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POLICY ANALYSIS: External Debt in Nicaragua

April 2nd, 2008

Marta did not go to school today. She is seven years-old, standing among speeding cars at a busy Managua intersection, selling chewing gum. On a good day, Marta will make $1 to contribute to her family's income, still not enough for her to go to school or pay for medical treatment. While Marta makes pennies working at intersections, she, like other Nicaraguans, owes $1,400 to her country's wealthy foreign creditors.

Marta faces the reality of Nicaragua´s poverty each day, living in a country where:
-over 50% of the population earns less than $1 a day
-80% of the country lives in poverty
-62% of the population is under and unemployed
-over 50% of school age children do not attend class, and 34% of the urban population is illiterate
-one of three children is malnourished

In the country with the largest per-capita debt in the world, Nicaraguans bear the personal burden of their country's external debt. Instead of spending money on health care, education, infrastructure, and other social services, Nicaragua must put its resources toward paying back its debt, meanwhile taking out even more loans.


Nicaragua's external debt currently stands at 6.7 billion dollars.
- 25% of the Nicaraguan budget is spent on debt payments each year
-14% on health care
-11% on education

Nicaragua relies on loans from multi-lateral lenders like the IMF and World Bank to supplement the national budget and economy. Since Nicaragua does not earn enough income to support its bare-bones budget each-year it must rely on foreign loans to make ends meet. The IMF and World Bank operate around the idea that capital from macroeconomic growth will "trickle down" to eventually benefit the poor majority. But while Nicaragua's macroeconomic indicators have show growth as foreign investment increases, its human development indicators keep getting worse, thanks to IMF and World Bank imposed Structural Adjustment Programs (SAPs a.k.a. ESAFs or PRGFs). Structural Adjustment Programs were designed by the IMF and World Bank to help poor countries "reactivate" their economies and make their debt payments, by prioritizing exports and redefining the role of the state. SAP's were not designed to reduce the debt that a country owes, but to help them make their payments on time. The Nicaraguan people are paying its debt time and time again through Structural Adjustment Programs.

Structural Adjustment Programs Devastate Nicaragua´s Poor by:
· Reducing the Size of the State. Nicaragua is forced to privatize state-owned enterprises like telecommunications, electric, and water companies. Privatization eliminates an important long-term source of income for the Nicaraguan government, but creates a one-time sum of cash that Nicaragua will use to make debt service payments and carry out structural adjustment programs. After "downsizing" state-owned companies to be efficient enough to sell, which includes massive layoffs of state employees, and huge increases in rates, state owned companies often sell out at rock bottom prices to transnational corporations. During the downsizing phase of the electric company, electricity rates rose 62% for Nicaraguan´s, while the transnational investors got a bargain on the sale of this state service.

· Balancing the Government Budget. Nicaragua´s current budget deficit is 318 million dollars. To balance the budget, Nicaragua has to reduce social spending on services such as health, education, and environmental protection. For every $1 spent on health care, Nicaragua spends $5 on debt service payments.

· Deregulating the Economy. SAPs force countries to modify their laws to attract foreign investment by removing trade tariffs, eliminating subsidies and price controls, and devaluing the national currency and privatizing state banks. These policies hurt small and local producers, by shifting agricultural production to prioritize export crops, which rely on the fickle international market and demands for Nicaraguan export goods in the North. Fewer government controls results in the exploitation of natural resources, and less attention to labor rights. As a result of SAP policies that seek to attract foreign investment and promote macroeconomic growth, Nicaragua's Free Trade Zone is rapidly growing, where workers make the second lowest wage in the Hemisphere.

Who is behind the IMF and World Bank?
The International Monetary Fund (IMF) and World Bank are headquartered in Washington D.C. Even though the World Bank has more than 170 member countries, most of whom are poor developing countries with external debts, rich countries like the United States have decision-making power within the World Bank and IMF. Unlike the United Nations that uses a one-country, one-vote system, for the IMF and World Bank, a country's voting power is determined by that country's contribution to the institution. The United States holds over 17% of the vote in both institutions. Given that 85% of the vote is needed to make decisions at the IMF and World Bank, the U.S. effectively has veto power within both institutions.

Another Day Older and Deeper In Debt: Nicaragua's Cycle of Debt
Nicaragua is a bankrupt country that has entered into an endless cycle of debt that keeps the people of Nicaragua impoverished. Because Nicaragua doesn't have enough money in the bank to make its debt payments, it has to take out even more loans and go further into debt, while leaving the social sector without a cent. Nicaragua is paying back an unpayable debt by sacrificing its citizens to IMF and World Bank imposed Structural Adjustment Programs. Until Nicaragua is relieved of its debt burden, its people and government will not have the freedom to make real choices about their desired course for development, and take steps to climb out of poverty.

The Oxygen Mask to the Poor: HIPC
The IMF and World Bank have offered an oxygen mask to a suffocating country: the Highly Indebted Poor Countries (HIPC) initiative, which keeps Nicaragua locked into the same cycle of debt. At its culmination, the HIPC initiative will reduce Nicaragua's debt by $3.5 billion dollars. Under HIPC Nicaragua's debt and debt payments will be made more "sustainable"-in other words, the IMF and World Bank will keep receiving their payments on time. To complete the HIPC initiative, Nicaragua will undergo another series of stringent Structural Adjustment policies, including the completion of the privatization of state enterprises such as electricity, water, and telephone service.