Envío Digital
Central American University - UCA  
  Number 169 | Agosto 1995



A Parade of Images in Paris

At stake in Paris was whether Nicaragua would change from being classified as a country that receives “aid for development” to being a country that qualifies for “humanitarian aid”, as is the case in many African countries. The only victory of the government in Paris was preventing the reclassification, at least for now.

Nitlapán team

In June 1995, a high level Nicaraguan government delegation went to Paris for the second time this year to meet with representatives from the international community. And for the second time, Minister of the Presidency Antonio Lacayo returned to Nicaragua with a triumphant discourse echoed by the media.

Since these meetings are relatively secret and take place very far away, the only objective of information offered to Nicaraguan public opinion is to persuade it that the government is doing well and that its work outside of the country is successful. The information does not try to inform but to convince. The vast majority of Nicaraguans does not even know that the government goes to Paris, much less its real intentions or the results.

Two Images Designed in Paris

Few people, for example, know that the visits in March and June were very different in all aspects, including where they took place. Some media talk about the "Paris Club" as if going to Paris necessarily means going to the Paris Club. It is true that Paris was the location of both meetings. In March, it was held in the French Ministry of Finance, where the Paris Club meets and where its wealthy member nations discuss with developing nations the latter's huge debt with the former. June's meeting was with the 16 countries in the Consultative Group for Nicaragua, which periodically examines our country's financial cooperation lines. It took place at the French branch of the Interamerican Development Bank (IDB), which sponsored the meeting this year.

Obviously, the content real or assumed of these meetings not only helps the Nicaraguan government create a good image before a misinformed public, but also serves to build a better international image with the countries and financial organizations that attend the meetings. The primary result of these closed yet highly publicized Paris events is to show the Nicaraguan people that their government has the international community's support and show the international community that the Nicaraguan government has its people's support or, at least, that things are going well in Nicaragua.

This is the image, but what is the reality? What were the true results of the meetings in Paris and what are the consequences for the national economy?

Paris, March 1995: A Debt Pardon?

Although some months have now passed, it is worth looking back at the agreements Nicaragua reached in Paris on March 21 regarding service of the foreign debt in order to understand the prospects for net foreign aid (what Nicaragua receives in aid minus what it pays in debt service) in the coming years.

When Lacayo returned from Paris on March 23, he declared that the Nicaraguan delegation had been highly successful and called the result "a great step forward." According to him, 80% of Nicaragua's debt with the Club's member countries had been pardoned, "equivalent to between $500 and 600 million."
When he spoke of "pardoning" the debt, many people assumed he was talking about a reduction of the actual debt amount. But since the debt with Paris Club members topped $1.67 billion at that time, it is hard to figure out where he got the calculation of "$500 to 600 million," other than out of a magician's hat.

In reality, what was agreed to in Paris was the pardoning of 67% of the programmed debt service payments (interest and capital) between April 1995 and June 1997, and a reprogramming of the 33% remaining according to conditions to be determined bilaterally with each creditor. A complementary detail: approximately half of the Club debt had already been renegotiated in 1991 according to conditions that implied pardoning 50% of the originally programmed service. Thus, in referring to half of the debt in March 1995, the supplementary pardon of the service was only 17%.

It is also hard to estimate the precise impact this renegotiation will have on the country's foreign financial balance in 1995 and coming years, since there are different kinds of debts. Some correspond to concessionary credits (granted under much more favorable conditions than those of the capital markets), in the framework of official aid the rich countries earmark for the development of poor countries. The service on these debts will be reprogrammed 100%; that is, all payment will be postponed until April 1997, but will no longer be eligible for future reprogramming.

In any case, the debt service with the Paris Club programmed for the 1995 97 period was, before the March accords, some $188 million, according to the government. This was divided into approximately equal parts between the debt renegotiated in 1991 and the rest. Therefore, taking into account that the period to which the accord is applied (called the consolidation period) is only two and a half years, the effective reduction of the service relative to what was programmed will be some $30 million per year, or 11% of the total programmed annual foreign debt service. Though this is obviously not an insignificant amount, it is far from the announced 80%.

Another positive result was that back payments to date were included in the negotiations, and submitted to the same treatment as the current service. Since the largest back payment was the $580 million owed to Germany for debts to the former East Germany (almost 35% of the total Paris Club debt), a reduction similar to that of the pending payment service is as if there had been a hidden reduction of the total debt amount. While this is an important achievement, it does not directly improve the short term foreign financial balance, because its debt service was not programmed in the first place.

Paris Club: A Creditor Cartel

There is no question that negotiations in Paris were arduous. The government delegation hoped to get more of the debt service pardoned, though the possibility of reducing the debt itself had been discarded from the beginning for two reasons. Some creditors, particularly the United States, totally opposed pardoning Nicaragua's debt because of the issue of the "US" confiscations. In addition, unless the pardon covered 95 100%, it would not have been convenient for Nicaragua. Paris Club rules are that a country that has had part of its debt pardoned cannot request a new round of negotiation for the remainder. It receives what is called an "exit program." Given the high level of Nicaragua's debt in relation to the poor performance of its national economy, this "exit" implies very exceptional treatment (over 95% pardoned) and the international community is unwilling to do this.

Behind this position lie global financial reasons that are out of Nicaragua's control. The very functioning of the Paris Club, which groups together wealthy countries to help them recover their loans to developing countries, does not allow an overall debate about the link between the foreign debt paid by poor countries and the foreign aid they receive or their true ability to pay and emerge from under their over indebtedness. In reality, no such international forum exists, and, despite the opinion of many, the foreign debt issue continues to be dealt with in a bilateral, case by case manner. The Paris Club is a sort of creditors' cartel, but there is no parallel debtors' cartel.

ESAF Objective: Pay More Debt

Nicaragua had other cards in its hand at the March 1995 session. The meeting of the club takes place in the presence of the IMF, whose verdict is very important for the results. Nicaragua signed an Enhanced Structural Adjustment Facility (ESAF) program with the IMF that is almost impossible to fulfill, particularly in terms of the foreign debt service levels the government committed the country to, which were higher than those projected before signing ESAF. Given that the agreement is too optimistic, the IMF's opinion in March 1995 in Paris based on even more optimistic government reports helped give Nicaragua the image of a country able to pay relatively high debt service levels.

One cannot give favorable reports to funders while painting a black image for creditors, above all when the same international institutions are present at both tables. The greatest paradox of this whole situation is that, shortly after the Club session, the IMF technical evaluation mission came to Nicaragua and found the country's finances in a chaotic state. This would not be comprehensible in the ESAF framework unless ESAF's forecasts were too optimistic, which is just what had happened. The chaos, moreover, was not recent; it had been brewing since October 1994.

The most dramatic aspect is that there might not even have been a meeting in March had the IMF mission given its verdict before the Club session. We already know the conclusion: the IMF's objective, in the name of the community of wealthy countries, is simply to maximize foreign debt payment by the highly indebted poor countries. If the economy of such a country improves even if artificially with an ESAF it must pay more. Thus, even if the creditors' club reduces its debt or service, it ends up paying beyond its capacity unless it signs an agreement with the international financial institutions. And if it leaves the program because the payments demanded are higher than its capacity, it is cut off from the possibility of renegotiating!
The Chamorro government, of course, does not see things this way. The fact that it could go to Paris in March, before the IMF evaluation mission came to the country, demonstrates the support it enjoys among the financial institutions. This support allows it to return to Nicaragua with an appearance of success in its foreign negotiations, which it assumes will help in the coming elections. But the people, who experience the results of unsustainable international commitments daily, are not deceived. And the voters are not in Washington or Paris; they are in the streets and fields of Nicaragua.

Paris, June 1995: Even Less Success

Exactly three months after the Club's session, the Nicaraguan government returned to Paris for the meeting of the Donor Community's Consultative Group, presided over this year by the IDB. As expected, the government delegation repeated its triumphalist discourse, and the media were its spokespeople. "The government obtained promises of aid for more than $1.5 billion over the next three years," was a headline in one Nicaraguan newspaper; "The donor community delivered $1.5 billion to the Nicaraguan government yesterday in Paris," said another. On this issue, the rightwing papers were indistinguishable from the leftwing ones.

Subsequent official commentaries and those of economists from distinct sectors only promoted the confusion. Was anything achieved in Paris on June 20? And if something was achieved, was it really something new? What will the funds be used for? Before answering these questions, a different one must be answered. In what conditions did the government appear in Paris? Was the negotiation there affected by Nicaragua's critical political situation?
In principle, the objective of appearing before the Consultative Group is to increase the official aid that wealthy countries offer for development. Since this aid takes the form of economic and social projects, the soliciting government should bring a portfolio of projects that is part of a coherent medium term development program (at least five years). Donors have repeatedly insisted on this point.

For this reason, the government has been designing a National Development Plan since the end of 1994. Its "final version" was revised at the end of May, shortly before leaving for Paris. This plan, designed "to initiate a constructive dialogue with different sectors of the country," is contradictory from the very first page, where it says, "restricted circulation." Does this mean that only certain renowned and qualified citizens have the right to represent "different sectors of the country"? But the most serious contradiction is that the program was first "circulated" not in Managua but in Paris, and its only real objective was to show donors that Nicaragua is capable of designing a medium term program.

The plan was not the only requirement imposed by the donors. They also required a positive IMF evaluation of the current economic program (ESAF) which translates into some simple macroeconomic conditions such as the level of international reserves the Central Bank should have or the fulfillment of some structural adjustment goals such as privatizing TELCOR. The third requirement was that the government come to Paris with a basic national political agreement and the reestablishment of constitutional order, with harmony among the branches of state or at least the appearance of it.

The Two Extremes or the Last Allies?

Of these three fundamental requirements, only the Economic Plan was ready, albeit with serious incoherencies. These did not come to light, however, since they were in the few charts that appeared at the end, and the donor country representatives did not study these details. It was enough that the Plan exist, and it was agreed to examine it in a future meeting. The concrete base of the Plan was not the basis on which funds would be obtained, if they were obtained.

The requirement of a reestablished constitutional order was achieved at high cost at the last minute. Cardinal Obando's actions as mediator and guarantor of the good faith on all sides in the dispute were touted. To improve its image even more, the government had invited all political, business and union groups to include representatives in the official delegation, but most refused, since their presence would be interpreted as a seal of approval on the executive's management at the very peak of the institutional crisis. Only the FSLN and COSEP, the big business umbrella, accepted. Did they travel as representatives of the nation's extremes, on the assumption that if extremes can agree, moderates will too? Or did they travel as the government's last allies? The subtle difference went unnoticed in Paris.

All of this led to a certain appearance that things were going well and, according to the official press release issued by the IDB in Paris on June 20, the Bretton Woods institutions spoke yet again of Nicaragua's "excellent implementation of the stabilization and structural adjustment program." This was quite a paradox, since at that very moment the macro economic conditions had almost provoked a rupture between Nicaragua and the IMF!
The loss of international reserves had been important since October 1994, but this was not the most serious issue. Although certain circumstances explained the bad 1994 results primarily increased spending for fuel for the thermal plants due to the drought and the impossibility of implementing a labor mobility plan in the government as had been agreed to in June the more complex problem was that, despite IMF technical team recommendations for the April June period, the macro financial variables continued to worsen in this period.

May Nicaragua Not Become Africa!

Given this reality, the government had to review its proposals for the Donors' meeting. It went to Paris armed with Minister of Foreign Cooperation Edwin Krüger's speech, edited for the occasion, soliciting $442 million in financing for social and productive infrastructure investment for the 1996 2000 period, based on its "development plan." That is, additional financing for public investment projects, which already have $177 million in foreign financing. With this request, the amount would increase to $619 million by the end of the century.

But the true objective was another: simply to try to conserve international support, even if only verbal, to turn it into a political victory in Nicaraguan public opinion. In the permanent, though not officially declared, electoral battle the country has already been experiencing for months, images are key. And the government has the privileged ability to manipulate national opinion with news from Paris or Washington.

With the virtual freezing of international funds in the first half of 1995 due to Nicaragua's institutional crisis, the possible withdrawal of further "development aid" would have left Nicaragua only eligible for "humanitarian aid" in cases of disasters, famines or wars. At stake in Paris, then, was not so much financing for the Development Plan as the possible reclassification of Nicaragua from a "developing country" to an "extremely poor country," as the majority of African countries are classified. This was avoided for the moment which was an achievement, naturally. But there is a huge gulf between this and claiming that billions of new dollars were obtained.

$1.5 Billion: Where From?

So where did the "over $1.5 billion" announced by the finance minister come from? (Curiously, it was not announced by the minister of foreign cooperation, who headed the delegation.) The answer is simple. In Nicaragua's macro financial projections to design the large scale success of its economy in the near future, the total amount of foreign cooperation earmarked for projects is considered to be $350 million annually. This corresponds to the ceiling amount the government has been able to implement in its public investment program an amount always limited not by the availability of foreign funds, but by the government's institutional ability to design and implement projects. Since this ability is not expected to increase significantly in the near future, this is a conservative but accurate method of maintaining the $350 million constant.

There are also the liquid resources, which the Central Bank uses to sustain the córdoba against the demand for dollars, import fuel or complement the foreign debt payment, or simply accumulate reserves. These funds no longer come in the form of donations as before. The international community's honeymoon with this government ended some time ago. The liquid funds come primarily through ESAF, through which some $170 million are programmed annually until 1997. What will happen after ESAF? Surely another ESAF. Given that the current policies do not promote growth, short term financing will always be necessary. And how much do both of these resources add up to? Some $520 million annually, which is where the "over $1.5 billion" for the next three years comes from. Luckily, math rules have not changed.

So, there was nothing new at the meeting: simply the continuation of a none too glorious hope, one conditioned to resolving the political conflict so "the good faith effort of each of the sectors involved can guarantee its implementation," according to an IDB report. Although this is not assured, government politicians, rewarded for appearing victorious at the foreign negotiations, speak of having obtained resources "even for the next government."

Demanding More and More Clarity

The government also spoke of having obtained some $120 million to buy back the debt with the commercial banks, that ancient debt which has been growing since the Somoza era through the compounding of interest (the Sandinista government broke relations with international private banking early on, though it continued making sporadic payments throughout the 1980s). Without doubt, it is an advance that the government can take advantage of the very low repurchase value of this debt to get rid of such ancient and heavy baggage.

This commercial debt repurchase is in fact an old initiative, but it gained more strength with a new push from the World Bank some months ago and the possibility has been taking concrete form for some time in Washington, not Paris. The possibility has remained latent in Washington, waiting to see how the constitutional conflict was resolved so as to not risk the operation's success. But those who are most up to date on this favorable opportunity have probably tried to speculate with the titles of this debt, which would have the disastrous effect of raising its price in the parallel market, making it significantly more expensive.

While other foreign negotiations are highly publicized even when they are not real, this one, which is quite real, has been kept a relative secret. As always in these types of repurchase operations, those who can get personal profit out of it have the least interest in publicizing it. For the great majority of Nicaraguans, news of what happens in government meetings with the international community, whether in Paris or any other part of the world, is always totally obscure or highly confused. This is not only because of the intrinsic difficulty of the issues, since everything can be explained clearly when there is the willingness to do so, but because these meetings are the object of conscious manipulation by politicians seeking favorable images. It falls to the citizens to demand clarity about these issues, about the economic cooperation agreements, and above all about economic policy; to demand it until they get it.

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