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On December 15 2006 Nicaragua will be completing a 3-year IMF programme – which was extended to 4 years – under the Poverty Reduction and Growth Facility (PRGF). The country would be then completing a 15-year relationship with the IMF, during which it would have negotiated four programmes with the institution. Meanwhile, the new elected Nicaraguan government is getting ready to immediately negotiate the terms of a fifth IMF programme.

This new programme will be fundamental, since it would represent the final culmination of Nicaragua’s subordination to IMF conditionality. If this institution manages to impose its requirements, it will have succeeded in turning the constraints it imposes on macroeconomic policy management into an integral part of the country’s legal framework.

This new programme will also be fundamental since its enforcement period coincides with the period during which Nicaragua should be making an extraordinary effort in terms of public investment in human capital and basic infrastructure to achieve the Millennium Development Goals and recover or not basic perspectives on future development.

This implies that by drastically limiting investment in human capital and basic infrastructure, IMF conditionality, if maintained under current patterns, could become a key obstacle to Nicaragua’s achievement of the Millennium Development Goals, and would seriously hinder the country’s perspectives on future development.

The IMF is setting the following series of basic starting points to launch negotiations for a new programme:

i) The reform of the Law on Municipalities and the Municipal Transfers Law to ensure a definitive "neutralization" of municipal transfers:

In the “Fifth and Sixth Reviews” under the PRGF with the IMF, submitted to the IMF Board in December 2003, and produced by an IMF mission monitoring the fulfillment of the programme, there is already severe criticism to the Transfer Law, stating that the same fails to be “fiscally-neutral”. In this paper, the IMF staff urges Nicaraguan authorities to take measures aimed at restoring the “fiscal neutrality” of the decentralization process.

“The July 2003 Transfers Law calls for increasing revenue transfers to municipalities starting in 2004, but does not simultaneously devolve commensurate spending responsibilities. The mission, supported by World Bank and IDB staff, urges authorities to match revenue transfers with devolution of spending responsibilities in order to ensure the fiscal neutrality of the process”.

The requirement to “devolve” municipalities new spending responsibilities in order to “match” them with revenue transfers has been translated, more recently, into the requirement to reform the Law on Municipalities and the Transfers Law itself, for the main purpose of clearly allocating spending responsibilities and obligations to municipalities which until now had been totally or partially performed by the central government.

“Achieving full decentralization will require revising the legal framework. In a first step, and another prior action for proceeding with the programme, the assembly has passed a law delaying further increases in transfers to municipalities (they will now be increased from 7 to 10 per cent of total revenues in 2010, not 2007). This will alleviate spending pressures when preparing the 2007 budget and allow time for further reform of the framework. The authorities noted that as part of the recent political accord, a broader agreement has been reached to change the laws underpinning the decentralization framework, to devolve clearly (new) spending responsibilities to municipalities. As such, amendments to these laws would be submitted to the assembly before June 2006. In reforming the framework, it will be important to link explicitly the revenue transfers to municipalities embodied in the Municipal Transfers Law, with the devolution of (new) spending responsibilities that should be more clearly defined in the Law on Municipalities” (Seventh, Eighth and Ninth Review under the IMF Programme, December 2005).

The demands aimed at achieving “fiscal neutrality” through the “devolution” of increased responsibilities and obligations to municipalities – which would be matching the amount of transfers received – are based on the assumption that the responsibilities thus allocated to them by the Law on Municipalities should be fully financed by means of the existing municipal tax potential. That is to say, contrary to the consensus prevailing in the country, the demands are based on the criterion that Nicaraguan municipalities would not be suffering from any “vertical fiscal imbalance”.

The consensus prevailing in the country, which was reflected on the Transfers Law, and is contrasted by the IMF, was based on the criterion that municipalities – by means of the Law on Municipalities and its reforms – had been given spending responsibilities which could not be fully met just with the collection efforts of municipalities themselves. In other words, this consensus was based on the criterion that Nicaraguan municipalities suffered from a “vertical fiscal imbalance”.

This “vertical fiscal imbalance” arises as a result of an asymmetry: fiscal decentralization is typically larger in terms of spending than in terms of tax revenues. From the point of view of expenditure, there is a large number of local public goods and services that are in principle more adequately provided by the different levels of local governments.
However, from the point of view of revenues, tax bases allocated to municipalities are usually limited and of little efficiency. Therefore, it is extremely difficult to increase municipal resources by simply devolving more productive taxes, since according to their nature it would be desirable that they continued to be managed by the central government.

From this point of view, transfers are necessary because – even if sub-national governments managed to collect the corresponding tax revenues in the most efficient way possible – said revenues would be insufficient to face their responsibilities and obligations related to local administration and government, the provision of public services and the promotion of local development. Furthermore, in certain cases, local revenues would be even insufficient to ensure a minimum level of administration and services.

Another consensus expressed by the Transfers Law referred to the need to use budget transfers to face the “horizontal” fiscal imbalance suffered from municipalities. This horizontal fiscal imbalance results from the inequality in terms of potential per capita tax collection, or fiscal capacity of the different local governments.

Some areas – owing to the fact that they have a greater comparative population density and economy activity – will have quite a higher per capita tax collection potential than the average, independent of selected tax bases, while a large number of municipalities – those with a significantly lower population density and economic activity – will have quite a lower per capita fiscal capacity than the average, which is both unequal and ineffective.


The search for “horizontal equality” through fiscal transfers tends to aim at achieving the highest possible balance in terms of fiscal capacity among the different municipalities, thus compensating those with less revenue capacity with increased transfers, with a view to equal their per income revenue capacity with the national average.

If taken as indicator of the existence of “horizontal” imbalances, we find that municipal tax collection is distributed in an extremely unequal way in Nicaragua.

It is worth noticing that with such a high level of inequalities in the development of the different territories and municipalities within the country, as evidenced by the huge disparities in terms of potential per capita municipal revenues, IMF documents expressing the requirement to neutralize municipal transfers – alleging that there are no “vertical fiscal imbalances” affecting municipalities in Nicaragua – make no reference either to the existence or inexistence of strong “horizontal fiscal imbalances” that would be affecting Nicaraguan municipalities.

By assigning new spending responsibilities or obligations – currently under the central government – to municipal governments, the latter would be forced to face these new responsibilities with resources resulting from transfers, thus being unable to use them to cover their current and massive vertical and horizontal fiscal “imbalances”.

ii) The automatic adjustment of energy tariffs and the reform of the Energy Stability Law, aiming at eliminating price controls on energy within the market and at eliminating every possibility of introducing price controls on hydrocarbons and regulation of excessive margins within these markets.

iii) Implementation of a detailed "road-map" for the approval, implementation and enforcement of a Fiscal Responsibility Law, which would establish – being a law of the Republic – a series of permanent regulations which would decisively subordinate the behavior of fiscal policy to the constraints being considered as indispensable by the IMF, including the application of sactions against responsible officers in case of their lack of fulfillment.

The country may only divert from said “rules” in case of a real national emergency, provided it is also duly classified as such.

In practical terms this will grant “ceilings”, rules and multi-annual fiscal restrictions agreed with the IMF the status of Law of the Republic. Such ceilings are aimed at restricting in a very strong way the growth of the so-called “primary spending” of the government, that is to say, government spending allocated to the fulfillment of fundamental responsibilities towards citizens: provision of public services in the area of education, health care, water and sanitation, infrastructure, defense and citizen security, administration of justice, etc., for the purpose of ensuring, above all, and at all costs, the availability of resources to pay for the large public debt and net transfers to the Central Bank.

Resources that can be allocated to Primary Spending, are the residue remaining once the public debt service requirements and transfers to the Central Bank have been covered. Thus, for instance, for the period 2007-2009 primary spending would remain “frozen” at just 21.4 per cent of GDP, while the overall resources available from the government during that same period, would reach an average annual rate of 27.5 per cent of GDP. That is to say, the amount of resources to be allocated to primary spending is reduced in order to allocate the difference to public debt service and to the Central Bank.

The IMF, in particular, states that priority should be given to public debt payment, thus increasing even more annual disbursements in amortization of principal as a way to “reduce” more quickly the levels of indebtedness. Logically, accelerating disbursements will imply, during a whole period, which might be a very long one – and which may coincide with the critical period to the achievement of the MDGs and national targets on health and education – to increase current debt payments and to further restrict spending not related to debt service.

Based on this, the whole budget policy remains subordinated to the generation of global financial surpluses to be allocated to public debt service payment and transfers to the Central Bank, to the detriment of key priorities for these poor countries, in terms of the provision of essential human capital that is both needed to overcome poverty and to join the global economy with basic chances of success.

In this scheme, those resources that are available for the public sector to fulfill its commitments to the population represent the “residue” remaining from the overall resources of the government, once the above-mentioned items, which are given absolute priority status within the IMF programme, have been deducted.

From the point of view of the IMF, this Law should not be constrained by the same “constitutional obstacles” that affected the Budgetary Regime Law. The same should subject the fiscal behavior of ALL public sector entities, including universities and municipal governments, to its regulations.

Consequently, as previous requirement to give “credibility” to this Law, the IMF believes it is of utmost importance to “consider” the political constitution reforms that will be necessary in order to succeed in subordinating the budget of those entities that are granted both financial and administrative (universities) as well as political (municipal governments) autonomy, to this rigid scheme for budgetary and fiscal control.

Obviously, the only reform that would enable this is the revision of autonomy provided for in the constitution for universities and municipalities.

Another “basic requirement” for the Fiscal Responsibility Law is the elimination of constitutional budget allocations to public service universities, municipalities and the judiciary, in order to achieve increased “flexibility” in spending – that is to say, to make its drastic reduction possible – in the face of eventual “external shocks”.

Another constitutional modification to be required by this Law is referred to the constitutional power granted to the National Assembly to re-allocate budget resources among different expenditure items, and among different institutions, thus remaining within the overall expenditure ceiling.

This constitutional power would be limited, since it would be absolutely forbidden for the National Assembly to modify wage ceilings and those related to domestic debt service.

The country would lose each and every single piece of fiscal sovereignty. The National Assembly, apart from having to abide by the “ceilings” agreed with the IMF and made Law, would not only be unable to modify the global budget ceiling but also wage ceilings, the amount of interests to be paid and the amount to be transferred to the Central Bank.

Taking into account that the Finance Ministry prepares the national budget bill within the framework of a strict attachment to ceilings agreed with the IMF, and once this is drawn up it is submitted to IMF and World Bank revision for their clearance, this new legislation aims at sending it to the Legislative Assembly just as a formal requirement for its approval. The Assembly will have to approve it without including even slight modifications that could alter its strict “agreement” with said terms which will have been then granted legal status.

This legislation is aimed at constraining the possibility of allowing any national discussion process with regards to the country’s budget, which would seek to change the committed budgetary and fiscal approach and priorities, even limiting the time frame allocated to the National Assembly for discussion and consultation with the different sectors. The country would thus remain tied down.

iv) Social Security Reform.

v) The freezing of total government salaries in real terms.

As evidenced by a recent paper released by the institution, the main reason to establish the virtual freezing of total government salaries in real terms as conditionality lies in the IMF’s concern about the “demonstration effect” that eventual increases in public sector salaries, mainly in education and health, might have on private sector workers, and thereby on the country’s “competitiveness in terms of salaries”, particularly within the maquila sector.

“Strong unions represent public sector workers in collective bargaining negotiations, but the same cannot be said for private sector employees. However, as the difference between average public sector wages and average private sector wages in the formal sector increases, the risk of demonstration effects driving higher private sector wage demands and setting off a wage-price spiral loom larger”. (IMF, Country Report No. 06/173 “Nicaragua: Selected Issues”).

The IMF is concerned about the fact that there are strong unions with a strong negotiation power representing these sectors (education and health), based on which they have managed in recent years to be granted salary increases by the National Assembly. These increases have meant a slight recovery of the real salary of teachers and health workers – in spite of which there still remains a considerable salary shortfall in these sectors.

Further increases in real wages achieved by these sectors, according to the IMF, could give room to a “demonstration effect” on workers of the formal private sector, who could feel encouraged by this “bad example”, and also start their own struggle for salary demands.

If these demands of private sector workers (within which maquiladora companies are included) turn out to be successful, the country’s average labor force cost would be increased, and according to the IMF, Nicaragua would lose its main “attractiveness” for the type of investment it “attracts”: the existence of miserable salary levels, lower than those in neighboring countries.

“...increasing public sector compensation risks having a negative effect on competitiveness. Most foreign direct investment (FDI) is attracted to the formal sector, including the operations of major exporting firms. As the government remains an important formal sector employer, growth in real public sector compensation far in excess of the private sector risks eventually putting pressure on labor costs in the formal sector. This would pose risks to the competitiveness of the formal export sector, and undermine Nicaragua’s attractiveness as an investment location, with respect to neighboring countries”. (IMF, IMF Country Report No.06/173 Nicaragua: Selected Issues)

In a recent joint letter sent by Coordinadora Civil (Nicaragua) and Intermon OXFAM to the IMF, our concerns are confronted to the concerns of the IMF in terms of competitiveness: “…we cannot stop being astonished at the fact that the IMF considers that adapting the salaries of teachers and health staff to decent living standards is a risk factor with regards to competitiveness with foreign investors. The fact that increasing the salaries of these public servants would lead to an improvement of labor conditions should be regarded as a favorable factor for the attraction of investors looking for what the ECLAC has labelled as ‘true competitiveness’, thus taking some distance from old harmful practices such as the race towards minimum labor conditions as a way to attract investors” (Joint Letter sent by CC-Intermon Oxfam to the IMF (pdf format).

Related Information:

IMF conditionalities in Nicaragua, by Adolfo Acevedo

International campaign against IMF conditionalities, by Coordinadora Civil (CCER)

IMF response to Oxfam-Intermon’s letter to IMF Rodrigo Rato

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