Envío Digital
Central American University - UCA  
  Number 177 | Abril 1996



Bridging the Bridge: ESAF and the Future

Until now economic policy remains stabilized on the tip of a boulder that stands in the middle of a river that keeps rising. What to do – dive into the waters and risk death or wait up on the rock until certain death arrives?

Oscar Neira

The International Monetary Fund (IMF) paid its ordinary semi annual visit to Nicaragua at the end of February, this time to evaluate the implementation of the bridge program agreed to in September 1995 and detail fiscal and financial goals for 1996. Compared to other visits, media coverage of this one was particularly modest, which cannot be explained by either the Pope's visit some days earlier or the country's endemic political instability.

As at the end of 1995, there is simply not much to show. Any in depth evaluation of the bridge program would have concluded that the goals established then were totally unrealistic, and thus impossible to meet. Such an evaluation would have left both the IMF technocrats and the government in a bad light, the former for having proposed the impossible and the latter for agreeing to fulfill it.

What is the point of this game of failures? Will the Enhanced Structural Adjustment Facility (ESAF) go under and the IMF withdraw financial support from the country? Or will the IMF be flexible enough to reach an agreement on the 1996 program? If the latter, will its program be more realistic, since this is an electoral year? Is there a risk that the government will still not meet the goals due to electoral populism?

A group of economists discussed these questions, in an opportune forum on ESAF and the country's perspectives organized by CRIES and the Nitlapán Research and Development Institute of the Central American University under the auspices of the Dutch Development Service. The debate paralleled the IMF visit and sought to both distribute information and initiate economic policy proposals for the next government. We summarize below some of the principal conclusions of this event.

The Point of Departure

The government systematically failed to fulfill the ESAF program throughout 1995. Because of this, the reprogrammed goals for 1996 are extremely restrictive in terms of monetary and credit policy, and are strictly attached to the revised international reserves level that must be maintained.

The first evaluation of ESAF took place in March 1995, at which time its goals were reprogrammed due to the drop in international reserves registered at that time. The reprogramming was aimed at giving more weight to the savings goals of the non financial public sector, to the detriment of the Central Bank's expansive credit to private commercial banks and the Nicaraguan Investment Fund (FNI).

Something similar happened again in September 1995, when a second IMF evaluation determined that the March reprogramming had not been observed either. At that point, the ESAF agreement was superceded by a "bridge program" to get back on the ESAF path. In recognition of the deficits accumulated by the public sector, its savings goals were lowered, which affected FNI and private commercial bank credit even more.

On that occasion, the IMF reached agreement with the government on an aggressive "liquidity sterilization" plan, which would keep inflation low by withdrawing money from circulation and immobilizing it in the accumulation of reserves or in savings deposits. The main measures employed to reach these objectives implied withdrawing the equivalent of US$18.2 million. almost 32% of the cash means of payment existing at the end of September 1995. That plan was consistent with the effort needed to reach the reserves goal of the second reprogramming of 1995 in other words, the bridge program.

ESAF in 1995: Poor Implementation

envío anticipated that meeting the bridge program's goals was unlikely. Sure enough, only $28.5 million in reserves (33.4% of what was required) was accumulated between September and December 1995. In addition, the Central Bank continued financing the non financial government sector beyond the amount programmed, which meant that financing to the commercial banks was reduced too much. The FNI reached its deposits target with the Central Bank by restricting the delivery of investment credit to the private sector. At the same time, the Central Bank managed to put 39% more than was programmed in Investment Certificates, which, together with the FNI deposits, constituted 60.4% of accumulated currency at the end of 1995.

Even though more was paid on the debt than had been programmed, 41.6% of the liquid currency from programmed foreign cooperation was not released. The strong restrictions on credit to the commercial banks and private sector took away $4.8 million more than had been reprogrammed for that period.

In terms of monetary policy, the year's results were lean. The last minute excessive restriction meant that the real monetary base dropped by 3.3%, basically due to the contraction of real emission of money, although cash in circulation only dropped by 2.3%. Liquid assets expanded by 2% due to the increase in savings deposits. Deposits in hard currency actually increased 39%, a considerable change, although less than in the two previous years.

Even though the bridge program ended up being insufficient to reach the distant ESAF shores, two facts were firmly established. One: the clamping down on ESAF disbursements at the end of 1995 put pressure on the government to keep trying to get back on the ESAF path, even though it is an unattainable goal. It should be recalled that, from the beginning, ESAF was inappropriate for Nicaragua's material and financial conditions. But instead of renegotiating the ESAF to make it more realistic, the government continued opting for unreality and non compliance. Two: the band aid bridge program implied fulfilling some goals in exchange for not fulfilling others. This was evident even in the highest priority, foreign debt payments. Paying the 1995 debt service implied falling into arrears in payments on the debt itself. Of the arrears charge, which reached $46.9 million, $35 million was for failure to pay the Central American Integration Bank (BCIE) and the remaining $11.9 million for unmet payments to bilateral sources.

A Bridge Over the Bridge

Last year showed that IMF support to the Nicaraguan government goes beyond good or bad implementation of the ESAF. Technically, ESAF utterly failed in 1995, yet the political decision was not to rescind it, but to patch it up to "keep up appearances." The IMF mission that came in February decided to skip evaluating the government's flagrant failure to meet the bridge program's targets in order to avoid uncomfortable conclusions. It satisfied itself with putting a halt to the government's expansion plans for 1996. In other words, the IMF built a "bridge over the bridge" to get the Chamorro government to the end of its administration.

One key consequence of the poor implementation of ESAF in 1995 is that the first bridge program at the end of that year extended the private productive credit restrictions into 1996, largely by programming this year's international reserves target at $82 million. Adding to that the $77.2 million of prioritized foreign debt payment not covered by foreign cooperation means that the government must somehow come up with $159.2 million in hard cash. The effort to accumulate these reserves and make the uncovered foreign debt payment means severe credit restrictions again in 1996 as well as greater pressure to recover loans and to keep inflation down.

The "domestic effort" is programmed to accumulate the equivalent of $102.2 million, which can only be done through such liquidity and credit reductions. Of these "savings" (more deposits than credit distribution), 65.8% must come out of the net credit to the non financial public sector, 10.2% and 18.9% respectively from the greater deposits programmed for the private commercial banks and the FNI, and 5.1% from liquidity sterilization through the Central Bank's Investment Certificates. For this to happen, inflation must be kept below the 12% annual devaluation rate. The inflation target is 8%, so that the nominal exchange rate at the end of 1996 can be kept down to 8.68 córdobas per dollar (it is currently 8.07).

These measures annul any expansive policy in 1996. Financing for agricultural production will be reduced even more (the 1995/96 cycle financed 33.5% less than the year before, and 57.8% less than the 1992 93 cycle, when the first great drop in agricultural financing in the 1990s was registered). In the first month of 1996, the "savings" of Central Bank credit to the non financial public sector surpassed its programmed goal. At the same time, 1996 was rung in with a drastic cash reduction, which has kept inflation down to the planned 0.7% monthly. Fulfillment of the program implies continuing with an unsustainable recession that, combined with the polarized electoral mood, undermines growth perspectives for 1996.

Finally, given the huge foreign resource gap for 1996, the government will repeat the de facto method it used in 1995: partial non payment on the prioritized foreign debt, taking into account that some of even these creditors are a higher priority than others. In 1995 the government did not pay the BCIE, and it will probably renegotiate with other Latin American creditors in 1996, in order to loosen the asphyxiating restriction.

Looking for a Light at The end of the Tunnel

It is generally understood that the juncture we have reached is a serious one that demands viable and concrete proposals rather than criticisms. It also demands that the political forces back national and long term state policies rather than party or ----government policies biased toward the particular interests of certain groups.

In its twilight, the Chamorro government issued a National Sustainable Development Program, which had been in rough form since the end of 1994. The document represents an advance, in that it recognizes that programs like ESAF should be part of a more general and integral proposal for the country's development. It is meritorious that the rough draft, released to the international community in Paris in June 1995, has now begun to be consulted with diverse social sectors. Although it is late and the consultations are limited, the initiative deserves applause.

The proposal's greatest problem is that after listing a series of very laudable objectives combat poverty, stimulate production and support exports it does not clearly and concretely indicate how to achieve all of this while maintaining stabilization at the same time.

This gap offers two lessons. First, there is no "lost link" between the document's goals and its general proposals; it is a given that the proposed goals would somehow be reached. Nothing new is proposed, except to sit down and wait for things to improve by themselves. That is, it is more of the same that we already know from the 1991 stabilization to the Bridge Program II, including ESAF: keep aggregate demand depressed and continue losing effective liquidity, which assures economic stagnation and generates unemployment and poverty.

Second, there is a willingness to change direction from a conservative political economy to a pragmatic and reactivating activism, but there would still be the problem of how to get from the current adverse situation to the program goals. That is, it would mean learning how to move from stabilization to growth, which is what actually interests the country. The fact is that the current deflationary policy, with its concomitant restrictive monetary policy, is not sustainable given Nicaragua's demands for reactivation and social inclusion.

Risk Death or Die

Until now, economic policy has been passively perched atop a stable rock well above the growing river of productive stagnation. If it stays on that rock indefinitely, the alluvion and rising currents will sooner or later threaten to inundate it. Jumping into the turbulent waters and trying to swim to safety is very risky, but remaining on the rock watching the waters rise means sure annihilation. There is no solution other than to risk dying in the attempt to survive, rather than awaiting death. This is the dilemma of today's economic policy.

The country has in its favor that since 1991 it has reestablished certain basic macroeconomic balances, but there is still far from enough growth to absorb those currently unemployed and the new workers entering the labor market. This contradiction puts the stabilization itself in danger. The adjustment has been very unequal and insufficient, incapable of increasing the productivity and institutional conditions required to move toward a modernization that supports a sustained growth rate.

A reflection of all of this is that the country's financial program is not truly connected to either a short or long term integral program, one consistently and broadly debated and democratically decided on between the private sector and the government. The problem with ESAF is not that it exists. Things would be even more difficult if it did not. The problem is that it is incapable of dealing with the country's main challenges. ESAF needs to be an integral part of an economic recovery packet.

What Will the Next Government Inherit?

From the economic policy point of view, it is crucial to make a realistic, unpoliticized assessment of the problems to be resolved, and to establish the timing and sequences of policies that address identified problems. If one begins with "everything is alright," there will be nothing to do. If "everything is bad," there will also be nothing to do. The starting point should be that substantial gains have been made, but they are not enough for national reconstruction and the battle against poverty.

The government that takes power in 1996 will inherit the following problems:

* The state's patrimonial character and its serious inefficiencies and gaps in terms of laws, administration of justice and service to the population. This leads to discretionary handling of tax policy, a lack of transparency in privatization and bidding on projects, influence peddling and rampant self enrichment by high level public functionaries.

* The reduction of the state apparatus, which is destroying its regulatory and social reconciliation functions.

* An institutional crisis, without a consolidation of democracy, which generates political instability at the highest levels.

* A crisis of sovereignty because different policies are arbitrated by extra state powers and institutions (the Church, the US Embassy) and because economic policy is totally run by the IMF, the World Bank and the IDB.

* The absence of even a minimal acceptance of the rules of behavior and criteria for the actions of different social actors. The further absence of a basic agreement on economic rehabilitation and the remodeling of the political system, with resistance making economic policy options very unsuccessful.

* Property rights in conflict, product of the Sandinista piñata and the Chamorro privatization process. The problem lies in a handful of large appropriations and an even smaller group of claimants who impede a negotiated accord.

* The physical insecurity of producers and citizens because of rearmed groups in rural areas and crime in the cities. Both problems are linked to unemployment and the lack of responses to demobilized veterans on both sides. This situation also generates political instability at the lowest levels.

* An unpayable foreign debt, with an uneven weight due to the volume of foreign resources that prioritized payments absorb.

* Critical deterioration of the basic conditions for production: serious health and education problems associated with the population's poverty and unemployment levels; loss of productive capacity to unemployment and migration; deterioration and loss of transport, energy and communication infrastructure. In short, the absence of positive externalities for investment, as can be summed up in the fact that the levels of investment and import of inputs and capital goods have dropped.

* The unsustainability of the growth pattern registered between 1994 and 1995, based on the extraction of natural resources (seafood, forestry, cattle) or their depredation (extensive basic grains agriculture).

* The absolute bias of stabilization benefits toward fractions of the old oligarchy and the new capital created by privatization.

* A low level of domestic savings and a lack of austerity by the non finance public sector, which affects the private sector.

* High tax pressure, due to the unsustainable state spending (especially in current and capital transfers), in a context of the privatization of state assets. This makes the regressive tax structure more critical and puts administrative pressure on discretionary tax hikes and increases in public service rates.

* A "greenhouse" financial system, protected by a state policy that permits high appreciation of interest rates and a deviation of public deposits to the private commercial banks.

* The absence of a real state development bank and the privatization of the state banking system.

* Depressed credit supply for production, due to commercial bank orientation toward profitable credits and deposits.

* Dollarization of the pricing system and indexing mechanism (high interest rates and córdoba accounts with dollar value maintenance). Ineffective nominal devaluations to depreciate the real exchange rate and insecurity about currency value due to the continued economic stagnation.

But there is a Solution

The magnitude of these accumulated problems could hide the fact that this country has great possibilities. The first problem for Nicaragua's dynamic reinsertion in the foreign market is its foreign debt. Without overcoming this obstacle, exacting foreign resources to pay the foreign debt annuls any export improvement. Linked to this problem is that of better use and quality of foreign cooperation. Being able to count on efficient use of acquired foreign resources without them filtering out of the country in large proportions is a priority to complement the domestic national reconstruction effort.

The second step is to eliminate economic policy biases that block the recovery of economic competitiveness in the production of transactional and non transactional goods. These biases are seen in short and medium term policies, basically with the correction of relative price structures (exchange, trade and fiscal policies), and in the long term policies that affect the factors shaping the productive skills of human resources (technological research and development, education and health policies).

Recovering competitiveness is not limited to the problem of relative prices, but also assumes changes in the economy's supply function. Production and services must be reactivated, simultaneously extending the frontier of production possibilities, improving productivity specifically in public services, business management, labor productivity and integrated production techniques and imports.

Without looking at this challenge in all its complexity and multi faceted nature, it will be difficult to improve the country's ability to attract foreign investment and participate in the regionalization opening up with the Free Trade Agreement and the Central American integration process.

Concrete Suggestions of What to Do

From the public sector point of view, the specific actions to achieve dynamic reinsertion into the regional and international market currently consist of:

* Strengthening the state institutions through modernization, giving them forecasting and social reconciliation capacity.

* Fostering institutional disposition for economic modernization and opening the social game to allow for effective economic policies.

* Correcting market weaknesses, homogenizing the segmented market structures and combating price monopolies and oligopolies.

Correcting anti export bias in exchange, fiscal and foreign trade policies.

* Improving the country's trade negotiation capacity for advantageous integration into the regionalization processes, Free Trade Agreement and Group of 3 trade agreements and links with the Great Caribbean countries.

* Giving adequate signs to investors, maintaining and broadening the infrastructure nucleus and making a series of demonstrative investments to show that the reactivation impulse is permanent.

* Restoring private investment confidence, culminating a real political depolarization process based on installing the rule of law and including both veterans and peasants through investment and reactivation programs.

* Improving the quality of human capital at the managerial and worker level and in education and health services. Special emphasis should be put on public spending for technological research, learning and adapting new technologies, as well as for teaching and distributing its results.

* Setting up a protective umbrella for agricultural goods produced at the small farm level. This is justified both by the overvalued exchange rates and by the dumping practices for many imported goods that compete with national goods. The current system of price bands does not protect agricultural goods and, by its nature, only attempts to smooth the fluctuations between peak supply and demand for these goods.

* Ordering all these protected goods into a tax policy that allows transparent treatment and better administration of trade policy.

* Reducing taxes on imported intermediate goods for the production of complementary non competitive goods, with the goal of reducing production costs.

* Simplifying the tax structure, avoiding the windfall tax.

* De indexing rates for essential public services.

* Restricting most direct food donations, which negatively impact prices and local producer incomes.

Getting from the 19th Century To the 21st Century

Road, port, warehousing and trade infrastructure are all strategically indispensable to making production profitable. The problem is not only one of replacement and maintenance, which is itself a formidable task. It also has to do with increasing service quality through expedited and simplified paperwork, making trade operations automatic and providing the private sector with free access to information, which will allow rapid and reliable production and export decisions to be made.

Implementing real solutions and creating the desired effects always require time and skills. The policy framework should thus be closely interrelated. Fiscal adjustments should also be effective, rationalizing spending but also seriously changing its composition from the flow of resources out of the country to productive and social investment. Changing tax sources will also play a crucial role, moving from a 19th century policy based on monopolies (the "fiscal" industries of cigarettes and alcoholic beverages) and customs (import taxes) to a modern policy with strong incentives for the productive use of money and penalties Por profiteering and hoarding.

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