What purposes will serve the IMF debt cancellation in Nicaragua and the other 18 “poor” countries?
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Source: FEDH-IPN
Adolfo Acevedo Vogl
Thu Feb 16 2006

The cancellation of a large part of Nicaragua’s external debt (and that of 18 more countries), first carried out under the auspices of the HIPC Initiative and then under the most recent G-8 Initiative, has been expressly aimed at freeing resources that should be allocated to an ADDITIONAL increase in expenditure focused on poverty reduction, and particularly on education and health. However, when analyzing Nicaragua’s case it is worth wondering whether things will really go this way.

The cancellation of a large part of Nicaragua’s external debt, first carried out under the auspices of the HIPC Initiative and then under the most recent G-8 Initiative, has been expressly aimed at freeing resources that should be allocated to an ADDITIONAL increase in expenditure focused on poverty reduction, and particularly on education and health.

As stated in the recent IMF Press Release that informs about the decision adopted by the Board to cancel 100% of debts owed to the institution by a group of 19 poor countries – among them Nicaragua – such debt cancellation is expressly aimed at freeing resources that should help these countries to move forward in the achievement of the Millennium Development Goals (MDGs):

"This is an historic moment, which will allow these countries to increase spending in priority areas to reduce poverty, promote growth, and to make progress towards achieving the Millennium Development Goals".

With regards to Nicaragua, it states that:

"The international community has made these additional resources available to help Nicaragua make progress toward its Millennium Development Goals (MDGs)".

However, as it can be inferred from statements by some public officials, it is highly likely that those resources freed up from the IMF debt cancellation, which in the case of Nicaragua have been translated into an increase in net international reserves amounting to almost $200 million - net international reserves went up from an amount of $536.6 million on December 31, 2005 to $729.5 million by February 2, 2006 – will remain “frozen” in the form of reserves.

This means that NOT ONE SINGLE PENNY of resources freed up through IMF debt cancellation would be allocated for bridging the huge gap in lack of finances registered in the Ministry of Education, Culture and Sports and the Ministry of Health, aiming at achieving the MDGs; that is to say, not one single penny will be allocated for the purpose of contributing to the fulfillment of such goals.

In Nicaragua, it is argued that resources stemming from the external debt cancellation as well as resources resulting from the huge tax overcollection, should be allocated to “strengthening the reserve position”, since this helps to strengthen the macroeconomic stability.

International reserves become usually accumulated either as a result of external trade surplus or strong capital inflow. The accumulation of reserves in a country which has led external trade opening to the point of registering the lowest levels of average nominal tariff protection throughout the Americas (including the US and Canada), while having an overvalued exchange rate, is made possible at the expense of the transfer of resources from the government to the Central Bank.

That is to say, the accumulation of reserves is made possible at the expense of constraining, to the maximum extent, the increase in public sector expenditures and channelling a large part of the increased fiscal revenues to such effect.

If this amount of $192.2 million was spent in equal shares within 10 years, it would yield an amount of $19.2 million per year for the next decade. That is to say, for example, that the programme “Enhanced Strategy for Economic Growth and Poverty Reduction II” (ERCERP) would increase spending on education by $19 million per year in case the additional disbursement of foreign cooperation in the amount of nearly $200 million was effected.

In spite of the fact that the HIPC initiative has freed up resources from external debt servicing in the amount of more than $200 million per year - as evidenced by reports issued by the Central Bank of Nicaragua (BCN) the country had been making average debt service payments of $287.5 million within the period 1994-1998, although in the last two years it has only paid less than $80 million - , and that the G-8 Initiative has already released additional resources – in this case, the outstanding debt to the IMF is freed at once -, and notwithstanding the huge overcollected amounts and the fact that fiscal revenues as measured in US dollars have been doubled if compared to revenues within the period 1994-1998, the government keeps alleging, year after year, that there are simply “no resources available” to address the essential needs of the population.

The budget of the Ministry of Education, Culture and Sports has remained “frozen” at 3% of GDP since 1999 and prospects indicate it will remain the same for many years to come. The budget of the Ministry of Health was reduced from 3.2% of GDP in 2000 to 3% in 2005, and it is also expected to remain unchanged.

In 2004, the target for reserve accumulation agreed with the IMF was overfulfilled by more than $100 million – in other words, reserves grew by $100 million more than the amount agreed with the institution - while tax collections stood at $25 million above the agreed target. Notwithstanding the above, the government kept alleging, throughout the year, that there would be “no resources available” to finance the School Milk Programme that barely amounted to $3.5 million.

We are realizing, with increasing distress, that there is no investment in human capital that could match the efforts the country should be making to regain a minimum level in terms of future prospects. The net primary school enrollment rate has fallen from 85% in 2002 to 80% in 2005 – which points to the fact that this indicator has fallen to a level similar to the average registered by the world’s poorest countries.

The country continues to register an average of 30% of the population suffering from hunger. Fifty-five per cent of the population has no access to essential medicines. Physicians and nurses earn salaries that are similar to that of their peers in Malawi, a country that is three times poorer than Nicaragua. Teachers’ wages continue to be almost half of the average salary earned by the rest of the labour force.

According to the IADB “the evidence and conclusions are strong. Productivity, distribution and growth are directly determined by the country’s stock of human capital and the rate at which this becomes accumulated. High levels of education, good health and nutrition are optimal predictors of its subsequent performance”. (IADB, “Pathways to Growth”, Washington, 1997).

If we apply this judgment to the case of Nicaragua, we should have to say, on the contrary, that very low levels of schooling, extremely low quality of education, bad health and nutrition (Nicaragua shows the highest rate of population suffering from hunger in Latin America, behind Haiti), “are optimal predictors of its subsequent performance”.

In view of these indicators, everything seems to point out that the future of the country – and that of the millions of human beings inhabiting it – is being undermined at an increasingly fast pace and maybe in an irreversible fashion.

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The author is an economist, member of the Education and Human Development Forum of the Initiative for Nicaragua (FEDH-IPN)

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