SATURDAY, JANUARY 31, 2004
HIPC: Not As Good As It Looks!
By Katherine HoytWith what he called, "Nicaragua's best economic news in 25 years," President Enrique Bolaños announced on January 23, 2004, that the International Monetary Fund and the World Bank agreed that Nicaragua has taken the steps necessary to reach its completion point under the Heavily Indebted Poor Countries (HIPC) debt relief initiative. He said that he expected Nicaragua's creditors to cancel 84% of Nicaragua's US$6.5 billion foreign debt. In an upbeat speech, he praised "the heroic Nicaraguan people who had made enormous sacrifices during many years, putting to one side their just claims and thinking only of the good of the country as a whole." The president spoke optimistically about "having established the conditions for our economic take-off," and "the beginnings of prosperity."
However, even as the president spoke, Bank and Fund officials were warning that the structural adjustment policies which Nicaraguans have had to endure for so long would have to be continued. As a caution, officials noted the case of Bolivia, the only other Latin American country so far accorded HIPC status, which is already seriously indebted again due, they claimed, "to failing to maintain a strict economic discipline." In any case, they said, Nicaragua's remaining external debt, even after this relief, will still stand at some US$2.5 billion. This does not square with the Bolaños proclamation.
In written answers to questions sent to IMF officials by the Nicaragua Network, the IMF said that multilateral (IMF, World Bank, the Inter-American Development Bank, Central American Bank for Economic Integration) holders of 32% of Nicaragua's debt will reduce Nicaragua's debt burden to them by almost 73 percent. In terms of bilateral debt, the IMF noted that Nicaragua has signed agreements with most individual countries which hold its debt, canceling about 90 percent of that debt. Overall these countries hold about 34 percent of the debt (at the end of 1999). Some other bilateral creditors have pledged assistance, but have not come to a final agreement on how to deliver it. Other creditor countries have either refused to provide assistance or have not responded to Nicaragua's requests.
Nicaragua also borrowed from commercial banks about US$200 million that was never paid back. This debt has been resold to other agencies, some of which have sued in the U.S. for past-due interest. The IMF estimates that this debt was US$785 million at the end of 1999. The IMF says that the World Bank is putting together financing for a debt buy back operation that would raise money from donor countries to buy back these debts at a heavy discount.
The supposed goal of HIPC is for a country to have a debt burden of only 150% of the value of its annual exports (based on a three year average). However, the IMF notes that at the end of 2004, after the HIPC relief, the ratio for Nicaragua will be 187%. Including expected relief from some other creditors will later drop it to 168%. This is still above the IMF's own goal of 150%. The HIPC goal is for remaining debt to amount to 250% of a nation's total revenues. The IMF estimates that Nicaragua's national revenue for 2004 will come to US$940 million. This means that the remaining debt should not pass US$2.3 billion whereas, as noted in the preceding paragraph, the remaining debt is expected to stand at about US$2.5 billion.
The IMF expects Nicaragua to pay US$59.3 million in debt service in 2004, assuming relief from all creditors. Nicaragua was not making its debt service payments following Hurricane Mitch and even when the debt deferral period ended in early 2000, Nicaragua did not resume making full debt service payments. Before Hurricane Mitch, Nicaragua was also in arrears, not making full payments as they were due. Now, Nicaragua will be expected to make its debt service payments and still show that the country has used the money supposedly "liberated" by debt relief in programs leading to poverty reduction. The obvious question is where this "extra" money is going to come from when Nicaragua was not making timely payments on its debt even before HIPC relief.
The IMF is still calculating exactly how much debt stock will remain after the cancellations from bilateral and multilateral creditors, "since each creditor handles the technical decisions separately." The total amount of debt outstanding was US$6.75 billion but, because the possibility of its ever being repaid in full was low, the debt also had a "net present value (NPV)" which was US$5.5 billion (at the end of 2002). The net present value is arrived at by, as the IMF describes it, "estimating how much money someone would need [at that moment] in order to cover those payments that [the creditors] are forgiving, assuming interest accumulates during the interim."
Jubilee USA notes that in the case of poor countries (such as Nicaragua), "Partial debt relief, without full cancellation, will only raise the value of the debt, forcing [a nation's officials] to pay more than they would have before any relief. This has been true for many heavily indebted nations. When a nation has little to no hope of being able to pay its creditors, the actual value (as opposed to paper value) of the debt is very low (since it is not likely to be paid in full) but as the paper debt burden gets smaller overall with relief the more likely the nation is to be able to pay the debt back and the greater the actual value of the debt."
In the case of Nicaragua, Nicaraguan economist Nestor Avendaño noted that the remaining debt, especially commercial debt, is a serious threat to the country because "it acquires more value now that we are becoming less indebted." He added, "Now that we are entering into HIPC, Nicaragua must re-purchase its commercial debt because to the degree that the country is less in debt, the creditors are going to demand more money for the [remaining] debt."
Leading sociologist Cirilo Otero challenged the government to "speak plainly with the people." He claimed that the remaining debt would be higher than promised, since "within the wealthy countries there is a policy of picking and choosing just which debt will in fact be forgiven." He continued, "Then, [President Bolaños] must explain to the people that this is not new money, fresh donated; many people are already calculating as though it was. On top of that, he must tell the people we have to continue with these structural adjustment programs. The government must speak frankly. As we say in good Nicaraguan, 'There are more leaves than corn here.'" Otero emphasized that, despite the president's ordering the launching of fireworks and rockets from the presidential palace in response to the news, the debt relief process had so far been largely a matter for governments, functionaries and academics. "The people as a whole have had very little information about all this, especially how HIPC relates to their daily lives, with all these continual price rises."
The IMF and the Bank first launched the HIPC initiative in 1996 in what they portrayed as an effort to reduce the debt burden on the world's poorest countries to levels considered sustainable by the two agencies. Responding to criticism by the world-wide Jubilee 2000 movement, and other NGOs and popular movements that these efforts were too little, too protracted, and too narrow, the two agencies modified the terms in October 1999. The so-called "enhanced" HIPC aimed at reducing the net present value (NPV) of debt of qualified countries to what they considered a more manageable level: a maximum of 150 percent of the value of their annual exports and 250 percent of their government revenue.
Under the enhanced program, eligible countries would qualify for debt relief in two stages. In the first stage, they would be required to demonstrate their compliance with IMF- and World Bank-approved structural adjustment programs (SAPs) over a three-year period to reach what is called the "decision point." Only then would an eligible country begin receiving interim debt relief in exchange for designing and implementing a "poverty-reduction strategy" (structural adjustment in lamb's clothing) which the institutions claimed was aimed in part at using the funds that would have been spent on debt service on social, health, and educational services for the poor. Once that stage is completed, the two Bretton Woods agencies would provide the remainder of the relief to which they were committed, while bilateral creditors in the Paris Club of donor nations would adopt similar measures.
In January 2003, the IMF had threatened to cancel a US$131 million loan signed with Nicaragua because the country's legislature, the National Assembly, changed the nation's budget to give more money to local governments for public improvements and to raise slightly the extremely low salaries of teachers, police officers, nurses and others. (A Nicaraguan elementary teacher earns between US$60 and $75 per month.) Besides requiring that Nicaragua adopt the budget the IMF wanted, the Fund also demanded the privatization of hydroelectric power generation even though the legislature had passed a moratorium on further water-related privatization. And it also required Nicaragua to expand its "school autonomy" program that cuts funding to local schools, monies that must then be made up by parents' fees. This latter measure also violates U.S. law against user fees as a condition for loans.
Loss of that IMF loan would have meant that the country would be unable to meet the requirements to remain within HIPC. The National Assembly, in the end, passed almost all of the measures that the IMF demanded for entrance into the debt relief plan, except for the privatization of the hydroelectric facilities. That privatization process was fraught with corruption and irregularities. Early in 2002, Enron bid to buy the hydroelectric dams. But when Enron failed to comply with conditions of the sale, the contract was transferred to Coastal Power of Texas. However, the bid was so low, estimated at only 20 percent of the plant's value, that the comptroller general of Nicaragua began a review of the process. This incident prompted the National Assembly to unanimously pass a law that suspended all private concessions involving water use until a national regulatory framework for water could be established. [Two separate water bills are now before the National Assembly.] In meetings with IMF officials in November 2002, representatives of the Nicaragua Network and other groups were told that, if the moratorium on water privatization stood, the IMF would have to consider what to do about going forward with HIPC, because Nicaragua would be "in breach" of its agreement. It now appears that the moratorium has held, Hidrogesa is still in public hands and HIPC has gone forward. This appears to be a victory for all those in Nicaragua and internationally who protested IMF trampling of Nicaragua's sovereignty. In its written answer to our questions about HIPC, the IMF noted that "the privatization of the telecommunications company (ENITEL) was completed in January--this was a HIPC completion point condition…. There are no pending privatizations as part of IMF program conditionality."
Jubilee Nicaragua has demanded total and unconditional cancellation of Nicaragua's foreign debt "as illegitimate, immoral and unjust." The debt left by the dictator Anastasio Somoza Debayle when he was driven out of Nicaragua by the Sandinista revolution in July of 1979 was between US$1.3 and US$1.5 billion, including a US$66 million loan extended by the IMF two months before the regime fell. While the revolutionary government ran up a substantial debt in order to fund its extensive social programs while fighting a war against the U.S.-sponsored contras, most of that was cancelled in the 1990's. Jubilee Nicaragua insists that "the debt has been paid several times over through: 1) payment of interest on the debt; and 2) the unequal terms of trade between our countries and the industrialized countries of the North." According to Jubilee Nicaragua, "This minority that overexploits the common resources of the earth has a debt with our peoples, the majority who consume less than our just part of the resources of the planet."
Beyond debt cancellation, Jubilee Nicaragua demands that funds freed by debt cancellation be invested in the poorest rural areas of the country. This contrasts with provisions in President Bolaños' National Development Plan which prioritize economic sectors within the country that show the most economic promise, abandoning the poorest regions to their own devices. Jubilee Nicaragua also demands that the development model which continues to impoverish the most excluded sectors of Nicaragua's society be revised and that policies be established which would prevent the country from falling into debt again.
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