Nicaragua to Sign Structural Adjustment Agreement

By the Witness for Peace Long Term Team, Managua, 3 August 1997

Here is an exerpt from the latest Witness for Peace Update, written by our Long Term Volunteers in Central America. To read regular updates on Nicaragua and Guatemala, check out our website: http://www.w4peace.org/wfp

This week, Noel Ramrez, president of Nicaragua's Central Bank (BCN - the equivalent of the Federal Reserve in the US) announced that Nicaragua will sign a new Enhanced Structural Adjustment Facility (ESAF) with the IMF by December of this year. There had been talk of signing the agreement for the last year but the date kept changing. Perhaps this time it will really happen. The government is certainly under tremendous pressure to sign, given how long it has been "off track" (without a structural adjustment agreement in place) and therefore ineligible for IMF funds.

According to Mr. Ramrez, the new ESAF would last for two years and would qualify Nicaragua for debt relief under the World Bank and IMF's Highly Indebted Poor Countries (HIPC) Initiative. Once the new ESAF were to be signed, Nicaragua would visit the Paris Club to renegotiate outstanding bilateral debts with its member countries. Mr. Ramrez stated that Nicaragua currently pays between 40 and 45% of the total value of its exports in debt service, a level that is simply unsustainable. The country owes about $1.2 billion to the Paris Club countries, $360 million to the World Bank, $700 million to the IDB, $520 million to the Central American Economic Integration Bank , $28 million to the IMF and $3.2 billion to other creditors, bringing the total amount of external debt to just over $6 billion, or three times the country's Gross Domestic Product.

The ESAF that Nicaragua will sign comes with strict conditionalities, many of which are carryovers from the first ESAF (1994-1997), which the Chamorro administration failed to fulfill. These include the passage of the new tax law, the accelerated privatization of the state phone company, more layoffs in the public sector, the "redimensioning" of the state development bank (BANADES) and a government austerity plan. According to a Central Bank official who recently met with a Witness for Peace delegation, the new ESAF will also imply the privatization of the public water company, power company and cement factory.

Clearly, many of the measures will be politically unpopular and of questionable benefit to the country's poor majority. Yet, given Nicaragua's tremendous debt burden and its dependency on foreign aid flows to sustain macroeconomic stability, the Nicaraguan government has little choice but to sign. By trading national sovereignty for foreign aid, it can assure low inflation, high foreign reserves and regular payments on the debt.

Mr. Ramrez stated that the World Bank has already approved a $30 million loan for the "redimensioning" of BANADES. The institution that has been operating at a loss for years and has been lending far more to large producers than to small and medium farmers. A network of Nicaraguan NGOs concerned about the issue of food security has expressed alarm over this vague talk of "redimensioning". Though it agrees that something needs to change, it argues that what happens to BANADES is of vital interest to thousands and thousands of small farmers and it is not right for the bank's future to be determined by World Bank bureaucrats and government economists bent on eliminating fiscal deficits. However, as is usually the case, the negotiations with the IMF have been clouded in secrecy and there is little public knowledge of what commitments the government is making.

The successful signing of a new ESAF will pave the way for the Consultative Group meeting slated for December 2 and 3. The Inter- American Development Bank will act as host of the meeting, convening Nicaraguan government officials and representatives of all the countries and institutions that contribute foreign aid to Nicaragua to consense on priorities and coordinate strategies. The decisions reached before and at this meeting will determine to a great degree the policies that the Alem_n administration will follow over the next two years.

Given the importance of this meeting, a number of Nicaraguan NGOs are trying to put together a proposal to circulate to donors and lenders before December, suggesting alternatives policies and priorities to those of the International Financial Institutions. With the support of NGOs in Europe and the United States, these representatives of Nicaraguan civil society hope to be able to influence the course of negotiations to ensure that their concerns are taken into account. Their position is that without immediate debt reduction, any new agreements the Nicaraguan government makes are bound to fail again, for debt service robs the country of its capacity to reactivate its productive sectors.

Witness for Peace will be involved in supporting this initiative, so stay in touch with us to find out more!