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Central American University - UCA  
  Number 170 | Septiembre 1995



One Year into ESAF: What Must Still Be Adjusted?

Xabier Gorostiaga

As much as we have criticized the content and implementation of the Enhanced Structural Adjustment Facility (ESAF), we must accept it as necessary and inevitable. ESAF offered access to concessionary foreign resources at a critical moment, in which the country's reserves were almost nil.

We must also recognize its concrete possibilities for initiating a more efficient, democratic, equitable and thus more human and Christian economic reactivation. Considering ESAF in this light is more important than ever as we move into an electoral campaign requiring economic proposals that enjoy consensus among social and productive actors, and at a moment in which the government has announced a National Development Plan.

It is not enough to evaluate the first year of ESAF's implementation; we must also evaluate ESAF in the context in which it is applied and from the real and potential perspective facing Nicaragua today. An adjustment has been needed since even before 1985, due to the already apparent macroeconomic imbalances and the political willfulness, economic personalism and lack of coherence among the Sandinista government's various ministers. But the current adjustment plan is not only insufficient, it is not the one that was required to overcome those old macroeconomic imbalances, particularly manifested in hyperinflation.

With hyperinflation now eliminated, Nicaragua has been put on the path to price stability, but that stability still essentially depends on outside aid. This dependence results from not having made the structural adjustments necessary to reactivate the economy, dynamize public and private investment and achieve the public sector's financial sustainability, by improving its efficiency, its forecasting capacity and its coordination with the private sector and expanding its income sources. This dependence is also under a growing threat as access to liquid foreign resources becomes more restricted.

The government assumes that its responsibility is limited to maintaining price stability and expects all the rest to come from the private sector, viewing the recovery of an investment dynamic as simply a "private" affair. It thus eschews active economic policies, shaking off any responsibility for promoting development in this traumatic postwar period. State activity is obviously not omnipotent and is virtually nothing if it does not have the solid backing of the private sector. But this implies more rather than less government forecasting, coordinating, representative and leadership capacity. Abdicating these tasks is part of the problem, not of the solution. It leaves dangerous room for outside intervention in the economy and forces the government and the economic and political actors to pay more attention to foreign cooperation than to the population's own demands and capacities.
Dependence on foreign resources, necessary at the beginning, is unsustainable in the future. We must depend less on the generosity of friendly countries and more on our own savings and investment capacity, our own ability to learn and innovate technologies, our own work and adaptability to change. Today, since investment has not been reactivated and no real attempt has been made to achieve consensus with the country's main productive subjects around the economic policy, the expected has happened: we are stagnated, maintaining price stability but without knowing how to grow.

ESAF may have been inevitable, but it could also have been more integral. An opportunity was lost to make use of it to start practicing a modern development policy in which, instead of presenting the "tablets of the law" to civil society, a dialogue is opened in which civil society is invited to participate. Not even the branches of the state discussed why, with whom and how ESAF was going to be implemented.


The ESAF accord was signed a year ago June. Since then, Nicaragua has benefited from concessionary financing from the multilateral financing agencies, in exchange for meeting certain macroeconomic policy norms under IMF supervision and making structural changes in the country's economy.

The accord set quarterly goals for some macroeconomic variables: the central government's current spending; Central Bank credit to the public sector, its total credit to the economy and its net international reserves; and back payments on the prioritized foreign debt. During the year, these quarterly goals are like signposts to guide the economy, but in December of each year arrival at the destination is obligatory.

The structural transformations agreed to in ESAF are to: reduce state employment, eliminate Central Bank credit to the state banks, limit the credit handled by the Nicaraguan Investment Fund to resources acquired abroad for specific programs, reduce the losses of the state banks, privatize TELCOR and other companies still belonging to the state, prepare a legal framework that permits the participation of private capital in the sectors of electricity and hydrocarbons, eliminate the existing restrictions on charging for education and health services, and lift the non?tariff barriers against import and export activity.

The structural adjustment regulated by ESAF has a dual proposition: First, reduce the state's capacity to intervene in the economy and open the key sectors (finances, energy and communications) to private competition. And, second, reduce the public sector's internal financing so those resources can be used to increase its capacity to pay on the foreign debt and then, if they reach that far, make them available to the private sector.

That accord, signed a year ago, could have generated a more consensual process. It could have had fewer social costs and even increased Nicaragua's competitiveness. But none of that happened. It was a provisional life saver that is today tied to a shipwreck sunk under the weight of the foreign debt and the program's own strict criteria for paying that debt and keeping the currency stable. ESAF has been nothing more than a monetary program lacking any integration into an effective national development strategy. Beyond any party vision, the pending task is to dedicate all energy to pulling the country out of its hole of poverty and desperation, turning the adjustment into a mechanism for moving into development with social equity and respect for nature. This requires that as a nation we reach some agreement with the international institutions about what is best for Nicaragua.

Has ESAF Been Fulfilled?

The ESAF agreement was designed in such a way that there would be no serious failures in meeting debt payments or in receiving foreign resources. Nonetheless, the government has significantly deviated from these targets. This is not to say that this has led to any revision of ESAF. On the contrary, it has been the justification to harden it even more.

The latest IMF mission to evaluate Nicaragua's monetary program visited the country in April 1995. It was very alarmed by the loss of nearly $31 million in net international reserves in the first quarter of this year. But the loss did not stop there; by May the reserves had shrunk more than $40 million. The reason lies in Nicaragua's chronic defect in monetary programming. The strong increase in the monetary base in the last quarter of 1994 (almost 204 million córdobas), favored traditional unproductive Christmas consumption. That had to be compensated for by a strong monetary contraction in the first months of 1995 (almost 104 million córdobas less between January and April), which provoked an even stronger contraction right when the economy needed greater injections of credit for the agricultural cycle. This chronic defect distorts the monetarist policy even more and hinders productive reactivation.

The IMF mission also noted failure to fully comply with the privatization program, reduction of state employment, debt payments or the recovery of credit and savings in the non?financial public sector. "Considering the original program, a deviation was caused by a net expansion of credit in excess of what was planned," was the IMF assessment gathered from the Central Bank. It went on to say that this deviation "was important in the case of credit to the banking system and less so in the case of the non?financial public sector. Furthermore, a reduction of the monetary base, unanticipated by the program, was detected between January and March."

Despite this alarm, both the IMF mission and World Bank vice president for Latin America and the Caribbean Shahid Javed Burki, in his later visit to the country, confirmed that Nicaragua was "on track." It is difficult to comprehend how both institutions can say that Nicaragua is on track with ESAF at the same time as they show such concern about the failure to fulfill its conditions. The judgment of the IMF and World Bank was also one of approval in the June 1995 Consultative Group meeting in Paris.
This tolerance and flexibility implies recognition that the goals were impossible to meet despite government efforts. Such unrealistic objectives should oblige a reprogramming of ESAF and greater flexibility, not a further hardening of the program's overall targets. But the only targets made more flexible were those concerning the public sector. Such actions are a clear show of political support for the Chamorro government by the IMF and World Bank, but it is not realistic support to either the nation or its private sector, much less to its agricultural producers.

The new programming made in March 1995 implies "new conditions," concretized in a much stricter redefinition of the concept of Net International Reserves. In this redefinition, the $74 million in reserves as of December 12, 1994, were "transformed" into $?1.5 million, discounting short?term debits according to the new method of calculating, as can be seen in the chart below.

This new way of calculating international reserves is stricter, in that it does not consider the hard cash the government has as a result of issuing monetary stabilization drafts as genuine reserves because they are due in the short term. The same thing occurs with the current outstanding payment on the foreign debt. With regard to the commercial banks' dollar reserves, the correction is much more debatable: while it is true that they are not Central Bank reserves, they are the country's reserves. Furthermore, if deposit behavior were stable, a portion of these reserves could be used to finance imports. In any case, it is obvious that a new calculating method for the reserves cannot be introduced in the course of implementing the ESAF without modifying its fulfillment criteria. Although the evaluation of the second half of 1994 was not applied, it will imply a dramatic supplementary effort during 1995, since the same reserve target amount of $40 million was maintained for December 1995 despite the change in calculating method.

Small Producers or the Debt?

All of this assumes strongly contracting the credit policy and sterilizing the existing liquidity in Nicaragua. This will translate into a greater contraction of both the commercial and productive sectors, not to mention the drastic effects it is already having in the agricultural cycle due to the lack of credit, especially to small and medium rural production.

Restrictions on credits, particularly those provided by the Nicaraguan Development Bank (BANADES), require a serious reevaluation of the policy of this state bank. BANADES is being required to recover 200 million córdobas, the bulk of which was lent to large producers and cooperatives. It must be underscored that the BANADES crisis was not caused by credit to small and medium business but by unrecovered credit to big business as well as the bank's own administrative disorganization. To the credit restrictions must be added the increased price of credit, which also limits access.

Contrasting with what occurred with the big producers, there is efficient recovery of the credit provided to small producers and high productivity per dollar invested in them can be observed. It is fundamental to create consensus around prioritizing small and medium production; this would link social adjustment to productive adjustment and job creation to increased productivity. Putting a priority on small and medium producers would generate the effective demand that the commerce and manufacturing sectors need for their own reactivation, which in turn would have a non?inflationary multiplier effect throughout the country.

It is also necessary to create national consensus with respect to the foreign debt. Nicaragua's debt is an exceptional case even among what are called SILICs (severely indebted low?income countries). The 6?to?1 ratio between its foreign debt and its Gross Domestic Product makes Nicaragua's the relatively highest debt in the economic history of the world, alongside that of Guyana. It is also the greatest per?capita debt in the world and the greatest in relation to what the country receives through exports. This exceptionality offers Nicaragua the possibility of turning its debt into an opportunity, a catalyzer of national consensus and of additional funds through various forms of barter, which would allow the negotiation of special treatment for Nicaragua and the half?dozen other countries in similar, if less extreme, conditions.

This opportunity was not taken advantage of in the most efficient way in either Copenhagen or Paris. Nonetheless, it still exists if the government, the private sector, NGOs and civil society coordinate joint action with the international community. The latter has repeatedly demonstrated a willingness to give Nicaragua's debt special treatment if the country corresponds with a productive, equitable and ecologically sustainable development plan linked to Central American integration.

This task is pending, and numerous technical studies exist to do it, as does the capacity to create consensus among the productive sectors and even between the executive and legislative branches. But this potential has not yet been sufficiently used in the negotiation over ESAF, even though exchanging debt service for the initiation of a National Reconstruction fund is possibly the most available short?term source of supplementary financial resources that Nicaragua has.

Credibility, Confidence, Clarity

As to the implementation of ESAF, its economic efficiency could be qualitatively improved. Participation, openness and credibility are as important as financial resources. "Money is confidence," wisely stated Lord Keynes. The mistrust sparked by statistical camouflauge and the bias in opportunities due to favoritism may be more economically costly than the reduction of funds itself. The statistical triumphalism expressed in the letter and document presented by Minister of the Presidency Antonio Lacayo on November 8, 1994, announcing that Nicaragua's situation was not like Africa's (due to a readjustment in the statistical measurement base that suggested a greater GDP than Nicaragua normally calculates) only deepened the credibility crisis instead of creating enthusiasm by showing a less grim future.

Greater transparency and participation in economic information management are fundamental to the functioning of democracy and the market. Credibility and confidence are more important to democracy and the market than foreign cooperation. They are even more urgent now, at the onset of an electoral campaign that could detour the nation's scarce resources from their key goal, which is economic reactivation.

Nicaragua's recent institutional crisis encouraged more international intervention in our economy, more restrictive criteria in applying the ESAF. In exchange, the government obtained greater flexibility in the savings target for the non?financial public sector. Credit cuts and diminished expectations of private sector investment have set back potential economic growth. Many analysts agree that, if there is growth at all in 1995, it will not go beyond 2.5%, half of what was announced at the beginning of the year. The conclusion is not that the institutional crisis will make us grow less in 1995, but that it detracted from the effort at growth in various ways: through the neglect of macroeconomic management, the anticipated dedication of high officials to their electoral campaign, the squandering of time and the loss of opportunities with foreign donors. Furthermore, the increased uncertainty inhibited the private sector and foreign capital from deciding to invest their own resources, and powerfully buttressed the private banking system's fear of getting involved in production.

In the midst of the institutional crisis, the international community, tired of the sad spectacle of the fight between the branches, reduced the flow of cash disbursements to Nicaragua to pressure for a solution that would not affect the 1996 electoral contest. Even though there was already a $94 million gap between programmed liquid funds and payment on the debt, that freeze on cash disbursements plus the attempt to make the debt payment on time affected the reserves even more after the IMF visit in March 1995, as the chart on this page shows.


After the Social Summit in Copenhagen, one can speak of a new international consensus regarding the need to integrate social and economic aspects. There can be no economic growth in a sea of poverty and unemployment. A growing consensus exists in today's world: poverty must be dealt with by creating permanent productive employment and by investing in human potential through an integrated educational system.

It is not enough for the ESAF to have a temporary job?creation program such as the Emergency Social Investment Fund (FISE), even though FISE is well financed (it increased from $37 million in 1994 to $75 million in 1995 to create 20,000 new temporary jobs). What is needed is an integration of productive with social activities in a joint package, with complementary productive and social goals. This is another of the fundamental tasks in the next years of ESAF. The electoral campaign itself could serve for candidates and parties to present concrete proposals to integrate the economic with the social. Demagogy and populism would be reduced if there were easily measurable practical goals.

The problems of property and the privatization of state companies should also be linked to this social adjustment policy. A debate over the draft of the National Development Plan put together by the government could also serve to establish a program on these two issues within an ESAF that incorporates social justice.

The privatization of the telecommunications institute (TELCOR), the energy institute (INE) and the state cement company within an integrated social adjustment package would permit broader consensus, which would help the country get beyond paralyzing ideologized tensions. The why, with whom and how of property and privatization could begin to be part of the social adjustment agenda instead of the polarized political agenda. Incorporating the social adjustment and grassroots participation into the second phase of ESAF is a challenge for all and even for Nicaraguan democracy itself.

The Ecological Summit held in Nicaragua in 1994 and the Alliance for Sustainable Development signed by the six Central American Presidents put a strategic issue on the table. Nonetheless, neither the adjustment policies nor ESAF take it into account. Both ignore the environmental issue. The World Health Organization has recently recognized that "poverty is the world's most serious illness" and international ecological organizations recognize poverty as the greatest threat to the environment in the countries of the South. An adjustment that does not past the social test and the ecological test is an adjustment with no future.

An institutional adjustment is also necessary. The state should not limit itself to guaranteeing macroeconomic stability. With appropriate institutions it should also promote the coordination of the diverse actors. The market has never functioned optimally without public institutions. With no economic and social counterweights, the market becomes asymmetric and monopolistic, inducing authoritarian forms rather than favoring democratic relations.

Not only should the state be reduced, it should also be reformed to create institutions capable of achieving these economic and social counterweights. The neoliberal adjustment is based on a simplistic conception that attempts to reduce the complexity of society to mere market relations, forgetting the relations of power. A regulatory state is necessary for the market to function and for civil society to participate in a stable and democratic manner. The institutional adjustment is a fundamental element to reforming the state and to the efficiency of ESAF.

Nicaragua's recent institutional crisis, as damaging as the social uprisings in the first years of the new government, demonstrate that the market does not function without civil society's stabilizing institutions. The market needs these institutions to function democratically and transparently, so that it is not distorted by arbitrariness, corruption and favoritism.

By Xabier Gorostiaga, sj., rector of Managua's Central American University and president of the Regional Coordinator of Socioeconomic Investigation (CRIES).

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One Year into ESAF: What Must Still Be Adjusted?
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