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In an interview for Intermón Oxfam (Spain), the economist Adolfo Acevedo Vogl explains the different forms in which the International Monetary Fund (IMF) interferes in the economic, social and political life of Nicaragua. The consequences of this practice are reflected in the quality of life of the population.

"The lack of priority granted by the institution to the achievement of MDGs – by upholding requirements that are even against its own interests – has a huge impact. If countries follow IMF-recommendations they may put the fulfillment of those goals at risk. If they fail to follow them, it is their capacity to obtain resources – both of the IMF itself and that of other donors that often require countries to be "on track" with their agreements with Bretton Woods institutions – that is placed at risk" (Oxfam Intermón and Cáritas: "IMF, 60 years of a trip to nowhere" in Spanish language).

1) What conditions places the IMF on the Government of Nicaragua?

IMF conditionality spreads over a broad range of fields.

This includes a strict control over fiscal performance: setting inflexible goals in relation to government spending, public deficit, the amount of resources the government should transfer to the central bank, the accumulation of international reserves.

It spreads over a reformulation of the legal framework that regulates municipalities and determines the scope of local governments and the system of budget transfers directed towards them, as well as over a comprehensive review of the “Tax Code” that was recently approved with broad consensus following extensive consultation at the National Assembly.

It encompasses the freezing of total government salaries in real terms over a long period of time, owing to the IMF concern about the “demonstration effect” that eventual increases in education and health might have on private sector workers and the country’s “competitiveness in terms of salaries”, particularly within the maquila sector.

It requires certain tariff rate increases for public services now being controlled by private companies (25 per cent in 2005, 6 per cent in 2006 and then automatic adjustments for Union Fenosa), subjecting even the corresponding regulation entities to this conditionality.

It demands reforms to the “Energy Stability Law” in order to prevent it from having control over fuel prices (Nicaragua’s margins on fuels double the regional average - and this in the poorest country within the area) and to other regulations constraining the exercise of monopolic power by oil companies that import, refine, store and distribute fuels.

It spreads over the demand for a new plan to reform the social security system (after its privatization was rendered impossible in view of its huge fiscal costs, which the IMF had not even taken into account before demanding such privatization) and a plan to implement the “Fiscal Responsibility Law”, also “considering” the possibility of carrying out the constitutional reforms the IMF deems appropriate for the successful implementation of this law.

Although in the past IMF conditionalities were limited to the enforcement period of the agreement with the institution, and mainly to the so-called macroeconomic conditionality, the new thing about it in the present context is the fact that it is remaining permanently “engraved upon” the country’s current legal and institutional framework.

The “Law of Budgetary System” provided that ALL budgets (it aimed at including the budgets of municipalities and public universities that enjoy financial and administrative autonomy, however this did not happen because such autonomy is granted by the constitution) should remain under the control, restrictions and budget ceilings imposed by the government’s “Economic and Financial Program” (in this case, the IMF three-year program), the same as any related Ministry.

The “Fiscal Responsibility Law” would turn those multi-annual “ceilings” previously agreed with the IMF into a national law, and the country would only be allowed to divert from the same in case of national emergency, provided it was duly qualified. Severe sanctions would be applied to those responsible for such diversions.

As a condition for the “success” of this Law, the IMF believes it essential to consider reforms to the country’s Political Constitution in order to allow the budgets of entities that have been granted financial and administrative – and even political – autonomy (municipal governments) to be subjected to this scheme as well as to a “review” of constitutional allocations to Public Service Universities, Municipalities and the Judicial Power, so as to achieve increased “flexibility” in spending – their drastic reduction – in the face of “external shocks”.

The IMF has demanded permanent modifications to the Law on Municipalities, the Law of Budget Transfers to Municipalities, the Tax Code and the Energy Stability Law. It has required the National Assembly to rectify the modifications made – exercising its sovereign power – to the Budget System bill sent by the Executive Power.

More recently, the IMF has demanded the elimination of the recently passed General Education Law as a condition for not suspending again its Programme with Nicaragua; this Law would allow the country to reach for the first time between 2009 and 2010 the equivalent of 6 per cent of GDP for public spending on education, while Honduras reached 7 per cent of GDP in 2001 and Bolivia did it in 2003. Without this law, it will not be possible to achieve the MDGs and national targets in terms of education.

The National Assembly is increasingly limiting itself - by sheer formulism (the passing of laws by the assembly is a formal requirement the IMF has still not managed to avoid) – to approve those laws required by the IMF (called by the press as “IMF laws”) without not even being able to make changes to the drafting of bills that the Government has secretely negotiated “behind closed doors” with the IMF.

2) Why? What is the IMF aiming at through these conditions?

This is a difficult question to answer. Supposedly, the aim of the IMF is to support countries that have balance-of-payments problems so that they can solve such problems without the need to apply drastic recessive measures (one can notice here the Keynesian origin of the idea that gave rise to the IMF).

But obviously, the above-mentioned conditionalities have little – if nothing – to do with this aim. Joseph Stiglitz, Nobel Prize Laureate in Economics and former chairman of the council of Economic Advisors under US President Clinton and World Bank Vice President, provides another view of the IMF based on his own experience. It shows it as an institution that is very much influenced by the views and approaches of the US Department of the Treasury, and the latter as an institution completely at the service of what he calls “the financial and business community”.

Maybe this strong identification with the “sensitivity” of the financial and business community at global level may help to explain better the emphasis laid by the IMF on the severe restriction on government expenditure aimed at the fulfillment of fundamental obligations such as education, health, housing, drinking water and sanitation, etc.. And all this for the purpose of generating financial surpluses aimed at validating the “sacredness of loan agreements” (in the words of the IMF), in this case the “sacred” public debt securities in the hands of private investors, and at strengthening the accumulation of international monetary reserves at the expense of public funds, in order to give such investors signs of “currency strength” and stability.

In Nicaragua, the absolute priority granted to public debt service (mostly of fraudulent origin) is due to the fact that the IMF considers it indispensable to subject all social and economic policies in a country as poor as ours to the development of a market for public debt securities. This calls for a high credibility of securities which in turn demands payment of all liabilities stemming from them both promptly and at any cost. Of course, this turns out to be very suitable to the interests of “investors” who are the holders of such securities.

Perhaps the view of Mr. Stiglitz may also allow to understand the concern of the IMF about the possible regulatory measures aimed at constraining the exercise of the monopolic power of oil companies, which are obtaining exorbitant profits in the middle of the crisis. Anyway, the country loses even its slightest fiscal and also regulatory sovereignty and conditionality threatens to affect even the country’s Political Constitution itself, which would be setting a fatal and very serious precedent.

3) What are the impacts of these conditions on Nicaraguan people?

The country is not able to determine by itself how to face the basic problems that any country as such has to solve, such as the setting of key priorities with regards to the allocation of domestic resources, since it is the IMF itself the one that sets these priorities, in a way that top priorities such as investment in education, health, housing, maintenance of rural roads and other key priorities end up being seriously affected. Also among these priorities is the system of state political descentralization and the funding of such descentralization; as well as the regulatory framework that needs to be established.

The first price to be paid is that we are left without a country, and without the capacity to make our own basic decisions at country level. Democracy becomes a fallacy. The decisions that are fundamental to our country and its future are not made through the democratic and deliberative processes that are consubstantial with democracy but are rather imposed by an international institution whose power structure is absolutely anti-democratic and whose bureaucracy is not accountable at all to the millions of human beings affected by such decisions.

Any elected government will be forced to become a mere administrator of these policies, since the country has lost even the slightest possibility of choosing among different policy options and views and instead has to subject itself, without no choice, to an only option.

The country is prevented from making such basic decisions as raising the salaries of teachers and health workers – which are miserable – in order to start to overcome the huge shortfall suffered by them, under penalty of being charged with expensive financial sanctions by donors who support IMF conditionality (while they express their desire to achieve MDGs).

4) What should the IMF do to make its policies succeed in really putting an end to poverty?

The IMF, by default, is not aimed at putting an end to poverty.

As a result of this, in the best of cases, the IMF should just limit itself to ensure that no unmanageable fiscal imbalances take place, which is achieved by preventing public deficit from being financed through currency issued without solid backing or unsustainable indebtedness, thus allowing the country to decide its own policies aimed at development and the reduction of huge inequalities through open, democratic and participatory processes.

Supposedly, “poverty reduction strategies” should have been thus formulated. However, in practice these strategies should be completely adapted to the macroeconomic and structural conditionality framework pre-established by multilateral financial institutions, the IMF and World Bank, which are not subjected to any democratic or deliberative process at national (or international) level and whose main focus and priority is far from being the fulfillment of MDGs.

In addition, “Poverty Reduction Strategy Papers” themselves should still have to be submitted for revision and approval of the IMF and World Bank Executive Boards, which are entitled to demand partial or total changes to them, under penalty of withdrawing funding related to the Program.

These changes to nationally agreed strategies by the IMF and World Bank are not strange at all:

"In Armenia, a group of local economists closely participated together with the Economy Ministry in the drawing up of their own macroeconomic framework for the PRSP. These estimates acknowledged the importance of growth but also of equity, and therefore set goals for both items. Thus, it was included in the first draft of the PRSP, but when in May 2003 a second draft was released, this previously agreed framework had vanished without no explanation, in favor of figures agreed with the IMF within the Poverty Reduction and Growth Facility. In spite of the fact that this was denounced before the World Bank and IMF boards, such demands were not addressed” (Oxfam Intermón and Caritas: FMI, 60 años de viaje a ninguna parte).

Decisions and policies in key areas for the “poverty reduction strategy” and for the future of countries such as education, health, descentralization policy, management of public services and other key reforms, remain subject to the conditionality of sectoral loans and to the global conditionality of multilateral institutions. Developed countries have granted exaggerate and abusive power to the IMF, and certainly, this was not aimed at ensuring the achievement of MDGs.

5) A few months ago, Nicaragua was granted the cancellation of most part of its external debt. How is it possible that this has not been translated into benefits for the population?

The most recent debt relief has only meant a very small reduction in external debt service, and the destination of freed resources remains unclear. This will be secretely decided between the Government of Nicaragua and the IMF. The most important relief has been the one granted within the framework of the HIPC Initiative which has implied a reduction in terms of external debt service from 51 per cent of fiscal revenues in 1994-1998 to less than 9 per cent of revenues at the present time, while the same level of fiscal revenues was doubled between both periods.

Likewise, the country continues to show levels of external aid that are among the world’s highest (if not the highest, as % of GDP). However, the country’s per capita social spending barely halves that of Bolivia and Honduras, the other HIPC countries in the region. What has happened?

In the case of Nicaragua, public debt service represents – besides the insufficient and regressive character of the tax burden – the main obstacle for the allocation of resources required for investment in human development and capital.

In the 1990s, in fact, growth in terms of public social expenditure was drastically constrained by the magnitude of external debt service, which ended up covering an average 51 per cent of fiscal revenues. External debt service imposed a fundamental restriction, mainly on the availability of domestic resources to finance social expenditure.

So far this decade, while the External Debt Service has ended up covering less than 9 per cent of fiscal revenues – which means that significant fiscal resources have been released from debt payment, with regards to the previous period – it is the Domestic Debt Service that which has turned into the main obstacle for the allocation of resources required for investment in children.

Domestic Debt Service reached very reduced levels within the pre-HIPC period, but in the present decade it has skyrocketed, reaching $367.5 million in 2003 and $354.2 million in 2004, accounting – as previously noticed – for 46.3 per cent and 39.5 per cent of tax revenues, respectively. In contrast, External Debt Service which reached in the pre-HIPC period (1994-8) an average $287.5 million (amounting the share of debt service funded with the country’s own resources to an average 51 per cent of fiscal revenues within such period), recently fell to just $87 million (and covered less than 9 per cent of fiscal revenues) as a result of that initiative.

The result was that, while in the 1990s Nicaragua was unable to invest in human capital owing to the excessive burden posed by external debt service, in the present decade it has also been hampered from investing the resources needed to start overcoming its huge social shortfall, since fiscal resources released by the HIPC initiative from external debt payment have been allocated to cover the exorbitant increase in domestic debt service and transfers to the Central Bank.

The foregoing analysis confirms that the achievement of the Millennium Goals and national targets in these key areas, shall not be fulfilled provided progress is made towards a comprehensive re-structuring of the burdensome domestic debt and reforms to the tax system are carried out in order to turn it into a more efficient – in terms of its capacity to provide the State with more suitable resources for the fulfillment of its obligations – and less regressive system. At the same time, this requires the country to recover basic levels of fiscal and regulatory sovereignty.

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