One hand gives while the other takes: Nicaragua under IMF conditions

19 June 2006 | Guest comment

versión español

In the UN declaration on the Millennium Development Goals (MDGs) all signatory states undertook to spare no efforts to “free our fellow men, women and children from the abject and dehumanising conditions of extreme poverty”. The achievement of the MDGs, in the case of Nicaragua – as in the case of many developing countries – is severely constrained by the relationship of the country with the IMF. It is estimated that under current IMF conditionalities only half of the MDG targets will be met in Nicaragua.

The importance of achieving the MDGs for a country like Nicaragua is quite evident. Nicaragua is the poorest country in Latin America after Haiti, Bolivia and Honduras. Eighty per cent of its population lives on less than $2 a day and 46 per cent on less than $1 a day. The country registers higher-than-expected “income poverty” levels considering its per capita income.

the principle obstacle is the surrender of fiscal sovereignty to IMF policies

Child poverty is high in Nicaragua. Education should be a priority. Primary education levels are comparatively lower than other Latin American neighbours such as Bolivia and Honduras. Only 41 per cent of secondary school age children actually attend. In comparison to neighbouring Honduras and Bolivia, which spent approximately 7 per cent of GDP on public education, Nicaraguan spending in this area was the lowest, at 4.3 per cent of GDP.

For the first time in its history, Nicaragua should be in a position to confront its structural problems: in the 1990s the country was in no position to take on the enormous financial investment required for human development given the amount of public resources it had to divert to paying its external debt. From 1994-1998 the government gave approximately 51 per cent of its total annual income of $455 million to debt repayments. Since qualifying for relief under the Highly Indebted Poor Countries (HIPC) initiative the country now devotes less than 9 per cent of its fiscal income to debt servicing. During this time government income has doubled to $900 million and Nicaragua receives one of the highest levels of foreign aid, $580 million per year since 2002.

The principle obstacle to Nicaragua increasing its spending levels on human capital to the level required by the MDGs is the surrender of fiscal sovereignty to IMF policies. The most stringent IMF macroeconomic condition is the requirement to make payment of domestic debt an absolute priority. This is aggravated by requirements to increase foreign exchange reserves and to maintain ceilings on the government’s primary spending and fiscal deficit. In order to reach the financing levels required by the MDGs, the country would have to increase its spending over and above the levels imposed by the IMF, meaning it would need to use all of the resources freed under HIPC.

The government’s domestic debt repayments were very reduced during the pre-HIPC period, but they have now become untenable. Internal debt servicing is now absorbing resources freed up by debt relief, which should be used for additional social spending. For a country where government spending totals $1.2 billion, sustaining international currency reserves of $800 million is a serious burden. For example, if imports grow by 20 per cent next year, the central bank’s reserves must also be increased by 20 per cent, or $160 million, an amount similar to the total budget allocated to the ministry of education.

The IMF’s new conditionality establishes that the government payroll will also have to remain frozen in real terms. This implies that it will be impossible to accomplish even the goal set in the National Development Plan of overcoming the enormous salary shortfall in education and health, and hire the new teachers and medical personnel necessary to meet the domestic goals regarding education and health.

It is ironic that northern donors who provide budget support to Nicaragua demand that on the one hand Nicaragua achieves the goals required to meet the MDGs, whilst on the other insisting that it comply with IMF conditions. This puts the country in a virtual position of schizophrenia. The most logical step would be to demand that the main purpose of IMF programmes be to contribute to the achievement of the MDGs.

Adolfo José Acevedo Vogl is an economist and Coodinator at Coordinadora Civil, a coalition of more than 350 Nicaraguan social movements, non-governmental organizations (NGOs), sectoral networks, territorial networks, producers’ associations, unions and federations that decided to work together.