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Central American University - UCA  
  Number 199 | Febrero 1998



New Twist with the IMF: The Winners and the Losers

The signing of the new enhanced structural adjustment facility (ESAF II) starkly illustrated that only some prosper in the Liberal project. And the debate over the 1998 budget illustrated, yet again, that Alemán wants his hands free to exercise this economic project with a discretionality that the reformed Constitution does not grant and the office of Comptroller General is not prepared to let him get away with.

Nitlápan-Envío team

AS 1997 DREW TO A CLOSE, THE ALEMÁN GOVERNMENT FINALLY, through paid publication in the daily newspapers, made known the contents of the Letter of Intent it had signed with the International Monetary Fund as an imminent prior step to signing a new structural adjustment agreement (ESAF II). An important and very defined shift in the government's economic policy was clearly visible in the letter. The nature of the economic project on which President Alemán's Liberal administration is embarked is at last becoming obvious.

Winners and Losers

The "Letter of Intent and Memorandum of Economic and Financial Policies Submitted to the IMF" by the Liberal government reflects an evident realignment of forces within the heterogeneous alliance that brought Arnoldo Alemán to power over a year ago. Two sectors are coming out strengthened by the signing of the new ESAF: the strongest capitalists, who are still based in Miami, and the fraction of the national technocracy that supports the project to transnationalize the Nicaraguan economy.
And the losers? Those who appear to have lost the battle for control of economic policy are national agricultural capital and the fraction of technocrats who wagered that the Liberal project would have a populist cut to its jib.
Another loser is the PLC, Alemán's own Constitutionalist Liberal Party, as political party and electoral machinery. With the signing of the ESAF the PLC's leaders will have to assume the political costs of the new agreement's impact on the grassroots pocketbook. If the signs given in 1997 hold up, however, we can assume that the Liberals will not stop making use of the public coffers to bolster their political and electoral clientele.

BANADES: The Stumbling Block

During its first year of administration the Liberal government made an effort to maintain and publicize a nationalist discourse against the multilateral lending agencies. But that posture didn't stand the government in good stead when the first IMF mission came to Nicaragua, only a month after Alemán took office. Negotiations with the mission failed. With that, the possibility of renegotiating ESAF I, the first structural adjustment agreement, made between the Chamorro government and the IMF in 1994, slipped from Alemán's grasp.
As originally set out in 1995 agreements between the Chamorro government and the creditor countries in the Paris Club, any improvement in Nicaragua's debt payment terms would depend on the results of the IMF's evaluation of ESAF I. The failure of Alemán's negotiations with the IMF meant that the new government did not get a green light to renegotiate its debt interest payments with the Paris Club creditors. That, in turn, meant that foreign debt service increased in 1997.
One key reason for the failure of those first negotiations was the IMF demand that the National Development Bank (BANADES) be privatized or closed. BANADES, the largest of the state banks, has played a key role in financing agricultural production for decades.
The fact that BANADES is technically bankrupt is not the only reason the IMF views its privatization or closure as indispensable. The other reason is that the new government had cancelled any possibility of its financial recovery by decreeing that the legal embargoes on producers in arrears with the bank be suspended. The government also unilaterally cancelled the contract of COBANICS—the famous "Cobra"—which was the company executing the embargoes at the time the new government took office.
"Kill the cobra" had been an Alemán campaign promise, along with a pledge to grant BANADES more capital and reopen some of its rural branches. The branch banks had been closed as part of the reduction of the state banking system agreed to by the Chamorro government in the framework of the IMF's first ESAF. The bankruptcy of the country's most important bank and the setting up of the "Cobra" resulted from the the Chamorro administration's inept and corrupt administration of BANADES.
It is not surprising that the first negotiations between the IMF and the new Liberal government fell apart over the IMF's priority of cutting off all subsidized Central Bank credit to BANADES. The government had had hopes of resurrecting BANADES to support the reactivation of the depressed national production by small, medium and large agricultural capitalists, who had been an essential component of the Liberal Alliance's victory.

The Tax Law:Two Birds with One Stone

The Liberal Alliance defended the interests of non-oligarchic and agricultural capital for its entire first year of administration. Its first sizable economic policy initiative, the tax reform law, had anti-oligarchic features while seeking to create greater efficiency in the national economy overall. The tax law was clearly designed to eliminate import trade monopolies and reduce the industrial oligopolies' protectionist barriers. For the first time in the country's history land ownership was taxed.
On the other hand, the reform reduced the tax burden on wage earners, but eliminated the tax exemptions that the Sandinista government had established to benefit cooperatives and nongovernmental organizations. Logically, oligarchic capital and the new Sandinista capitalists were the sectors most strongly opposed to the law. Both argued that its hidden aim was to open the national market's doors to Nicaraguan capitalists in Miami, the main financial backers of Alemán's electoral campaign.
In fact, Alemán did kill two birds with the same stone by signing the Tax Reform Law. He economically strengthened the government and its allies and dealt a serious economic blow to his two political enemies—the traditional oligarchy and an important fraction of Sandinismo, including its leadership. In addition, the improvement of public finances that implementation of the law should bring about will be a significant feather in the government's cap in future negotiations with the IMF.
Nonetheless, Alemán's "nationalism" began to ring critically false insofar as the increased tax collection thanks to application of the law failed to compensate for both a drop in bilateral foreign cooperation and the notable increase in payments on the foreign debt. As the government itself admits in the Letter of Intent it presented to the IMF, the Central Bank's credit to the government doubled in 1997 over 1996 and the Central Bank was forced to issue bonds indexed to the dollar with interest of up to 25% a year just to have enough foreign currency at hand. The total amount of these bonds was US$340 million, equal to half the country's total annual exports.
This bared the crude national reality that many had already suspected: the Chamorro government's relative economic stability had been achieved only through total dependence on international aid flows and reduction of the service on the foreign debt.

More Errors, Less Aid

The significant decrease in international aid to the Liberal government was not the result of some drastic cut in funds contracted with bilateral cooperation. In 1995, the Chamorro government had negotiated a tri-annual aid package that would cover the country's foreign financing needs until the end of 1997. But the arbitrary firing by President Alemán and his loyal ministers of a significant number of technicians trained to administer bilaterally financed development projects resulted in a notable drop in disbursements for that previously contracted aid.
Besides their economic consequences, these firings continued to cause political and diplomatic tensions for months. The most publicized was President Alemán's verbal spat with Swiss cooperation agency representative Peter Spycher at a party on December 4. Spycher called the President's attention to the unilateral firing of the director of a Swiss-financed rural development project just to put a PLC member in the post. In a fit of anger, Alemán ordered Spycher's expulsion from the country within 48 hours. In response to pressure from European diplomats, Spycher returned and the deadline was postponed first to January 10 and later to April 10. The Swiss government called Alemán's reaction "disproportionate" while he himself justified it as an expression of the nationalism of a poor but dignified country in response to what he called "insolence. "

"Nationalism" Goes Up in Smoke

Today's Nicaragua is so totally dependent on what comes in from abroad that any reduction of foreign cooperation and any further debt payment burdens make it even harder to maintain the price stability inherited from the Chamorro administration. This finally forced the Alemán government to abandon its nationalist discourse completely and get the second ESAF agreement signed with the IMF at any cost.
This necessity is at the core of any economic decision-making. It explains, for example, why the logic of the government's proposed financial and economic policies for the next three years in no way aim to modify the existing macroeconomic scheme, or to reduce the economy's dependence on foreign aid. To the contrary, Nicaragua's government will once again request that the international community increase its bilateral and multilateral cooperation, so it can use that aid to fuel a macroeconomic scheme, proven to be unsustainable, that has brought benefits to only a handful of Nicaraguans.

Alemán Brings Just More of the Same

Since the economic policy scheme remains the same, the gap between what Nicaragua exports and what it imports from the rest of the world will continue to be unsustainable. That means that within another three years the Nicaraguan government will again be begging for more foreign aid. The price of the córdoba with respect to the dollar is now and will continue to be overvalued. One only need look around Managua to see that a small high-income sector—some whose income is originally "clean" and some who have laundered theirs—is the only one enjoying the avalanche of imported luxury goods that are such an insult to the country's economic reality.
In the next three years of applying the new ESAF, the import of luxury goods will not go down as long as the córdoba's dollar price is artificially maintained. By the same token, national exports will not achieve adequate growth rates unless truly attractive prices for national products are established in the international market—which is also done by bringing the córdoba in line with its real dollar value.
Despite all this evidence, the Liberal government proposes to the IMF in its Letter of Intent that, in lieu of modifying the exchange rate policy to adjust the national currency price, it even reduce the sliding rate for the córdoba's dollar value. We thus have a President who began by wrapping himself in the national flag and has ended up defending economic and financial policies that keep the córdoba overvalued and, by so doing, deepen the economy's already profound dependence on the exterior. These policies hand the economy on a silver platter to international interests, represented in Managua by a minority.

A New Wave Of Corruption

Alemán is also shelving his populist electoral campaign promise to create 100,000 jobs a year. With the signing of ESAF II, the government accepts the firing of some 3,000 more public employees. Thousands more will end up without jobs as a result of the partial or total privatization of the state telecommunications, electricity and water companies, a process the government has pledged to the IMF to carry out.
Alemán's large capitalist backers expect to make a killing with these privatizations, just as oligarchic capital and some Sandinistas did with the state businesses privatized during the Chamorro government. The capitalists who move in Alemán's circles are also rubbing their hands over the talk of privatizing the state construction companies and the administration of the country's roadway network as well as the privatization of the profitable state commercial bank, BANIC, or the sale of BANADES branches to private banks.
The signs of corruption around this privatization process were in evidence throughout 1997. The government has put up strong opposition to the National Assembly representatives regulating privatization or being the ones to grant concessions to the electricity company. The government awarded the first sizable contract for building road works to BASS, a US company with very limited experience and with a dubious reputation for having been implicated in money laundering.
Another example of the corruption: in its proposal to the IMF, the government promises eventual indemnification to the old owners of BANIC, who are today prominent government figures. Eduardo Montealegre, named Minister of the Presidency several months ago to regulate Alemán's public appearances, muzzle his outbursts, and thus try to polish up his tarnished image, is a son of BANIC's largest former stockholder. Jaime Morales Carazo, who was Alemán's campaign chief and personal adviser and since January hasbeen in charge of his Social Communication Secretariat, was also linked to BANIC.
The already agreed upon sale of the BANADES assets is a clear expression of the orientation of the Liberal's economic policy. In the Letter of Intent the government promises to cancel BANADES' license as a financial intermediator. To replace it in this task, the government pledges to create a fund to finance bank branches, cooperatives and NGOs that specialize in rural credit. Despite what was written and signed, however, President Alemán has implicitly reneged on this commitment to assist such private initiatives by announcing that he will use what remains of the BANADES infrastructure to create a state institution attending to the peasantry.
The government is determined to attract all the foreign aid it can to develop this institution, which has a political objective that is becoming strategic now that the government's nationalism has been reduced to rhetoric and ESAF II will start seriously castigating the public. With the new rural institution, the Liberals plan to guarantee a captive peasant clientele that will assure them votes in coming elections. Despite its clumsy and avoidable clashes with bilateral cooperation, the government evidences no shame in asking for new resources to finance a project with such a clear political spin.

Beggar on an International Scale

The government is also shameless in presenting its project to increase social spending in the national budget. The Letter of Intent to the IMF explicitly states that the government expects to finance social spending increases with more contributions from foreign donors. To guarantee these contributions, it has initiated talks with different organizations of civil society—the very ones it has fought with and even on occasion disqualified—to get their broad support for the request it will make in April to donor and cooperant countries in the Consultative Group, that they increase their cooperation funds with Nicaragua to US$400 million a year.
This attitude should come as no surprise. The government has made impassioned public confessions of neoliberal faith, stating that the solution to the problem of poverty is in the growth of trickle down economics. The United Nations representative in Nicaragua, Carmelo Angulo, roundly criticized this approach in November 1997 during a debate with Ministry of Agriculture Mario de Franco. On that occasion Angulo outlined its serious limitations unless the structural causes of poverty are attacked and unless enough time is guaranteed for the "trickle" to satisfy the accumulated thirst of so many for justice.
The government went as a beggar to the Consultative Group in Switzerland about the same time as the first deadline for the Swiss functionary who had "offended national sovereignty. "It went with one hand out as a beggar but in the other carried a big political stick. It's the same stick that gets brandished at those whose duty is to oversee the use of public goods (the Comptroller General), at any who think differently, and particularly at the part of organized civil society that has any red and black roots in its past.
It remains to be seen how much aid the government will get from the international community, which is now very aware of the inefficient and openly corrupt way the Liberals are managing the foreign aid resources that have already been received.

Making Payable An Unpayable Debt

One of the government's most publicized justifications and even self-congratulation for signing ESAF is that Nicaragua will thus be included in the Debt Initiative for Highly Indebted Poor Countries, (HIPC). The World Bank and IMF have been promoting this initiative since 1995 but have yet to apply it to any of the 41 countries on their HIPC list.
In essence the initiative seeks to reward the good behavior of exorbitantly indebted poor countries if they agree to adjust their economies to the macroeconomic policies and structural reforms designed by these two multilateral lending agencies. The prize to those who meet the conditions consists of reducing both the principal and the annual servicing of their foreign debt to thus substantially improve their chances for economic recovery. In this reduction, the wealthy countries assume the costs of reducing the total value of the debt to them through their bilateral cooperation, while the lending agencies will refinance—but never write off—the part of the debt made up of outstanding loans to them.
In essence, the initiative is nothing more than the transformation of an unpayable debt into a payable one; converting an amount that really cannot be repaid into a lesser amount that can. It is clear that foreign debt relief under this modality does not guarantee the economic solvency of these poor and highly indebted countries, Nicaragua included, in either the near or distant future.

Coast Elections: A Big Question Mark

The Liberal government has not only the signing of the unpopular ESAF II agreement before it; it is also facing another imminent challenge in the March 1 elections on the Atlantic Coast. Will Arnoldo Alemán, whose own Constitutionalist Liberal Party (PLC) is one of the main contenders in the race, resolve that challenge with populist perquisites, threats to fire state functionaries who aren't loyal to him and what remains of his popularity?Or will he do it with fraud?
The idea of a steamroller victory by the PLC began to be rumored some months ago. To consolidate this image, Alemán and virtually his entire Cabinet plus the head of the army toured the North Atlantic for two days in mid-December—before the campaign officially opened on January 15 and using government funds. Faithful to the overbearing style that has characterized his administration so far, Alemán, leading the caravan of 117 luxury four-wheel drive vehicles carrying 500 people in all, inaugurated "works of progress" in a number of places along the 600-kilometer route.
A similar action was repeated in the South Atlantic on December 26-30, again using public funds to induce votes for the PLC. When asked about this crude expression of state-party confusion, the Liberals usually shrugged it off with "the Sandinistas did it too. "Alemán once smiled at the journalists questioning him about the illegal behavior and said, "Sleeping shrimp get swept by the current. "
The caravan idea was a pretty irregular and noisy start for off-year elections in a single region of the country in which the results are unpredictable. It did not go down too well with the coast population, which has developed something of an allergy to excess government presence since the 1980s. And it triggered an even less desirable response: it coalesced the other national and regional parties in the elections into opposition to the PLC, more than to the FSLN, the PLC's main electoral rival.
After the caravan, the Liberals continued to make illegal moves. Since the Regional Electoral Councils have not always blown the whistle on them, doubts about electoral transparency are growing, sympathy for the PLC among undecided voters has dwindled and the alert mechanisms among the other parties competing for seats on the two Regional Councils have been sharpened. Even when the acts that are denounced are somewhat rectified, they happen again and must be set right again.
The day before the campaign officially kicked off, leaders of the 8 national and 3 regional parties participating in the elections jointly denounced the irregularites. They also ratified their participation in the elections, since they had earlier announced their withdrawal given the PLC's attitude. The parties commented on the Electoral Council's unwillingness at either a national or regional level to put a halt to the PLC's illegality.
As election day nears, there is increasing evidence that the results will reflect the FSLN-PLC two party system in today's Nicaragua. The reforms to the electoral law made at the end of last year set the stage for these two parties to receive more economic resources for their campaigns and assigned them the presidency of all the polling places.
These results are by no means assured, however. The government's erosion nationally (its popularity has fallen some 30 points over the past year) suggests that in both the North and the South Atlantic Autonomous Regions (RAAN and RAAS), the small national or regional parties participating either alone or in alliances could wrest a significant number of votes away from the PLC. This possibility takes on somewhat greater predictability given that the PLC has been the party in power in the RAAN for the past two years and in the RAAS for the past four and there is significant dissatisfaction with its administration in both cases. In the 1994 regional elections, a "throw the bums out" mentality prevailed in both regions. If that attitude sets any precedent, it is no wonder that the Liberal government in Managua is trying to give the PLC all the support it can.
Another possible precedent from 1994 is that even small groups known as popular subscription associations, which only have the funds to concentrate their efforts in a single electoral district, could among them win enough votes to be spoilers. Four such associations are running candidates in both the RAAS and the RAAN.
The FSLN, on the other hand, showed in both the 1990 and 1994 regional elections, as well as in the 1996 general elections, that it has a much more captive vote than the PLC. It made a strong minority showing in all three of those elections, but has not had the stain of failure for eight years, since the dominant benches in both regions have given it little voice. If the FSLN does fall below its relatively steady percentages, we can look to two causes: one is the repetition of the party's 1994 failure to take the coast elections seriously as a harbinger of the next general elections, thus not giving local Sandinista candidates the financial backing they need. The other is that Sandinistas who split from the FSLN in 1994, and some who did so more recently, have formed a center alliance with the Independent Liberal Party, the National Conservative Party and a new grouping calling itself the Coast Popular Party, and are campaigning hard. This alliance has a shot at pulling votes away from both big parties.
One of the more interesting open questions in the race is what the final position of the Council of Elders will be. The Council, which represents some 250 Miskito communities mainly but not only in the RAAN, is one of the main forces behind the call for full independence for the coast over the past few years. As such, it was behind the hoisting of the Miskito flag over the central plaza of Bilwi (Puerto Cabezas) in place of the national one just after the 1996 electoral results were released. It has not forgotten Alemán's grave symbolic insult, when, on his first visit to Bilwi as President, he ordered their flag lowered (which was not done). While the Council of Elders have not yet endorsed any party competing in the elections, they have been clear that they do not endorse the PLC.

Autonomy Threatened

According to a field study done in the RAAN in January by a new research team called No Sabe/No Responde (Doesn't Know/Didn't Respond) in conjunction with the Center for Research and Documentation on the Atlantic Coast (CIDCA-UCA), a perception is growing among the North Atlantic population that regional autonomy will be weakened further if the PLC wins. The study lays it out as follows:
* "Paradoxically, the Liberal government's great promises and works underway in the Atlantic Coast, purposefully linked to the campaign, are not managing to fully capture the hearts and minds of coast people. They not only generate distrust, but are being interpreted as threats.
* "Certainly, 'when the charity is big even the saint is dubious,' but in this case the internationalization of the Bilwi airport and the upgrading of the Managua-Bilwi highway, as well as the possibility of a dry canal with a coast-to-coast train, have resurrected in the minds of the better part of the coast leaders the ghost of the coast's 'reincorporation,' consummated a hundred years ago by Liberal General José Santos Zelaya [President of Nicaragua, 1893-1909].
* "With the communication infrastructure at an optimum functioning point, what is predicted is an inundation of mestizos, who in a short lapse of time will end up dissolving ethnic identity. The Liberal promises thus lean toward closing the century with the unconcluded work of 'Spanish colonization. 'The greatest fear is of losing the framework of traditional life and communal and cultural values, in exchange for the 'glitter' of progress. "
Autonomy, whether empty or full of content, is a key word in these elections. In their campaign, the Liberals have spoken of pushing through a new autonomy law, stating that the current one was annulled by the constitutional reforms of 1995. They neglect to explain how, if that is true, they are competing in the elections under the very law they choose not to recognize.
"Autonomy" is a real sign of identity on the coast, even though the functioning of the autonomous governments has left more than just a lot to be desired, even though in eight years there has been no political will to pass a regulatory law that would give teeth to the existing Autonomy Law, and even though, as a result of all this, the concrete consequences of autonomy have been minimal and diffuse in practice. As the study says:
* "The 1998 elections will be a virtual plebiscite on the validity and continuation of the current autonomy project. Autonomy and the regional autonomous governments first inaugurated in 1990—as a result of the traumatic elections that year—have another political, social, economic and even cultural scenario as their reference point, at both a national and international level.
* "During this time, it has not been autonomous rights that have advanced, but rather fishing and lumbering concessions, many of them with the complicity of coast leaders themselves. The scant exercise of self-determination will continue to be the object of questioning, if not of denial by the governments of the Pacific, which have shown notable insensitivity to the ethnic specificities.
* "For the PLC, the elections are strategically important. With a victory on the coast, they could guarantee the free granting of concessions promised to the investors in Managua and Miami who financed their 1996 campaign. "
Those "investors" are undoubtedly the same ones who have won with the government's gamble of committing the country for another three years to a structural adjustment plan that goes against national interests.

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