Brief Notes on Foreign Cooperation At This Time of Uncertainty
The electoral fraud committed during November’s municipal elections
has had serious repercussions on Nicaragua’s foreign cooperation.
The resources earmarked to sustain the national budget and the
US Millennium Challenge Account program were both frozen.
In response, President Ortega confidently announced that
Venezuela’s government will cover Nicaragua’s shortfall.
The following are basic numbers that can help us
gauge the gaps and the chance of closing them.
* According to the projections of the Medium-term
Budget Framework attached to the 2008 Budget bill, the foreign cooperation resources to be disbursed by Nicaragua’s public sector this year would amount to US$704.2 million, of which $324.6 million would be donations and $379.6 million loans. The public sector includes both the central government and autonomous state bodies and enterprises. This $704.2 million is the equivalent of 10.6% of Nicaragua’s gross domestic product (GDP) in 2008 and 33% of total public sector spending projected for the same year.
For which sectors is this cooperation earmarked? The only reference we have is the way it was used in 2007, when 32% of the foreign funds for the public sector were earmarked for the social sector, 23% for economic infrastructure, 13% for the productive sector, 19% for budgetary or balance-of-payments support, 9% for payment on the foreign debt and 4% for other sectors.
* Foreign cooperation resources strictly projected for disbursement by the central government in 2008 amounted to $510.7 million, $274 million of which are donations and $236.7 million loans. This total represents 28.65% of the total funding sources for the central government’s projected expenditure.
* It is important to differentiate between the foreign cooperation tied to specific investments and liquid foreign cooperation or support for the general budget, both of which are registered in the budget. The difference between them is that the tied cooperation is earmarked for the execution of programs and projects agreed to beforehand by the central government and the funding source and forms part of the public investment program. Foreign cooperation that is liquid, freely disposable or for general budgetary support, meanwhile, can in principle be allotted by the central government to fund any budgetary item it deems relevant in accordance with its own priorities, as long as it is approved by the National Assembly representatives.
* Such general budgetary support resources allow the government greater flexibility in freely allotting them according to its own priorities, including funding recurrent expenditure items. This is not possible when the resources are tied to the execution of projects or to specific uses.
* The disbursement of cooperation for budgetary support is subject to compliance with a series of fundamental principles: a commitment to international law and the prevention of international conflicts; respect for human rights; respect for democratic principles, including free and fair elections; respect for the rule of law; the independence of the judicial branch; free and transparent democratic processes; transparency, accountability and the fight against corruption; healthy macroeconomic policies; and a commitment to the fight against poverty.
* The foreign cooperation tied to projects programmed for 2008 totaled $389 million ($192.3 million in donations and $196.7 million in loans), representing 76.2% of the total budgeted cooperation of $510.7 million. The liquid, freely disposable or general budgetary support portion amounted to $121.7 million ($81.7 million in donations and $40 million in loans), the equivalent of 23.8% of the total budgeted cooperation.
* It is worth asking how much foreign cooperation budgeted for 2008 has actually been executed. From the information available, only $236.1 million (or 60.7%) of the $389 million in cooperation resources tied to projects had been executed by October 31.
* The problems related to execution of the project-tied cooperation projects are normally associated with the difficulty involved in implementing projects financed by that cooperation. According to the Nicaraguan government, the difficulties that have affected the implementation of public projects and works in 2007 and so far in 2008 include: 1) lack of coordination within the institutions, 2) weakness in the planning and programming processes for the different phases of project implementation by certain institutions, 3) problems related to public tender (bids declared void due to bidder overpricing, the non-presentation of bids and the bureaucratic procedures of foreign funding organizations and the State Contracting Law), 4) deficiencies in administering the contracts and 5) delays in rendering accounts to the Finance Ministry.
As regards the disbursement of the freely disposable foreign cooperation, it is known that only $14.6 million of the $121.7 million programmed has been disbursed ($5 million from the United Kingdom, $4.2 million from Norway and $5.4 million from Switzerland), which represents just 12% of the programmed resources. Germany and Great Britain have announced that they will no longer continue providing this kind of cooperation; Finland decided to suspend its support due to noncompliance with the fundamental principles on which it was based, and the Netherlands decided to halve its contribution.
The countries and institutions in the Budgetary Support Group had been expressing their serious concerns to the government since May 2008. The newspaper El Nuevo Diario wrote on May 1 that “the Budgetary Support Group is freezing the disbursement of $20 million to Nicaragua for the 2008 budget while it analyzes the National Human Development Plan that the government presented to it last week and until other conditionalities are complied with. The planned disbursements also depend on an important meeting in May between the donors and the government on macroeconomic policy, transparency, accountability and human rights, confirmed Pedro Alonso, First Secretary of the European Commission in Nicaragua. Dialogue with the government on these issues is very important to free up these disbursements, although it is not likely to happen before May, explained Alonso, an official of the European Union, which presides over the Budgetary Support Group….”
* The members of the Budgetary Support Group expressed their concerns again during a meeting with the government on October 15 of this year: “With respect to compliance with the fundamental principles of the budgetary support, there is growing concern regarding the issue of free and fair elections and over recent tensions that have emerged in relation to the actions of civil society.” The members of this group had previously also expressed concern over the lack of transparency related to Venezuelan cooperation.
* The raising of fundamental doubts about the recent electoral process and its results puts in jeopardy the continuation of this cooperation, both the remaining disbursements for 2008 and those for 2009. This means that the way the electoral process has been handled did more than just delegitimize the electoral results and generate an internal crisis. By affecting cooperation, it is also fueling uncertainty about the country’s future and threatening to deepen the crisis even further. Budgetary support cooperation is earmarked to finance important programs aimed at poverty reduction, education, health and basic infrastructure, among other categories, and its temporary or definitive suspension would represent a massive blow to those programs.
Although the Millennium Challenge Account (MCA) is not implemented through the Nicaraguan public sector and is not registered in the budget, as it ought to be, it does represent an important contribution to the country’s development and has been recognized as such by the current Nicaraguan government.
Between 1990 and 2007, official US cooperation for the public sector—which has financed various sectoral projects, especially in the social sector—was mainly channeled through the Agency for International Aid (AID). Complementing this collaboration mechanism, the US government created a program to channel resources through the private sector. In June 2006 it established the Millennium Challenge Corporation, after signing a financial aid agreement with the government of Nicaragua.
The MCA is additional to the traditional US cooperation. The countries eligible for this program must comply with a series of requirements related to governance, investment in education and health, environmental policy, economic freedom, competitiveness, democracy, equity and transparency. In the northwestern region of Nicaragua (the departments of León and Chinandega), the area chosen to implement the program, the MCA contemplates executing $175 million over five years to support economic development, human development, the strengthening of democracy and the fostering of free enterprise.
The MCA’s main challenge in Nicaragua is to have a positive effect on poverty levels in these departments by stimulating economic growth. Its framework of action is divided into three large components: the development of rural businesses, road infrastructure (construction of highways and roads) and the strengthening of property rights. The main objective of the first component is to directly support the growth of production and its commercialization in national and international markets. The aim of the other two is to complement the Nicaraguan government’s efforts.
During 2006 and 2007, the projects implemented by the Millennium Challenge Account generated 1,945 new permanent jobs. The projection for 2008 was 2,886 more. Based on the aggregate nature of the information received, the disbursements executed during 2007 were $10.3 million, with $32.5 million projected for 2008.
Following the November 9 municipal elections in Nicaragua, US representatives Ileana Ros-Lehtinen and Frank R. Wolf wrote to Secretary of State Condoleeza Rice on November 24 requesting the suspension of any MCA resources that had not yet been disbursed. On November 26, the suspension of the disbursements for any new project or activity not yet being implemented was announced. “We had hoped, for the sake of the Nicaraguan people, that the government would continue the country’s trend towards peaceful, democratic and credible elections,” said MCA chief executive officer John Danilovich. “I fear recent events demonstrate that it is not the case.”
Could Venezuela make up the shortfall in foreign cooperation, which is currently so uncertain? Could it cover the suspended resources? President Daniel Ortega announced on December 1 that the Venezuelan government would cover any financial gap caused by the suspension of Budgetary Support Group disbursements for 2008, which he estimated at $54 million. He went on to announce that President Chávez of Venezuela had also promised to cover the Millennium Challenge Account projects that would be left without funding, stating they would be implemented starting in 2010.
Venezuela undoubtedly has the capacity to cover the $54 million in the short run and President Ortega announced that he had already agreed how to do so with the Venezuelan government. The question is whether Venezuela will be able to cover a greater suspension or withdrawal of traditional foreign cooperation and for how long. In principle, the available information shows that Venezuela has around $49 billion in available international monetary reserves, the equivalent of 23% of its GDP. Just as an example, the $500 million in foreign cooperation that Nicaragua channels through its national budget represents only 1% of Venezuela’s reserves. Venezuela also has another $37 billion in other strong currency assets.
Calculating Venezuela’s oil production at 2.62 million barrels a day, it is estimated that the country could cover its imports for 2009—projected at $47.5 billion—and still obtain a commercial surplus of $16.4 billion, which would easily allow it to service the interest on its foreign debt ($7.4 billion), if oil averages $60 a barrel. (There are no payments programmed on the principal of Venezuela’s foreign debt for 2009.)
Even if the annual average oil price is $50 a barrel, Venezuela would obtain a commercial surplus of $6.8 billion, which would generate a modest current account deficit of just 0.4% of the GDP, taking into account the payment of interests. This could easily be financed with its international reserves, which represent 23% of the GDP.
The average price of oil projected for 2009 by the Energy Information Administration is $63.50 per barrel. However, this estimate does not factor in the eventual impact of the important fiscal stimulation package being prepared by President Obama’s economic team to reactivate the US economy. In conjunction with the Chinese fiscal stimulation package (17% of the GDP), this could produce a certain recovery in demand which should have some kind of impact on the recovery of oil prices. Beyond this, the International Energy Agency’s projections for the disparity between oil supply and demand in future years suggest that the recovery of the world economy will probably be accompanied by a significant recovery in international oil prices.
For strategic and geopolitical reasons, Venezuela and China have been developing a closer relationship. This could translate into a broadening of Venezuela’s alternatives for obtaining financing. Venezuela has requested loans of $8 billion from China so far in 2008, thus China offers Venezuela a potential and growing source of additional financing as well as an important market for its crude oil production.
China’s international monetary reserves—worth $2 trillion—are quite simply enormous. Given all this information, Venezuela shouldn’t have any great difficulties financing a possible temporary deficit in its own current account balance in 2009 or 2010, and will thus not necessarily be forced into any drastic internal adjustment.
This does not mean that Venezuela won’t face restrictions, just that it won’t necessarily be forced to make a draconian adjustment that could potentially stop it supplying Nicaragua with much greater levels of cooperation, if that were one of its top priorities. The future of the international economy is plagued with uncertainties and variables and nobody can currently say with any assuredness how long the current crisis will last and how deep it will be. As a result, the Venezuelan government will have to be extremely cautious. If oil prices fall below a certain level in 2009 it will have to rationalize its expenditure.
Venezuela has also committed significant cooperation to other countries, especially Cuba, and it might have to streamline its ambitious foreign assistance program and establish priorities. The Venezuelan government will also be subjected to strong pressure to pay greater attention to its own population’s problems. In this context, support for the Nicaraguan government will compete with other priorities.
So it’s not clear whether the Venezuelan government could or will even be in a position to definitively replace all—or at least most—of the traditional foreign cooperation Nicaragua has been receiving, should it be withdrawn. The only information we have is that the Chávez government has promised to fill any funding gaps that emerge as a result of any eventual suspension or withdrawal of sources of cooperation and that the short-term gap that has been identified is $54 million. Beyond that we just don’t know.
Economist Adolfo Acevedo Vogl coordinates the Civil Coordinator’s Economic Commission.