WEDNESDAY, AUGUST 31, 2005

Debt in Nicaragua

By Yumiko Locussol

Nicaragua continues to be one of the poorest countries of the western hemisphere as well as one of the most indebted nations in the world. As of 2001, 45.8% of the population is reported to be living in poverty, affecting mostly rural areas. Within these areas, 25% of the poor are living off of less than a dollar a day. The Nicaraguan people have consistently been asking their government to provide them with assistance and financial aid as they are suffering from unemployment, hunger and lack of education around the country. However, it has not been able to offer adequate funding and aid in part because of the overwhelming weight of its debt.

Nicaragua has both a very high internal and external debt. In its latest report, CEPAD reported that the internal debt, though significantly less than the external one, is estimated at $1.69 billion. Part of this debt is owed to rich landowners whose land was nationalized during the Sandinista Revolution. When the Sandinistas lost the elections in 1990, the landowners demanded compensation for the land they lost, so the government issued ten year bonds which are now coming due. The other important part of the debt was incurred after a period of fraud and mismanagement which led to the collapsed of several banks. The Central Bank now owes about $374 million to cover for the cost of these losses.

The external debt represents about $6.7 billion, an exorbitant figure considering that the country's GDP was $4.0 billion in 2002. The debt represents about ten times the values of the country's exports. As a result, the government must use 40% of its budget to pay off the debt, funneling much needed money to multilateral and bilateral organizations from rich countries rather than dedicating it to education and health care.

At the end of the 2002, 38.3% of the debt was owed to multilateral creditors, 47.5% to bilateral creditors and 14.3% to commercial creditors. Nicaragua's fate is very much in the hands of its creditors, and although they are seemingly willing to reduce its debt, it is very important to scratch beneath the surface when studying the debt reduction proposals that are made because they do not automatically improve the situation.

As of the beginning of 2004, Nicaragua reached its completion point under the World Bank and IMF's enhanced Highly Indebted Poor Countries (HIPC) Initiative, a program meant to reduce debt to a point at which it can be paid back to the creditors. According to the IMF's March 2004 country report, “at the decision point, the assistance to Nicaragua under the enhanced HIPC initiative was calculated at US$3.3 billion in NPV terms.” Debt relief from multilateral and bilateral creditors is promised at, respectively, $1.1 billion and $2.1 billion. Nicaragua already received $195.5 million in interim assistance from a couple of its multilateral creditors. However, to qualify, Nicaragua had to abide by the World Bank and IMF's infamous Structural Adjustment Programs (SAPs), which have proven to do nothing but harm to the people they are supposedly designed to help. They stress a liberalization of the economy and public services, which means that the role and spending of the state must be minimized. The national currencies have to be devalued, restrictions on imports and exports lifted and interest rates raised. The SAPs sole achievements have been to help reduce the government's funding for education, food subsidies, and health and social care, among other services that the poor normally depend on the government for. Creditor countries have proven equally sneaky as many have agreed to cancel only the interest of the debt and not the principal.

Nicaragua is undeniably suffering from its unsustainable debt, and can only recover from the burden that the debt has imposed on the country for so long with a 100% debt cancellation. The Enhanced HIPC Initiative is not a long term and fair solution to offer, as even the IMF admitted that the external debt will remain large even after the completion point due to the fact that not all of the creditors have agreed to provide relief to Nicaragua under this program. This comes as no surprise considering that the actual goal of the initiative is not really to free these countries from the burden of their debt, but rather to ensure that they can reach a level of debt at which they can pay it back.
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