IPE-Debt-Case-Study-Nicaragua

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					Debt in Nicaragua
(Research assistance by John Lageson)
 Overview of the Problem

       Nicaragua is one of the poorest countries in the western hemisphere

       One of the most severe cases of income inequality in the world

       GDP Per Capita (PPP) in 2004: $2,300

       Nicaragua has the world’s highest level of external debt per capita: $1,300

       Unemployment: 7.8% unemployment PLUS 46.5% underemployment

       Questions to address:

         – How did the situation become so bleak?

         – What has been done to alleviate the problem?

         – What does the future hold for Nicaragua?




Sources: CIA World Factbook at http://www.cia.gov/cia/publications/factbook/geos/nu.html
         and Oxfam at http://www.oxfam.org.uk/what_we_do/issues/debt_aid/debt_nicaragua.htm
How did the Situation Become So Bleak?
The Beginnings of Debt in the 1970s

   Nicaragua and other Central American
    countries enjoyed several decades of
    considerable economic growth prior to
    1970s                                                                   Composition of Debt, 1975
   However, 1973 boom in oil prices hit
    Nicaragua and other oil importing
    countries hard

   Lending agencies agreed to help
    ease the burden caused by higher
    oil prices

   Nicaragua received roughly
    $800 million between 1974 and
    1979, with a large share
    coming from private sources
    (see image at right)

Sources: The IMF at: http://www.imf.org/external/pubs/ft/wp/wp9872.pdf and
         Enriquez, Laura J. at http://sociology.berkeley.edu/public_sociology/public_sociology_pdf/Enriquez.pdf
Causes of Debt in the 1970s

      Loans were used by President Somoza on agriculture and infrastructure projects

      However, this freed up domestic funds, which Somoza used to amass a personal
       fortune

      Used corruption and oppression as a means to secure political power

       During the 1970s, Somoza’s personal wealth
        reached $400 million

      Somoza was overthrown by Soviet-backed
       Sandinistas in 1979. But, the problem of
       debt in Nicaragua had only just begun…




                                                                                        President Anastasio Somoza Debayle
                                                                                                    1925-1980


Sources: http://www.moreorless.au.com/killers/somoza.html
         http://encarta.msn.com/encyclopedia_761577584_9/Nicaragua.html
         http://reference.allrefer.com/country-guide-study/nicaragua/nicaragua21.html
Debt in the 1980s
    Sandinistas inherited $1.6 billion in debt from the Somoza regime

    Between 1980 and 1990, Nicaragua’s total external debt rose by another                         $9 billion

    Heavy borrowing from the Soviet Union throughout the 1980s

    Interest alone increased debt
     stock by over $1 billion during                               Principle and Interest Arrears
     the 1980s (see numbers                                         (in millions of U.S. dollars)
     at right)




Sources: The IMF at http://www.imf.org/external/pubs/ft/wp/wp9872.pdf and
         Wikipedia at http://en.wikipedia.org/wiki/Sandinistas
Rising Debt in the 1980s
     Debt-to-exports ratio averaged:
       – 180% in late 1970s
       – 3,000%+ by early 1990s




Source: http://www.imf.org/external/pubs/ft/wp/wp9872.pdf
Rising Debt in the 1980s
   Debt service ratio (total debt payments…interest plus principle…as a % of
    exports) averaged:
     – 10-20% in late 1970s
     – 500% by 1992 (more than about 30% is considered severe debt)




Source: http://www.imf.org/external/pubs/ft/wp/wp9872.pdf
Why Did Debt Increase So Dramatically?

 Protracted Civil War
      –   Sandinistas (Marxist group supported by Soviet bloc and Cuba) versus the Contras
          (remnants of Somoza regime backed by US under Reagan)
      –   Nicaragua became an active front of the
          Cold War
      –   US laid mines outside Nicaraguan harbors
          in 1984
             • Nicaragua vs. United States in the
               International Court of Justice (ICJ). US
               actions deemed illegal by ICJ. US was
               ordered to pay, but refused.
      –   Armed conflict diverted funds and
          resources that could have otherwise been
          used to service debt
      –   Conflict disrupted agricultural production –
          agricultural products such as coffee and
          cotton constituted roughly half of all exports,
          and a decrease in these exports led to further
          debt


                                                                         Child soldier with Contra forces


 Sources: The IMF at http://www.imf.org/external/pubs/ft/wp/wp9872.pdf
          and Wikipedia at http://en.wikipedia.org/wiki/Nicaragua
Other Causes of Increasing Debt in the 1980s

   US trade embargo ordered by President Reagan in 1985

      –    Prior to Sandinistas, the US was
           an important trading partner for
           Nicaragua

      –    US was the destination for 23% of
           Nicaragua’s exports in 1980

      –    By 1985, trade between the two countries
           was non-existent

      –    Nicaraguan exports decreased dramatically as a
           result of the embargo, which made it more difficult to service the debt

      –    Exports overall declined by about 50% between 1979 and 1989




    Sources: IMF at http://www.imf.org/external/pubs/ft/wp/wp9872.pdf
             and allRefer.com at http://reference.allrefer.com/country-guide-study/nicaragua/nicaragua59.html
Other Causes of Increasing Debt in the 1980s

      Weaker terms of trade (price of exports declined)

      Limitations on imports—spare parts for machinery were not available, which
       especially hurt the cotton industry and further damaged export performance

      Expansionary monetary policy (increasing the money supply) led to hyperinflation

         – Inflation over 13,000% by end of 1980s




                                                                              Hyperinflation Banknote
                                                                              of 10 million Cordobas




Sources: The IMF at http://www.imf.org/external/pubs/ft/wp/wp9872.pdf
         and Wikipedia at http://en.wikipedia.org/wiki/Economy_of_Nicaragua
Other Causes of Increasing Debt in the 1980s
   In order to pay the bills, the Sandinista government increased its borrowing even
    more during the 1980s

      – Mostly bilateral creditors (see chart below)

              • Soviet Union (largest lender)
              • Costa Rica
              • Mexico

      – Multilaterals (including the
        IMF) and private creditors
        were not significant sources
        of money during the 1980s,
        and their contributions
        decreased as bilateral
        agreements increased

      – Once again, to reiterate,
        external debt had grown by
        over $9 billion during the
        1980s!


    Source: The IMF at http://www.imf.org/external/pubs/ft/wp/wp9872.pdf
A Change of Direction in the 1990s

       However, the Sandinistas were defeated in the general election of 1990


       Violleta Chamorro elected President

       Began structural adjustment of the economy

          – A whole new series of reforms stemming
            from neo-liberal economic thought

                 • Adherence to these reforms made
                                                                       Violleta Chamorro
                   Nicaragua eligible for money from the              (served 1990-1996)
                   international lending community
                   (including the IMF/World Bank), which
                   was necessary as the Soviet Union no
                   longer existed after 1991




     Source: Dijkstra, http://136.142.158.105/Lasa2000/Dijkstra.PDF
Structural Adjustment in the 1990s

 In order to recover from the economic woes of the 1980s, and in order to receive
 assistance (World Bank/IMF), Nicaragua had to adopt the following measures:

         1.) Reduction of hyperinflation, stabilization of Cordoba through:

                • Reduction of government spending

                • Restriction of credit (high interest rates)

                • Chamorro Administration did succeed in reducing inflation

                        – 1990: 13,490% inflation
                        – 1991: 865% inflation
                        – 1992: 3.5% inflation




Sources: Dijkstra, http://136.142.158.105/Lasa2000/Dijkstra.PDF
         and Wikipedia at http://en.wikipedia.org/wiki/Economy_of_Nicaragua
Structural Adjustment in the 1990s (con’t)
Recovery and assistance also dependent upon:

       2.) Privatization of public enterprises

               • Chamorro government privatized 351 state enterprises in industry
                 and agriculture

               • Process took 5 years

               • Assets of former state-run enterprises distributed as follows:
                       – 25% of assets to former owners
                       – 25% of assets to workers
                       – 50% to former soldiers (of both the army and the contra forces)

               • Lenders, according to the terms of the IMF’s ESAF (Enhanced
                 Structural Adjustment Facility), also insisted that state utility
                 companies be privatized.

                       – Communications company TELCOR, later known as
                         ENITEL was profitable
                         (thus, privatization was met with some resistance)

 Source: Dijkstra, http://136.142.158.105/Lasa2000/Dijkstra.PDF
Structural Adjustment in the 1990s (con’t)
Recovery and assistance also dependent upon:

      3.) Reformed trade policies

             • Liberalization of trade

                     – Most import tariffs lowered to 20%

             • However, import permits were used throughout much of the 1990s for
               some products, which allowed for a monopoly on those goods

             • Finally in 1997, the abolishment of import permits became mandatory,
               as a condition for the IMF’s second ESAF (Enhanced Structural
               Adjustment Facility)

             • In 1998, the ESAF agreement required that all import tariffs drop to
               10% within a 30-month period




 Source: Dijkstra, http://136.142.158.105/Lasa2000/Dijkstra.PDF
Structural Adjustment in the 1990s (con’t)
Recovery and assistance also dependent upon:

      4.) Reformed fiscal policies
             • Fiscal deficits were the main cause of hyperinflation in late 1980s
             • Revenue in the form of taxes (as a % of GDP) have gone up since 1990
             • However, expenditure was not reduced consistently throughout much of
               the 1990s (see table below)




 Source: Dijkstra, http://136.142.158.105/Lasa2000/Dijkstra.PDF
The Implications of Structural Adjustment in the 1990s

       As government spending was reduced, social programs were cut

          – For example, agriculture suffered because:
             • Agricultural credit, technical assistance diminished under
                structural adjustment programs
             • Financing for corn and bean acreage in 1995/1996 was
                only 7% of what it had been in 1991/1992
                   – small farmers suffered the most: small and medium
                     sized producers received 56% of ag. credit in 1990,
                     but only 29% in 1992

       In general, rural areas suffered the most from structural adjustment
        programs, while urban areas had a better chance of benefiting




     Source: Enriquez, Laura J. at http://sociology.berkeley.edu/public_sociology/public_sociology_pdf/Enriquez.pdf
Loans Received in the 1990s and 2000s

Who has been/is assisting                             Transactions with the IMF, 1991-2005
Nicaragua with these reforms,
and with how much money?
The International
Monetary Fund (IMF)




                                          Values are given in SDRs, the unit of account for the IMF, which is based on the values
                                          of several key currencies.


  Source: The IMF at http://www.imf.org
Loans Received in the 1990s and 2000s (con’t)
The World Bank
    World Bank has worked on 28 projects in Nicaragua
     since 1996
    Nicaragua prepared a Poverty Reduction Strategy
     Paper (PRSP) in 2001 (provides the basis for
     World Bank/IMF assistance)
       – Based on PRSP, $160 million in loans between 2003-
         2004 for the purpose of:
           • promoting faster growth by raising productivity and
             improving private sector competitiveness;
           • upgrading productive infrastructure, especially in the
             countryside;
           • expanding human capital via investments in basic
             health and primary education;
           • promoting expertise, efficiency and anti-corruption
             efforts in the public sector; and
           • developing social protection for the poor and most
             vulnerable
    World Bank currently working on 16 projects
      – Current World Bank commitment to Nicaragua is
         $461 million


 Source: http://www.worldbank.org
HIPC Assistance
     HIPC (Heavily Indebted Poor Countries) Initiative: 1996 joint-effort by the World Bank and
      IMF to reduce debt burdens of poorest countries.
     According to the World Bank:
        –    “Nicaragua's successful implementation of its Poverty Reduction Strategy is a key
             condition for the country to continue to receive debt service relief under the IMF and World
             Bank's Heavily Indebted Poor Countries Initiative (HIPC).”
     Requirements of HIPC Initiative:
       1.) Preparation of a fully-participatory poverty reduction strategy paper
           (PRSP) and its satisfactory implementation for a least one year

       2.) The use of budgetary savings resulting from the interim relief
           under the enhanced HIPC initiative

       3.) Maintenance of a stable macroeconomic framework

       4.) Implementation of reforms to promote human capital development
           and social protection:
             a.) Approval of a satisfactory school autonomy law
             b.) Approval of a satisfactory general health law and adoption of
                 corresponding implementing regulations
             c.) Adoption of an action plan to introduce an effective social
                 protection program



Sources: http://www.worldbank.org
        www.imf.org/external/pubs/ft/scr/2004/cr0472.pdf
HIPC Assistance (con’t)
    Further requirements of HIPC:

            5.) Implementation of governance strengthening measures, which encompass:
                  a.) Enactment and advance in implementation of a satisfactory civil service law
                  b.) Introduction of a satisfactory system of management and inspection of
                      public sector procurement
                  c.) Satisfactory progress in implementing the plan to strengthen and improve
                      the efficiency of the comptroller’s office
                  d.) Approval of the law on penal procedures and initiation of training programs
                      and technical preparations for its implementation
                  e.) Approval of the law on public prosecutors and initiation of training programs
                      and technical preparations for its implementation.

    IMF/World Bank determined in January 2004 that Nicaragua had met the conditions
     for reaching the completion point under the Enhanced HIPC Initiative




 Source: The IMF at www.imf.org/external/pubs/ft/scr/2004/cr0472.pdf
HIPC Assistance (con’t)

    Thus, Nicaragua qualified for continued assistance under HIPC Initiative from:
       The IDA

       Total savings on debt service to IDA $382.6 million between 2001-2023

    For example, before HIPC, the cumulative debt service was projected to be
     $147 million $US for 2002-2010. Afterwards, projected to be $34.7 million, a
     savings of 112.6

    Further assistance from:

       The IMF

       – Total IMF assistance under HIPC amounts to SDR 63,544,380
       – 1 SDR = 1.45104 USD




    Source: The IMF at www.imf.org/external/pubs/ft/scr/2004/cr0472.pdf
Other Measures to Reschedule/Reduce Debt in the 1990s
      In addition to loans designed to improve the economy (and thus make debt more
       payable), measures have been taken to reduce debt.

      The Paris Club

         –   1st Debt Treatment in December 1991
                • London Terms (meaning debt cancellation would increase from
                  33% to 50% for countries operating under this program).
                • Amounts Treated: $722 million

         –   2nd Debt Treatment in March 1995
                • Naples Terms (debt cancellation would increase from 50% to 67%)
                • Amounts Treated: $848 million

         –   3rd Debt Treatment in April 1998
                • Naples Terms
                • Amounts Treated: $213 million




    Source: http://www.clubdeparis.org/
Other Measures to Reschedule/Reduce Debt (con’t)
    The Paris Club (con’t)

       –    4th Debt Treatment in December 2002
               • Cologne Terms (cancellation rate of 90%)
               • Amounts Treated: $580 million ($406 million cancelled,
                 174 million rescheduled)

       –    5th Debt Treatment in March 2004
               • Cologne Terms
               • Amounts Treated: $1,579 million ($1338 million cancelled,
                 $241 million rescheduled)




Source: http://www.clubdeparis.org/
Other Measures to Reschedule/Reduce Debt (con’t)
    The Paris Club (con’t)

       –    However, the Paris Club can only cancel debts between Nicaragua and the
            governments of the Paris Club members

       –    Debts with governments of Paris Club countries are only a part of Nicaragua’s
            total external debt (see below)

       –    Therefore, other measures must be taken in the future


                                                                              Nominal Debt
                  Debt in December 1999                                    from Decision Point
                                                                       (in million of U.S. Dollars)
             Total                                                                6,412
             Multilateral institutions                                            2,154
             Paris Club                                                           1,625
             Non-Paris Club official bilateral                                    2,362
             Commercial creditors                                                   271


 Source: The IMF at www.imf.org/external/pubs/ft/scr/2004/cr0472.pdf
Other Measures to Reschedule/Reduce Debt (con’t)
   G8 2005

   June 11, 2005: G8 Finance Ministers
    agreed to cancel 100 % of debt owed to their
    governments by 18 indebted countries, including
    Nicaragua (but once again, this is not all of
    Nicaragua’s debt)

   July 6-8, 2005: G8 Leaders
    confirm agreement by Finance
    Ministers

   Unanswered Questions:

      –   Is this really possible, and what
          conditions are there?

      –   If implemented, will positive change
           really occur for the poorest people
           in these countries, and when?




Source: CNN at http://www.cnn.com/2005/WORLD/europe/06/12/uk.g8.africa.0733/index.html and
http://www.g8.gov.uk/servlet/Front?pagename=OpenMarket/Xcelerate/ShowPage&c=Page&cid=107899
5902703
Debt Outlook for the Future




    (This data is from 2004, thus it does not take into account the 2005 G8)




 Source: The IMF at www.imf.org/external/pubs/ft/scr/2004/cr0472.pdf
But Most Importantly…
     What does all of this really mean for the people?

     Is the situation improving in Nicaragua?

        –    Yes, in some cases:

        –    Between 1993 and 2001 the poverty rate dropped 4.5%

        –    Life expectancy rate in 1985 was 61 years
             Life expectancy in 2002 68.7 years

        –    Infant mortality was 52 per 1,000 in 1990
             By 2002, it was 32 per 1,000

        –    Some improvements in education
             Youth literacy rate was 65% in 1980
             By 2002, it had risen (modestly) to 72%




Sources: The World Resources Institute at http://earthtrends.wri.org/text/population-health/country-profile-135.html
         and the World Bank at http://worldbank.org/
However…
      Improvement and development as a result of structural adjustment programs and debt relief
       have not occurred evenly across all regions of the country and among all groups of people

         –    Pacific Urban Region saw the poverty rate increase by 9.1% between 1993 and 2001

         –    Poverty increased by 1.7% in Managua between 1998 and 2001

         –    Poverty increased by 5.7% in the
              Central Rural Region between 1998
              and 2001 (illustrates the vulnerability
              of this coffee producing region to
              commodity shocks)

         –    Privatization, etc. has left many without
              work and services

         –    Many still waiting for the benefits of
              structural adjustment to “trickle down”

         –    How long will it take?



    Sources: The World Resources Institute at http://earthtrends.wri.org/text/population-health/country-profile-135.html
             and the World Bank at http://worldbank.org/
Oxfam Says:

    The debt burden and SA policies to relieve that burden have kept hundreds of
     thousands of Nicaraguans in poverty

    Debt payments are 2.5 times the amount spent on health and education combined

       –    “Social investments have been ‘crowded out’ by diverting limited
            government revenues to foreign creditors. The effect has been to
            exclude the poor from the benefits of growth. At the same time
            growth has suffered since the poor, over half of the population,
            are denied access to the social and economic infrastructure
            through which they can participate more effectively and more
            equitably in economic life. The barriers to growth and poverty
            reduction caused by debt have grave consequences now, and
            will continue to do so into the future.”




    Source: Oxfam at http://www.oxfam.org.uk/what_we_do/issues/debt_aid/debt_nicaragua.htm
Outside Factors
    Finally, we cannot forget that additional factors can play a huge role in determining
     Nicaragua’s financial situation and the well being of its people
      – Example:
          Hurricane Mitch (1998) caused
          $500 million in damage, devastated
          Nicaragua’s economy




Sources: World Bank at http://www.worldbank.org and NOAA at www.ncdc.noaa.gov

				
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