicaragua.
Ortega goes after the IMF, These were the circumstances in which the new government of Nicaragua, headed by Daniel Ortega, quickly and insistently sought a program with a reticent IMF. Ortega argued that it would be an error for the IMF to “abandon Nicaragua again, as it did in the eighties,” when he headed the decade-long revolutionary government.
and it tries to back off
The IMF directors only caved in to the new government’s determined request to negotiate another program after prolonged deliberation. Nicaragua has already achieved “mature stabilizer” status by attaining the characteristics of countries the IMF believes must “begin to walk on their own two feet”: 3-4% annual GDP growth, single-digit inflation, a fiscal deficit after donations of 2% of the GDP or less and high international monetary reserves. The country Ortega inherited from the Bolaños government in 2007 met every one of those requisites.
The IMF was also reticent because independent financial experts and even its own directors now recognize that it lacks the expertise required to deal with the problem of development and poverty, and thus must stop financing poor countries. US Treasury Department Under-Secretary for International Affairs Tim Adams, for example, publicly told the IMF executive director in September 2005 that the IMF is not a development institution and its financial participation in the low-income countries has clearly been “terribly mistaken.” The Malan Committee, brought together in March 2006 by World Bank President Paul Wolfowitz and IMF Executive Director Rodrigo Rato, recommended that the IMF begin to pull out of its long-term financing of operations in low-income countries.
The Ortega government’s insistence on seeking a new program virtually coincided with the announcement by Bolivia and Ecuador that they would no longer need IMF assistance. The Ortega government argued that a new agreement was indispensable to “win over investor confidence.” It’s a pretty shaky argument, as it suggests that only the three Latin American countries that still have programs with the IMF (Peru, Paraguay and Haiti) merit investors’ trust, while all those that prefer to walk on their own two feet are somehow less reliable.
The FSLN government had a strong handA new element in evaluating Nicaragua’s case was that the IMF recognized that in previous programs it had introduced some “performance criteria” over which the government did not have full control, such as passage of laws that depend on the National Assembly.
Since 1990, three successive Nicaraguan governments had agreed to the approval of laws that in fact corresponded to what should be an independent and sovereign branch of state. This was only possible by getting all the political parties to submit unconditionally to the IMF almost as a conditioned reflex. And indeed, from 1991 onwards the National Assembly approved every single law required by the IMF programs; the legislators were pressured by the argument that if they voted them down, Nicaragua would be thrown out of the IMF program and the world would “come down around its ears.” Only in 2005 was the approval of certain required laws delayed, due to the acute political crisis triggered by the constitutional reforms passed by the FSLN and PLC.
Now, the new Ortega government would be able to benefit from the IMF’s willingness to set aside its demand for approval of laws by the National Assembly and its decision to limit the number of conditions to those considered critical to achieve the program’s objectives. Some European countries suggested that it would be a good idea to support the buying up of Nicaragua’s trade debt to encourage other creditors to grant relief in the HIPC Initiative’s terms.
In its negotiation with the IMF the new government also had the advantage that the donor countries had already said that a program with the IMF would no longer be a requisite for their disbursements. Furthermore, it was known by then that, in addition to the traditional cooperation, Nicaragua would have strong alternative financing, such as hundreds of millions of dollars per year from Venezuela, that would not be conditioned to the IMF. All this gave the new government more negotiating cards with the extremely weakened IMF, which was already on the defensive. No government had ever negotiated with the IMF in such advantageous conditions.
Yet nothing changed…For the first time ever the new government could present the IMF with an economic program made in Nicaragua. The IMF would limit itself to reviewing it and would then endorse it if found to be consistent. Astonishingly, however, the government’s proposal was basically the same economic policy implemented by the three preceding governments.
It would seek to maintain deficits after donations of close to 1% of the GDP (2007 showed a moderate surplus), and to freeze the government payroll as a percentage of the GDP until at least 2008 under the same argument: increasing the low-paid state workers’ salary would unleash inflationary pressures and undermine the country’s external competitiveness.
This restriction particularly hits teachers, health workers and police, which account for over 80% of government workers. Not only does it affect their possibilities of getting salary hikes approved to narrow the enormous salary lag behind their colleagues in other Central American countries, but it also drastically restricts the urgently needed hiring of new public servants in their fields. The fact that the real salary taken home by teachers is barely half the average for the overall Nicaraguan labor force means that instead of attracting the qualified personnel the educational system desperately needs, it tends to be left with poorly prepared teachers. The grave problem of low quality education in Nicaragua will never be resolved this way. With respect to the health personnel, data provided by OXFAM International shows that Nicaraguan nurses earn a salary only slightly higher than that of their homologues in extremely poor African countries.
...not even the arm-twisting of legislatorsDuring the National Assembly debate over the 2008 budget, when it was proposed to increase the salary of teachers, health workers and police by 20 percentage points more than allowed in the newly signed agreement with the IMF, the executive branch employed the exact same arguments used by previous governments to get the legislators to approve everything they had agreed to with the IMF: if you change anything Nicaragua will be kicked out of the program and its world will come crashing down...
This time the FSLN legislative bench announced that it would support no salary increase that exceeded the executive branch proposal so as not to endanger the program agreed to with the IMF. The unions linked to the FSLN remained silent during the discussion of this issue.
The priority is still the same: As before, the commitment to “honor” the service on the domestic debt is a basic feature of the new program. It did add that consensus would be sought with the creditors of part of the debt to extend the deadline and reduce the interest rate, something the Bolaños government did in 2003.
Pay the domestic debt at all cost
The FSLN government and the IMF appear to share the belief that it is indispensable for a country as poor as ours to subordinate its entire economic and social policy to the development of a government bond market. This requires generating strong credibility for the bond issues, which in turn requires that the “sacred” obligations derived from them be duly paid, no matter the cost. And it is the IMF that confers sacredness on these commitments.
Such prioritizing of the public debt service and transfers to the Central Bank—under the new program, even more resources need to be transferred to support the accumulation of reserves—will continue to impede Nicaragua’s access to even the minimum resources needed to meet the Millennium Development Goals. To give an idea, the per-capita social spending of Honduras and Bolivia, countries with a similar level of development to Nicaragua’s and also members of the HIPC Initiative, is almost double our own.
Another priority: Open up the energy sectorThis new program also grants special importance to energy sector requirements the previous governments could never implement. The main point is to adjust electricity rates to correct the estimated existing gap. Between November 2007 and March 2008 electricity rates have been “upwardly adjusted” by 18%. The government pledged to establish a mechanism to automatically adjust them to the rise in costs.
It also includes the “introduction of measures” by the end of 2008 that define criminal sanctions by a judicial authority for businesses and individuals found to have committed fraud in the consumption of electricity. Fraud is defined as improper use through illegal connections or alterations to the control and measurement systems; alteration of bills and the destruction or illegal seizure of property that forms part of the public service distribution and installation systems. Thus any “takeover” of installations of Unión Fenosa, the translational electricity distributing company, will be penalized.
While it has been said that the new program doesn’t involve the approval of laws, but only speaks of “adopting measures,” these measures can obviously only be adopted if legislated into Nicaragua’s legal framework.
With respect to illegal connections in spontaneous squatter settlements—the refuge of the poorest population—the program establishes that meters will be installed with the support of the authorities so the population can pay its obligations to Unión Fenosa and “receive a better service.” In the 2008 budget, the government will continue subsidizing Unión Fenosa to the tune of some $20 million, just like the previous governments.
A sovereign or imposed program?At the beginning, Ortega government officials proudly announced that, for the first time, a Nicaraguan government had presented the IMF with a financial-economic program drafted in a sovereign manner and “invited” the IMF to endorse it. And it’s true; the program was genuine government issue, natively manufactured on sovereign national soil.
Yet President Ortega has now begun to refer again to the IMF’s “impositions” in line with his age-old anti-imperialist rhetoric, claiming he had to negotiate the program with a pistol aimed at his head. It’s quite a different line than the one he uses in his frequent meetings with large private business groups, where he emphasizes how important compliance with this program is for Nicaragua.
So what’s the truth? A careful read reveals that every last one of the measures the government now claims were “imposed” by the IMF were in the original proposal drawn up by the government. Surely this discourse about the IMF’s “imposition” is aimed at the FSLN grass roots, the people President Ortega constantly assures that his government represents the “second phase” of the revolution, and to whom some probable-sounding explanation must be given for measures that are battering them with the same force as when the “neoliberal” governments were applying them.
Economist Adolfo José Acevedo Vogl chairs the Civil Coordinator’s Economic Commission. This article is taken from a preliminary study conducted for Kepa Finland.