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At the heart of conditionality lies a process of negotiation between the IMF and the country requesting financial assistance, which is based on a power relationship. Provided all the rest remains constant, the greater the asymmetry in power between the member country and the Fund and the greater the country’s need to have an IMF programme to have access to the financial resources it urgently requires, the more likely it is that conditionality will lead to an imposition of policies. The question is how the Venezuelan cooperation would conform to these “maths”?.

There are circumstances which appear to worsen the asymmetry in power between the IMF and developing countries. Not only is IMF lending often tied to the acceptance of the conditionality being imposed by the institution but also the access to other sources of finance.

If a country’s access to a substantial part of its international sources of finance remains also tied to the acceptance of IMF conditionality, its space of negotiation regarding the demands of this institution will be extremely reduced.

In the case of Nicaragua, although donors within the so-called “Budget Support Group” have not formally requested an IMF Programme in place as a condition to further their Cooperation with Nicaragua in the agreement signed by the government, the IMF representative has stated that donors do demand the existence of such Programme as a condition to continue making disbursements.

This issue needs to be fully clarified. There is no other reason for Nicaragua to have an IMF programme in place other than to assure the continuity of disbursements.

2. A country’s negotiation capacity vis-à-vis the IMF will be very reduced if it has no alternative source of finance that remains unrelated to the observance of IMF conditionality. In that sense, by providing Nicaragua with an important and alternative source of finance, the Venezuelan cooperation would theoretically expand the country’s space and capacity of negotiation vis-à-vis the Fund in a considerable way.

However, such potential could be limited by the fact that, apparently, it has been decided beforehand that Venezuelan cooperation should be framed within IMF “benchmarks”.

Such a priori acceptance of IMF “benchmarks” raises some questions which can only be solved by trying to elucidate how the Venezuelan cooperation – which, as far as it is known, will take the shape of concessional loans – could conform to the maths of IMF “benchmarks”.

3. The IMF is supporting the proposal to establish, as ongoing restriction on the performance of fiscal policy, the “zero deficit” rule (after grants), which, apparently, would end up being accepted as an a priori “benchmark” for the negotiation with the IMF.

In this case, if fiscal deficit equals zero, there is no need for the government to take on new debt for the purpose of deficit financing. The only need to take on new debt results from the necessity to cover payment at maturity of principal amount outstanding (external or internal debt), which is technically known as debt “refinancing” or “roll-over”.

Taking on new gross debt does not increase existing net debt levels, since it just replaces the old debt with new debt, preferably under more favourable financial conditions.

In this case, if one takes on external debt in an amount equivalent to that of the internal debt reaching maturity, the total net debt shows no increase; rather, the internal debt – which is only reduced when payment is effected – is just being replaced with external debt, which increases in an amount equivalent to the reduction in internal debt. The overall amount of public debt stock remains unchanged. The only thing that happens is that internal public debt simply becomes progressively replaced by external debt.

4. How would the Venezuelan cooperation conform to these “maths”? It all depends on the shape it takes and on the mechanisms through which it is channelled.

If this Venezuelan assistance was used to “refinance” internal debt maturities, as it is suggested in an article of “Confidencial” magazine (which confirms that said cooperation would “likely include a financial mechanism to purchase or refinance the Nicaraguan internal debt”), it would be thus freeing-up the resources currently being used to face these maturities, and would be theoretically making those resources available for the purpose of increasing public investment in human capital and basic infrastructure.

Now then, in principle, resources to be freed-up from payment of internal debt principal at maturity are no other than the resources flowing from IDB, World Bank and CABEI loans, which are currently being used to refinance internal debt maturities.

In this case, the refinancing of internal debt maturities itself would not increase net public debt levels, since it would be just replacing internal debt with concessional external debt owed to Venezuela.

However, if IDB, World Bank and CABEI loans – which would no longer be allocated to refinance payment of internal debt maturities – were used to finance public investment (the reason why they are officially borrowed), the net level of public indebtedness would indeed be increased.

That is to say, although indebtedness levels would not be increased by means of the replacement of internal debt with debt owed to Venezuela, they would indeed be increased by means of the additional net indebtedness resulting from the allocation of net loans borrowed from the IDB, WB and CABEI, to financing public investment.

The total debt is increased since loans that were previously allocated to the replacement of internal debt are now substituted by Venezuela’s resources, and therefore, said loans, once no longer being used to replace one debt with another, are turned into new net indebtedness.

5. Under IMF desired “benchmarks”, not only would Venezuelan cooperation lead to an additional external indebtedness, but any resources freed-up from payment of internal debt maturities, could not be in any case aimed – under said IMF “benchmarks” – at achieving the essential increased levels of investment in human capital and basic infrastructure.

The reason for this is simple: internal debt amortisation is not included in the Budget under Public Sector Total Expenditure; rather, said debt maturities are recorded “below the line” of fiscal deficit, under the “net internal financing” item.

By freeing-up the resources that were allocated for payment of these maturities – re-directing them to increase public investment expenditure on human and physical capital – the amount of total expenditure would be increased, which would lead to the occurrence of fiscal deficit in an equivalent amount, thus breaking the inflexible zero deficit “rule”, and therefore failing again to comply with IMF “benchmarks”.

6. If, besides this, as it is also inferred from the interview published by “Confidencial”, the intention is to take on additional significant credits from Venezuela in other areas of cooperation – energy, agriculture, public health, housing, etc. – then, in the event such credits were disbursed by any public institution, the net increase in external public debt would be even greater. So, as it has already been said, such an increase would not conform to IMF “benchmarks”, since contrary to this the institution is postulating an accelerated reduction in the debt-to-GDP ratio, until said ratio falls to 40%.

In addition, upon their disbursement, those credits would be translated into an increased level of expenditure at some public entity (and be it remembered that under IMF “standards” ALL “Non-Financial Public Sector” entities, no matter how autonomous, would make up the National Budget), which would bring about a fiscal deficit in an equivalent amount, thus breaking away from the “zero fiscal deficit” benchmark sought by the IMF.

Of course, for the purpose of neither increasing the level of public expenditure, nor the level of indebtedness, loans granted by the World Bank, IDB and CABEI could be eliminated, thus only providing us with the substitution of debts owed to these institutions by debts owed to Venezuela. But, in this case, Venezuela’s cooperation would not result in a net increase of resources to be made available to the country, which is in fact the advantage that aims to be achieved (combining “the best” of two worlds: Venezuela’s cooperation and the cooperation of these institutions). As the saying goes, there is no free lunch.

7. It could also be argued that, an alternative to prevent fiscal deficit from being expanded following the disbursement of Venezuelan cooperation, would be to obtain – at the same time – an equivalent increase in fiscal revenue, by means of a reduction in exemptions, tax evasion and a more progressive tax system. In this way, if the growth in expenditure was compensated by an equivalent increase in revenue, no increase in fiscal deficit would be registered.

However, to carry out a tax reform that would generate revenues in an amount equivalent to the significant amount to be supposedly reached by Venezuelan cooperation, is an exceptionally difficult task (estimates show that it would not be enough to cut exemptions in order to achieve such an increase in terms of income), and would require political will and above all social support of major importance – which would be still far from being created – to face the opposition of the powerful groups to be affected, apart from the institutional capacity needed for tax inspection, which would also be still far from being created.

But, beyond this, if it is truly believed that the country has the capacity to carry out a tax reform that would yield such results, then one may wonder what the point of submitting the country to the drastic restrictions of an IMF programme for the following three years while early accepting the standards set by the institution will be. If the need to resort to IMF assistance in order to achieve such levels of tax collection was rendered irrelevant, and even, if the increased investment expenditure on human capital and infrastructure could be covered by increased revenues, there should be no need to resort to greater indebtedness, no matter its source.

As a matter of fact, if any expenditure increase in public entities can be covered by a corresponding increase in revenues, there is no need whatsoever to become indebted to finance such an increase.

8. Whatever the case, it seems obvious that to accept and become submitted to IMF “benchmarks” beforehand – when everything points to the fact that conditions to establish a completely new kind of relationship with this institution are favourable – does not appear to be the most profitable option.

Actually, taking into account the level of international reserves held by the country, amounting to over 80% of the Government Primary Spending, and the projected fiscal deficit (practically equalling zero), together with the existence of major levels of cooperation which are mostly not dependent on the existence of an IMF Programme (contrary to the prevailing impression, much less than 20% of cooperation would be apparently tied to the existence of an IMF Programme), and also with the presence of major alternative sources of finance, there seems to be no rush to accept those benchmarks beforehand, as a priori items of the negotiation.

In any case, these issues should be settled as soon as possible in the most open and transparent way. These are issues that affect us all and which therefore cannot be settled in secret negotiations between public officials and the IMF. The complete and absolute transparency regarding these issues and the democratic and discussion processes around them are not a gift to be requested from public officials. They represent the most basic and most inalienable of citizens’ rights.

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