Part 2: The Economic Scene: The Unpayable Internal Debt Is the Budget’s "Black Hole"
The 2003 budget agreed to by the executive and the IMF will soon take center stage in the mass of negotiations and deals
absorbing the political elite today. At the heart of this budget is
a "black hole" that no one wants to discuss openly but that is swallowing up the country’s scarce resources.
The National Assembly debate on the bill for the 2003 budget sent by the executive is scheduled to get underway in mid-October. This budget reflects the agreements that the Bolaños government reached with the International Monetary Fund (IMF), but the political crisis triggered by the anti-corruption struggle will make the debate even more heated than it otherwise would be.
What the IMF designedThe budget has a belt-tightening logic: public spending reduced even more and no substantive investments in health and education. This contraction will be as politically damaging to Bolaños as it will be economically and socially damaging to the already strangled country. Even before submitting it, the government knows that the 38 FSLN legislators will oppose it. The only strategy, then, is to try to get the 45 PLC legislators who support Alemán to join forces with the Blue & White bench and push it through quickly. What is Bolaños prepared to pay for this support? The budget is the high card in all the threats of punishment and all the deals being negotiated around impunity in the anti-corruption war right now.
The PLC representatives could decide to approve the budget in exchange for something worthy of the political cost they will have to pay with their impoverished grassroots supporters. They may even assume that they can ameliorate that cost by repeating their 1998 performance, when they approved a similar budget for the following year that they subsequently failed to apply, using Mitch as their excuse. They may calculate that somewhere along the way they will be able to shift the load as they did when Alemán was in the executive office.
The FSLN will use its unbending opposition to the IMF-imposed budget as a political-ideological banner already included in its electoral calculations. All the disasters that IMF adjustment policies have caused in Latin America, especially Argentina and Brazil, have triggered unprecedented discontent and justifiable rejection of those policies, and with Brazil’s Lula riding the crest of this wave of opposition, it will surely grow. As the FSLN’s most recent speeches demonstrate, it has decided to join the wave.
The IMF’s concept of good governance is limited to a government’s ability to get legislative approval of its adjustment programs and then apply them successfully. Though its speeches on governance have incorporated the need to win civil society’s consensus to be able to implement the adjustment, in practice the IMF doesn’t give a fig how or even if a government gets that consensus. It is quite satisfied if the government just has the skill to get the political elite to approve, even if this "skill" usually fosters corruption.
Pressured on so many flanks, President Enrique Bolaños fully agrees with the IMF’s viewpoint on governance. To get the budget passed, he needs the Liberals because he cannot have the Sandinistas; the last thing he wants is also to have to consult the Economic and Social Planning Council (CONPES), the constitutionally mandated presidential consultative body in which civil society is amply represented.
Low inflation gets us nothingGiven its technocratic vision, the IMF’s first objective in cutting the budget is to maintain Nicaragua’s single-digit annual inflation levels. Thanks to heavy public spending cuts, cumulative inflation has barely reached 3% so far this year, a level normally achieved only by developed countries.
What does Nicaragua gain with such restriction and such low inflation? Precious little. The fact is that inflation could get up to around 10-11% without substantially changing anything. This is precisely one of the central aspects of Nobel Economic laureate Joseph Stiglitz’s criticism of IMF policies. Stiglitz insists that in times of acute economic recession such as Nicaragua is experiencing, a very restrictive public spending policy to achieve low inflation has never had any real or positive impact on the economic growth of any developing country. But he might as well whistle into the wind, because the IMF is sticking to its dogmas.
A vicious circular deal
There is an even more serious problem with Nicaragua’s 2003 budget bill, however. The Bolaños government’s drastic public spending cuts at so much sacrifice to the population plus the imposing of order after Alemán’s debauchery have allowed the Central Bank to accumulate net savings of roughly 700 million córdobas (over US$48 million) so far this year. The problem is not the existence of this surplus of income over spending, but rather that it is being used to pay the government’s domestic debt with Nicaragua’s banks rather than improve the squalid quality of life of the majority of the population.
Bolaños continually counsels that corruption doesn’t pay, but the numbers belie his claim. These banks being given priority over an impoverished population loaned the money to the government at onerous rates and harsh repayment schedules, fully aware of the horrendous situation the country was in, and are now raking in the dividends although it is affecting everyone around them.
The Alemán administration’s waste, corruption and lack of discipline, especially in its last two years, plus the bailout of the banks that collapsed those same years—another expression of the PLC-FSLN pact—are at the root of the internal debt rapidly run up with national creditors, particularly the country’s six remaining private banks. The fact that these banks have also invested a major portion of their portfolios in certificates, securities and bonds issued by the Central Bank exempts them from paying profit taxes on the interest these issues are earning. It’s a great deal for the banks and a vicious circular deal for the government. The banks bought the government bonds under very attractive conditions, and in so doing gained another advantage: exemption from paying the government taxes on the juicy earnings from them.
The government’s debt with these six banks is financially unsustainable, and given the current state of the country, is ethically unsustainable as well. But this is not discussed, at least not sufficiently, or clearly and insistently enough.
And why not? Mainly because the chief stockholders of three of these six banks are kingpins in the Bolaños government: BAC’s Carlos Pellas is Bolaños’ economics czar, BANEXPO’s Ernesto Fernández Hollman is closely linked to the government through his personal friendship with Bolaños and BANCENTRO’s Eduardo Montealegre is nothing short of treasury minister. The other three banks are the BDF, which houses the army’s sizable account and received most of the Sandinista capital after INTERBANK went under; BANPRO, which is less influential; and Caley Dagnall, which has the least capital of all.
Considering how much payment of the internal debt will drag on the national economy, and that the payment is being made to banks so closely linked to the executive branch, one could be excused for drawing a conclusion as shocking as it is worrying. Could it be that the President, this champion of anti-corruption, is organizing the national macroeconomy and finances to develop himself and his clique rather than the nation?
The IMF officials and technical experts may or may not be aware of all these links, but the IMF’s greatest fault does not reside in the fact that the bankers are part of the government itself. Rather, it lies in the fact that its anti-inflationary dogmatism and imposition of such a restrictive fiscal policy have turned Nicaragua into a country increasingly indebted to its banks, a commitment that is worsening the poverty and misery.
The domestic debt weighs heavier than the foreign oneNicaragua’s domestic debt with the Nicaraguan private sector—mainly but not exclusively these six banks—represents a greater problem for the country than the foreign debt right now. According to the latest estimates, it is equivalent to some US$1.5 billion. Although the foreign debt is almost exactly four times greater, it is not as onerous because Nicaragua doesn’t pay it, only pays part, pays late or renegotiates deadlines and interest rates. It is also less onerous because the deadlines and interest rates offered by bilateral development agencies or the multilateral lending agencies are much softer than those of the private commercial banks.
In the case of the domestic debt, Bolaños has reiterated that his government will honor its obligations. In other words, we are using a double standard. We do not honor our obligations for international loans but do so punctually when they are with our own bankers, who charge the government unfair interests far beyond what we pay on the foreign debt. Almost all of the new debt that Nicaragua has contracted with the World Bank or the Inter-American Development Bank carries a 0-2% annual interest rate with a 10-year grace period and a 40-year repayment deadline. In abysmal contrast, the debt with the domestic bankers has a maximum 2-year repayment deadline at 18% interest! The government recently made a great show of announcing that the interest would be lowered to 8-9%, but on $1.5 billion that is still unpayable for our impoverished economy.
It’s just not mentionedWhat can be done? Someone has to start arguing in favor of restructuring the domestic debt. It’s not a matter of defaulting, but rather of restructuring it so it will be possible to pay. The countries of the South that are questioning the foreign debt have already argued for this solution with some success.
The major institutional problem with restructuring the domestic debt is that the government must be the only arbiter and there is no clear indication so far that the Bolaños government wants to arbitrate this operation. The greatest "cultural" problem is that the foreign debt is already massively assumed, understood and assimilated in people’s awareness. We may not all know how much we owe, but everybody knows that it is a lot. We may not all know how much is paid in interest, but everybody knows that it has been asphyxiating the economy. Nobody knows anything about the domestic debt, however, how unjust and how unpayable it is, how it is asphyxiating the economy. And that is because the issue is simply not mentioned. The close links between the government and the bankers, and between the banks and the media, which live off bank ads, combine to keep a lid on the issue. Who is going to explain what lies behind the domestic debt? Who will denounce this onerous burden?
Bolaños is not wearing The starting point is to recognize that the national banking system has no patriotic perspective on the economic crisis affecting the country it operates in; it lacks that "vision of a nation" so bandied about these days. In the seventies, Nicaragua’s economic elite was rooted in Nicaragua, but the current members of this select group have uprooted themselves from their country. They either live abroad, or have their largest and best businesses abroad, particularly in Miami. Nicaragua’s big, basically finance capitalists, who no longer have major interests in Nicaragua, only want guaranteed profits for any investments they deign to make in this miserable little country that was once their homeland. But it is not just an attitudinal problem: in such an ultra-competitive globalized world, they cannot permit themselves any "weakness," "resignation" or "sacrifices" for Nicaragua because the competition would mow them down.
the hat of his office
In his genetic and historical alliance with these capitalists, Bolaños appears blind to the political cost that he personally and the whole country must pay for honoring the domestic debt burden in this way. In his dealings with these bankers, Bolaños is not wearing the hat of the office he now holds, but that of the businessman and bankers’ friend he always was, has not ceased being and will go on being afterward.
His economic team suffers the same problem. The case of Eduardo Montealegre is the most obvious: he heads up the negotiations with the IMF, the drafting of the budget and the design of the macroeconomic policy. But he is also one of the bankers benefited by preferential payment of the domestic debt, which, together with the service on the foreign debt represents over 38% of government expenditures in next year’s budget. His outside interests are far too clear to allow him an unbiased, national interest in solving this problem.
Will the US Treasury Nonetheless, someone has to say something. The government has reported that a US Treasury Department expert will come to Nicaragua for two years to analyze our domestic debt and find a way to restructure it. Perhaps the US government’s proven determining influence over all the decisions that Bolaños makes will be enough to get the debt restructured. Could the Bolaños government be waiting for a restructuring endorsed by the United States? Could President Bolaños himself be waiting for an official recommendation from the US Treasury that makes clear that the domestic debt is unpayable and should not continue to be paid under the current conditions so he can safely switch his business hat for that of the President of the Republic?
expert speak up?
If this is the case, it renders even more relevant the following opinion of Nicaraguan economist Néstor Avendaño, proffered as the budget debate was about to begin in the National Assembly. "National economic programs must not be imported in English or in any language other than Nicaraguan Spanish. It is a national shame that what is called the Poverty Reduction Strategy was written first in English then translated into Spanish. Only we truly know our potential and our productive limitations, our idiosyncrasies and customs, our riches and our poverty, our ethics and our shame. Unfortunately, Nicaragua has no economic strategy formulated and coordinated by its governmental authorities. It only has fiscal and monetarist dictates from abroad, orders to privatize the public estate, and official assignations for high-level public officials on top of salaries and stipends that assault the dignity of nearly half of the 5.3 million Nicaraguans, those living on a dollar a day or less."