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Central American University - UCA  
  Number 143 | Junio 1993



Foreign AID: Where have all the Dollars Gone?

It doesn’t help at all if more foreign exchange enters the country if there is no change in economic policy or the way the governments spends so much money.

Anne Larson

Shortly before Minister of the Presidency Antonio Lacayo's trip to the Paris Club meeting on April 2, everything seemed to be going against the Nicaraguan government. The UNO coalition refused to discuss its differences with the government in a National Dialogue; the FSLN the government's most important ally declared its opposition more firmly than ever to the current economic plan and organized a special Sandinista Assembly meeting to discuss an alternative; and by the eve of the Paris meeting, in spite of a special 12 day trip to Washington, Lacayo had not been able to obtain the release of $50 million in US aid suspended by former president Bush in 1992.

Given all this, what on earth could the government expect from its meeting with donor nations and financial organizations in Paris? It urgently needed $150 million in additional foreign aid in order to sustain the Nicaraguan economy in 1993. Was there really any hope of getting it? Then, the day the economic team was leaving for France, the government announced that Spain had authorized a $90 million credit line for Nicaragua. And once in Paris, just moments before the decisive meeting was to begin, another even more important announcement was made: Clinton was releasing the US aid.

The government's luck had apparently taken a 180 degree turn; now everything was in its favor. And after the Paris Club negotiations, Lacayo proclaimed an even greater victory: the government delegation had obtained $750 million in aid for Nicaragua. This was far more than the $150 million it was seeking. How could this be? Or is the government only telling part of the story?

The Paris Club Meeting

What Lacayo did not explain was that of this $750 million, 550 had already been conceded prior to the Paris meeting in bilateral negotiations with the governments and international aid organizations that make up the Paris Club. The Nicaraguan government had been holding this card in its hand for some time, but was waiting to play it at the best possible political moment.

So what, then, did it really get in Paris? Another $200 million? Not even that. To the $550 million already authorized, Lacayo simply added the $90 million commercial credit from Spain announced prior to the meeting; the $50 million released by the US government, which was already counted in total 1992 aid; as well as what Nicaragua really obtained in the Paris Club negotiations: a total of about $20 million, mainly added to already existing European funded projects, and a $40 million bridge loan.

The truth is that the government went in search of $150 million, and, in spite of having gotten promises for some new aid during the meeting, it still needs that $150 million. New money for projects does not help, because what the government needs is foreign exchange to support the balance of payments or, more precisely, it needs dollars to pay the Nicaraguan economy's relatively high bill for imports. The cost of imports has skyrocketed in the past several years as a result of the obligatory opening of the Nicaraguan market to foreign products part of the economic structural adjustment plan prescribed by the very same organizations meeting in Paris.

The government's victory cry had political ends and did make a political impact, but the country's financial situation is still critical.

Aid Flows In...

The Chamorro government has repeatedly bragged that it enjoys exceptional international support for putting Nicaragua's economy on the road to recovery. According to its own declarations, the country received more than $2 billion in aid in 1991 and 1992. Paradoxically, however, the government itself and all the country's political and social sectors agree that poverty and unemployment worsened considerably during those same two years. If conditions in the country are only getting worse, where has all that aid money gone? Was it not so much after all, or is it that foreign aid simply hasn't reached the people?
Using the example of US aid, in comparison with the other Central American countries, Nicaragua has, in fact, received significantly greater foreign aid than all except El Salvador. And in aid per capita, it has received more than even El Salvador. (See Table 1.)

When the Chamorro government won the elections in 1990, it did so with the full support of the United States. Shortly after the new government's inauguration, President Bush announced the end of the economic and commercial embargo that Ronald Reagan had imposed on the Sandinista government in 1985, opening the doors once again for providing US aid to Nicaragua. The end of the US blockade also reopened the possibility of receiving international financing from multilateral organizations such as the International Monetary Fund (IMF) and the World Bank, which Reagan and Bush had heavily pressured not to aid the Sandinista government.

Since that time, economic policy in Nicaragua has been oriented toward the country's reinsertion into the world market. A fundamental requirement for this is getting back into good standing with and thus being eligible for financing from the multilateral banks, which also means submitting to their conditions for that financing.

...Aid Flows Out

The first step Nicaragua had to take to reenter the world of the multilaterals was to pay off its outstanding debt obligations with those organizations. (The Sandinista government stopped paying these debts when, with the imposition of the US trade embargo, it became clear that the multilateral banks were not going to continue giving new loans to Nicaragua under the Sandinistas.) Therefore, of the $1.2 billion in international aid that the Chamorro government received for 1991, over $500 million went to pay pending debts.

At the same time, in order to obtain new loans from the multilateral banks, the government has had to accept the economic recipe known as monetary stabilization and structural adjustment programs that these organizations impose on underdeveloped nations.

A key element of this program the factor responsible for the government's current liquidity crisis is the opening of the Nicaraguan market to foreign imports. Nicaragua had to rapidly reduce the import tariffs that protected its agricultural and industrial producers, thus submitting them to foreign competition at a substantial disadvantage.

In addition to driving numerous national producers to bankruptcy, the result has been a boom in imports. By 1992, imports had increased 63% in relation to 1989, the last year of the Sandinista government. The majority of these new imports are not goods aimed at supporting production, but are consumer goods, especially luxury items for high income sectors.

This increase in imports, combined with a drop in exports, resulted in a gap in the trade balance in 1992 three times greater than the trade gap in 1989. Last year's trade gap was almost $700 million three times the income from exports for that same year. (See Table 2.)

According to the theory of the multilateral organizations, Nicaragua's exports should have increased as a result of incentives to the export sector provided by the structural adjustment plan. The devaluation of the local currency had precisely the goal of lowering labor costs and thus stimulating exports by making them more profitable. The idea is that the country will export more and thus finance the increase in imports that also resulted from the adjustment plan.

But exports have not increased. On the contrary, export income continues to fall. After a slight increase between 1989 and 1990, export income dropped over $100 million between 1990 and 1992. This is largely due to the drop in international prices for Nicaragua's most important export products. Between 1991 and 1992, the price of coffee dropped 16%, cotton, 28%, and beef, 25%.

This situation with imports increasing and export income dropping means that international aid must be spent on financing the trade deficit, or more specifically, on financing this boom in the import of luxury goods. So the foreign aid flowing into Nicaragua from abroad flows right back out to pay foreign debts. Those who are benefitting, therefore, from foreign aid to Nicaragua are the large importers, such as the Pellas principal importers of Toyota cars and trucks and the Mánticas owners of the most powerful supermarket chain. These importers not only get bank loans to import these luxury items but also pay much lower import tariffs due to the structural adjustment's open market policies.

In 1991, the government spent over $300 million in international aid money on foreign imports. The cost of imports together with the debt arrears paid that same year resulted in a total of almost $840 million in foreign aid 69% of the total entering the country only to be spent abroad.

The same thing happened in 1992. With the debt arrears paid off, the government now must keep up to date on its annual interest payments on the multilateral debt. And since there was no miraculous export reactivation, it also needed foreign aid in cash to pay the costly import bill. So once again, 69% of total aid money flowed right back out of Nicaragua. (See Graphics 1 and 2). It is clear that returning to and staying in good standing with the multilateral institutions has had a very high cost.

In 1991, the Nicaraguan government invested less than $400 million in international aid in infrastructure, production, health or education. In 1992, this amount was less than $200 million. The aid is being spent fundamentally on supporting the reinsertion of the country or, more precisely, of one sector of the country in the world market, instead of on improving the living conditions of the poor majority. And, in fact, it is being invested in sustaining an economic plan that has actually lowered almost everyone's standard of living.

Who is benefitting from this situation? In 1991, public consumption dropped 35%, and private consumption rose 33%. Public consumption reflects the amount the government spends on social services for the popular sectors. Private consumption reflects the buying power of the upper and middle classes.

Aid for Projects: A Lot Never Arrives

There is another significant problem with respect to the use of international aid. The amount of aid promised and programmed is not the amount the government has actually received. It has received much less because it has little capacity to implement the projects to which a significant portion of the aid is directed. For example, by September of 1992, with only three months of the year to go, the government had only received 54% of the total aid programmed for the year. Calculating that the aid arrived in the last three months at approximately the same rate as the rest of the year, only 72% of the aid programmed for 1992 was actually disbursed.

Even when the $104 million in withheld US aid is discounted from this total, since it was retained only for political reasons and is therefore unrelated to project implementation, the government still only received an estimated 80% of the aid programmed for last year.

The government is much more skilled at spending money directed to debt payments and imports than that directed to development projects. The aid that the government receives for the debt and imports is disbursed in cash. Aid for development may be provided in material goods or also in cash, but this money is tied to specific projects and is only disbursed in order to prevent it from being spent for other purposes or poorly managed when that project has reached a certain stage.

By the end of September of last year, 66% of the aid programmed for debt and import payments had been disbursed, compared to only 39% of the aid programmed for development projects. (See Table 3). Therefore, even if more foreign aid was really directed toward the Nicaraguan people, instead of toward paying foreign debts, this money would still not reach the people as long as the government does not improve its capacity to implement projects. The problem is largely due to the huge cuts that have been made in the government itself, as part of the structural adjustment plan, leaving far fewer personnel and especially experienced personnel to carry out projects.

Trends in Aid

Due to its postwar situation, Nicaragua was given the special status of "exceptional treatment" by the international community in 1990. This meant that it would receive more aid than that which is generally authorized to underdeveloped nations, and that there would be a high proportion of donations with respect to loans.
The goal was to support Nicaragua during its transition to "normality," when it would receive similar aid levels and be subject to the same rules of the game as other countries at similar stages of development. One of the biggest backers of this strategy has been the US Agency for International Development (AID). In 1992, for example, some 80% of US aid went to support the balance of payments, that is, to help pay for imports and cancel the debt.

"Normality" means the normalization of relations with the multilateral banks, which would again authorize loans to Nicaragua as to any other country. "Normality" also means implementing the economic program these institutions impose. Though it has had little success in all of Latin America, this economic plan is supposed to lead to the country's economic reactivation and development, leaving the need for foreign aid in the past.

It is, therefore, no surprise that international aid to Nicaragua is dropping. This was foreseen as part of the plan. And though the government has asked for an extension of the country's exceptional treatment, it has not been able to maintain the level of aid obtained in 1991. Aid has dropped from more than $1.2 billion that year to $800 million in 1992 though only about $575 million was actually disbursed and to some $660 million for 1993.

This total for 1993 does not include the US aid withheld from last year, because it was already included in 1992's accounts. It also does not include the $40 million bridge loan obtained in Paris, because this type of loan is very short term and is only authorized to bridge a financial gap while awaiting another loan. It does, however, include the $90 million commercial credit from Spain, though this is actually a 5 year credit and should not be included in its totality in 1993.

Excluding the financing authorized to pay Nicaragua's debt arrears in 1991, aid from multilateral organizations doubled from 1991 to 1992. Including aid to pay the outstanding debt, multilateral financing remained approximately the same. Nevertheless, since according to these lending institutions' theory exports should take off as a result of economic adjustments, total multilateral aid programmed for 1993 has fallen over $100 million.

A glance at foreign aid levels from different parts of the world shows that aid to Nicaragua is dropping everywhere, except from Western Europe. European nations responded to the retention of US aid in 1992 by backing the Nicaraguan government: after promising $200 million in 1991 and 1992, it increased programmed aid for 1993 by 30%. And even if the recently authorized credit line from Spain is spread over several years, total aid is still maintained at about $200 million for this year.

On the other hand, there is a significant difference between aid programmed and aid disbursed from Western Europe. In 1992, only half was actually spent. This is related to the problem of project implementation mentioned earlier, given that 70% of European aid is tied to specific development projects.

US aid which totals almost 50% of bilateral aid from 1991 to 1993 is also dropping. From $250 million in 1991, it dropped 20% in 1992 and 1993, and sources from the Clinton administration have conveyed that no more than $125 million will be authorized for 1994.

Less is known about trends in aid from Japan and Taiwan. In 1991 and 1992, total aid from these two nations came to about $75 million each year, but then plummeted to a third of this for 1993. Nevertheless, there are rumors that Japan and Taiwan may be the ones to help Nicaragua resolve its current liquidity crisis by helping cover the balance of payments deficit.

Another trend expected in foreign aid now that it is no longer "exceptional" is that the Nicaragua will receive fewer donations and more loans. What is observed, again, is a significant difference between aid programmed and aid disbursed. Between 1991 and 1993, with respect to aid programmed, the proportion of donations to loans rose from 52% to 60%, then fell to 55% for 1993. But in terms of aid disbursed, donations dropped to 42% in 1992. This difference can be attributed to the fact that, in 1992, donations tended to be more tied to projects, while loans were more aimed at debt payments and imports.

A Catch 22

European governments, in general, give aid for specific projects, as do some multilateral organizations, such as the Central American Economic Integration Bank (BCIE). Others, however, such as the World Bank and Interamerican Development Bank, as well as the US, Japan and Taiwan, have given aid primarily to support debt payments and imports.

Given all this support for the balance of payments, one could ask why the Nicaraguan government is in a liquidity crisis why it still needs $150 million more to cover import payments. The reason is precisely because these donors are beginning to change their position regarding the use of aid. For 1993, of all the foreign aid approved a week prior to the Paris meeting (therefore excluding the credit from Spain as well as what was obtained in Paris), 35% was aimed at debt payments and 20% at imports. This total of 55% represents a significant drop in the proportion of aid to be spent in these areas over the two previous years, when 69% was directed to the financial sector. (See Graphic 3.)

All of Nicaragua applauds the fact that a greater portion of foreign assistance will be spent on development projects rather than on payments made outside the country, but changing where the aid is directed is not enough. The economic policy responsible for getting the government into this current situation must also be changed. The indiscriminate opening of the market has resulted in an unpayable import bill.
And the dismantling of the state sector has resulted in the government's inability to implement projects. It is meaningless to direct more aid to development projects under these circumstances.

It is somewhat ironic that the same organizations and governments that imposed the economic policy that led to this situation do not want to help resolve the problems it has caused.

If they no longer provide or provide less financing for the balance of payments without modifying the economic program they themselves dictated, they are simply abandoning the government in a catch 22.


Without negotiations that would result in its total or almost total elimination, the foreign debt will always be an unbearable burden for Nicaragua. Vice minister of Foreign Cooperation Sergio Blandón recently stated that the country's debt, at $10.8 billion, is the largest per capita debt in the world: every Nicaraguan owes $2,700. According to a World Bank report published in Nicaragua in December of last year, Nicaragua was scheduled, for 1992, to pay $495.2 million in interest on this debt; for 1993, $508.3 million; for 1994, $629.8 million; for 1995, $654.3 million; and for 1996, $732.9 million. In 1992, the government spent some $200 million in interest payments,
without touching the principal. The Nicaraguan government though it seeks to distinguish itself from the Sandinista government for political reasons must do the same thing the Sandinistas did: not pay the total amount due.

Nicaragua's debt, with interest payments that grow every year and a principal that stays the same, is like the debt of all Latin American countries unpayable. But the financial organizations and wealthy countries, who are aware of this, still want to recover at least some of the interest due. They thus recover, little by little, the unpayable principal and, more important still, hold onto a mechanism by which the countries of the South remain dependent, and continue to apply the anti national and anti popular neoliberal plans that the North prescribes.

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Foreign AID: Where have all the Dollars Gone?

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