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Debt in Nicaragua

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

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Debt in Nicaragua

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  1. Debt in Nicaragua (Research assistance by John Lageson)

  2. 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

  3. 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 • 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) Composition of Debt, 1975 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

  4. 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.htmlhttp://encarta.msn.com/encyclopedia_761577584_9/Nicaragua.htmlhttp://reference.allrefer.com/country-guide-study/nicaragua/nicaragua21.html

  5. Principle and Interest Arrears(in millions of U.S. dollars) 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 the 1980s (see numbers 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

  6. 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

  7. 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

  8. Child soldier with Contra forces 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 theCold War • US laid mines outside Nicaraguan harborsin 1984 • Nicaragua vs. United States in theInternational 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 furtherdebt Sources: The IMF at http://www.imf.org/external/pubs/ft/wp/wp9872.pdf and Wikipedia at http://en.wikipedia.org/wiki/Nicaragua

  9. 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

  10. 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

  11. 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

  12. However, the Sandinistas were defeated in the general election of 1990 A Change of Direction in the 1990s • 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 Nicaragua eligible for money from the international lending community (including the IMF/World Bank), which was necessary as the Soviet Union no longer existed after 1991 Violleta Chamorro(served 1990-1996) Source: Dijkstra, http://136.142.158.105/Lasa2000/Dijkstra.PDF

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. Transactions with the IMF, 1991-2005 Loans Received in the 1990s and 2000s Who has been/is assisting 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

  19. 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 StrategyPaper (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

  20. 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.orgwww.imf.org/external/pubs/ft/scr/2004/cr0472.pdf

  21. 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

  22. 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

  23. 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/

  24. 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/

  25. 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 Debt in December 1999 Source: The IMF at www.imf.org/external/pubs/ft/scr/2004/cr0472.pdf

  26. 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 whatconditions 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=1078995902703

  27. 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

  28. 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/

  29. 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 withoutwork 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/

  30. 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

  31. 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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