Interview with Mark Lester, April 7, 2003


Q – When I got to Nicaragua [early April, 2003], there was a crisis brewing with the internal debt. Mark, could you explain to me what was happening and the relation of this internal debt to the issue of external debt of Nicaragua.


The problem with the internal debt is very closely related to the external debt problem. The most recent solution to the external debt problem – given that at US$6.3 billion, it is completely unpayable – is the HIPC Initiative, which is the Heavily Indebted Poor Countries Initiative. It would allow write-off of debt, up to 90% of the foreign debt, if countries followed certain conditions.  The basic condition being to maintain a working agreement with the IMF, which typically in the past has promoted what they call pro-growth macroeconomic policies, which in very short terms basically shifts incentives over to foreign investors in order to attract foreign investment that will then create growth which will then improve the situation of all countries. 


Now, formerly these working agreements with the IMF were known as ESAF Agreements, Extended Structural Adjustment Facility Agreements.  The new thing, along with the HIPC Initiative, is that they began to recognize that this hoped-for foreign investment wasn’t happening because of the social instability that existed in these countries, especially in the case of Nicaragua where monthly there is some kind of strike or people taking to the streets.  So there is a new recognition that money needed to be spent on social spending – these are previously areas that were typically cut by governments in an effort to lower their deficit.  For example, spending on health or education.  So part of the condition of the HIPC Initiative was that money freed up from the foreign debt had be channeled for poverty relief programs, spending on health or education.  And, in fact, a new requirement for the debt relief is that countries had to draw up a Poverty Reduction Strategy Paper, which basically was a 15-year plan on how to reduce poverty over 15 years.  Nicaragua did that in August of 2000.


Nicaragua reached the entry point for HIPC in 2001, I think.  But then you have to continue to apply these macroeconomic growth policies and if you do those successfully for at least a one-year period, then you become eligible to reach the completion point, which is when most of the debt is written off.


            Now in Nicaragua’s case what has happened is that it got behind under the last part of the Aleman administration, so it did not reach the completion point. This year’s budget, when they drew it up, included some of the expected debt relief in the budget. But in a recent analysis of the budget it was found that not all of it [debt relief] was recorded as income. Some of it was diverted to pay off the growing internal debt.


Now for Nicaragua’s internal debt, the latest figures I saw were 4.1 billion dollars. So if the IMF and the World Bank would hold Nicaragua strictly to its commitments, none of that money could be diverted to paying off the internal debt, according to the plan as it has been set out, i.e. with the new recognition that money has to be spent on poverty reduction. You can’t just have pure growth policy without poverty reduction, because you don’t have the stability needed to attract foreign investment.


Q – But I thought that the IMF was recently objecting to the small amounts of increases in social spending in the budget, education, health and so on, saying it shouldn’t have those increases.


            Right, this is key to the issue here in Nicaragua. Because what happened is that Nicaragua – another one of the historical requirements of the IMF in its policy designed to attract foreign investment is that a country has to have a certain amount of dollars in what they call their international reserves in the Central Bank. And the logic behind that is that if you are a foreign investor then you invest in Nicaragua in a business, but your business gets cordobas. But you are really not interested in cordobas, you want those changed into dollars. So unless the Central Bank has enough reserves of dollars on hand, you can’t freely convert your cordobas into dollars. So it has always been a requirement of the IMF agreements that the Central Banks have – the typical measure is the equivalent of three months worth of imports in reserves in the Central Bank here.


            Now in Nicaragua’s case they kept falling behind [on this measure], so one of the ways they increased the foreign reserves was by issuing government bonds. These are papers which when due would be paid back their principal plus interest. They are issued by the Nicaraguan government [through the Central Bank]. It is like US Treasury bonds, just much more risky in the case of Nicaragua. So these were auctioned off at different moments. It was said that the market set the interest rate on those bonds.


            There is an economist here, Nestor Avendaño, who has a PhD from Yale in Econometrics, who has been following up on this. He has worked for 5 different Nicaraguan governments, Somoza, Sandinista, Chamorro, Aleman, and he has worked on different World Bank and IMF related projects. He basically speaks of three illicit sources of the internal debt.  One is the property bonds which were issued to pay people for property which was unjustly confiscated. Now there was property that was justly confiscated, he claims, but then there were others which were unjustly confiscated. But in fact a World Bank study done a couple years ago – this from another source other than Nestor – showed that people were compensated for more property than was actually confiscated. So that is one source.


Another is the bank failures. After the ESAF first got applied in Nicaragua during Violeta’s period, the thought was that the State banks were greatly inefficient, and so they need to be closed and privatized. Well there have been 5 private banks out of the initial seven which were started which have gone broke, and the government has been forced to bail out the depositors, so as to prevent a run on the scarce dollars in the country. So that is another illicit source of the bonds [issued to cover those depositors], because these banks, two of them at least, went under because of fraud, private enterprise fraud, which was connected to the two major political parties as well, one connected to the FSLN and another connected to the PLC.


            The third illegitimate source of the internal debt are the bonds, known here as CENIs, Nicaraguan Investment Certificates, their acronym in Spanish, issued here between November of 2001 and January 2002, when Noel Ramirez was president of the Central Bank. Now Noel Ramirez is a Nicaraguan who worked in the World Bank for years. Aleman brought him back into the country to head up the Central Bank, which he did during Aleman’s government. Now these CENIs were auctioned off a month before the elections, when there was a possibility that Daniel Ortega would win, who would certainly be considered an addition to the already high country risk. [The increased interest rate on these bonds are related to what is known as the country risk.] The interest rate on these bonds in October was 13% Nestor points out. But in November, after the elections have taken place, and the market candidate had won – you can’t think of a better candidate for the market than Enrique Bolaños, who at one time was head of the Superior Council of Private Enterprise – all of a sudden the interest rates shot up to 20-22%. So those are the three illicit sources of the internal debt that Nestor refers to.


            In any event the internal debt has gotten to an amount which is completely unpayable. He points out that this year, 2003, for every tax dollar the Nicaraguan government takes in, it is going to pay 85 cents on payment on the debt. And next year it will be like 90 cents.


In any event, they are getting debt relief, supposedly if they implement the HIPC initiative, they will get debt relief on up to 90% of the external debt. But part of the HIPC initiative requirement is that that money go into poverty reduction, the 15 plan of the poverty reduction strategy paper. And Nestor has found that this year it is not [going there]. It is being diverted to pay off the internal debt. And it is precisely the heart of the budget crisis which you mentioned, which flared up between the Bolaños government and the Frente Bench in the National Assembly, joined by the Arnoldista bench, who joined with the Frente because they are upset with Bolaños attacking the corruption in the Arnoldista bench.


            In any event, when Bolaños sent down his budget proposal – Congress has the right to modify it – and my understanding is that part of the IMF agreement mandated that the deficit be cut back from 9% to 6.3% this year.  And basically, in their budget rearrangement, they respected that budget deficit cut but they rearranged some of the internal spending, specifically taking money out of paying internal debtors to raising salaries for health care workers, teachers, army and police.  There was actually an IMF delegation visiting here at the time and they said very publicly: unless you go back to the president’s budget, there will be no money for the country from this debt relief or any IMF agreement.


The other thing is that since 2000, because of criticism of the IMF and the World Bank, there’s been a lot of talk about changing the way they’re operating, adding this social spending – mandatory money out of the debt relief, and also increasing citizen participation in these agreements between the IMF and the World Bank and countries.  And the most recent letter of intent signed by Enrique Bolaños: nobody knew the content of it until after it was signed.  Just like what happened during the ESAF-style agreements, which system was supposed to be changed under the new working arrangement.


Q – I remember one of Alejandro’s papers said that it was a farce, the idea of consulting civil society, that it was after the fact or insufficient. They were supposedly consulting civil society but in fact he wrote his letter of intent without that?


Right. I think that the criticism of Alejandro and others has been that even though they talk about civil society’s participation, the mechanisms weren’t appropriate for civil society to truly participate.  Well, in this case, they didn’t even attempt to make the gesture of participation.  It was signed already.  And then you have the heavy hand of the IMF coming in and saying that unless the internal debt gets paid, there’s no money, sidestepping one of their other requirements, and ignoring one of their other requirements that any debt relief had to go to poverty reduction.  So it just unmasks the new rhetoric that’s been coming out since 2000, that when push comes to shove, the IMF defends the financial community at the cost of worsening poverty and greater social unrest, which was the logic behind the new design of the new Poverty Reduction Growth Facility, which was the new name for the old ESAF. 


Q – As I remember, Alejandro said that the whole notion of the Poverty Reduction Plan came about – and this may related tangentially to what you’re saying – because of the declining legitimacy of the IMF and the World Bank and they felt that they had to make a gesture in the direction of social justice. 


Yes.  I would say also that their interest in these policies was to open the doors to foreign investors and foreign investors didn’t feel like their investments were safe here because of the social instability.  So even from a financial logic, it had it’s own logic that was pro-investor.  If you at least provide some health care and education to the population, the situation would be more stable and investments would be more secure, but they’re even backpedaling on that, which has its own logic for the financial community. 


Q –  So where are we now?


Basically, Nestor is going to take this issue to Washington, at the end of April and have meetings with World Bank and the IMF and basically expose this.  It also involves corruption in the government. 


Q – Is he going alone or with a delegation?  Is it going to be a public affair?


It will be a public affair.  Nestor has now been hired by the Civil Coordinator for the Emergency and the Reconstruction (CCER).


Q – This is the Civil Coordinator from the post-hurricane days.   He’s been hired by them?


He’s been hired by them.  Basically to follow-up on the budget issue.  Because there was a lot of attention focused on Enrique Bolaños’ budget proposal precisely to see if the poverty reduction strategy had a chance of being implemented.  These issues about the internal debt that Nestor had raised – the Civil Coordinator kind of took those on too.  They’ve actually got a petition out now to get different sectors on Nicaraguan society to sign onto this, to ensure that the money freed up from the foreign debt really does go to poverty reduction and doesn’t get diverted to the internal debt.  Nestor is advocating that the internal debt be renegotiated, that they do a sovereign debt restructuring which means that the country recognizes that the debt is unpayable and that the terms get renegotiated: that the interest rate drop to closer to what the international interest rate is, 5%.  Basically arguing that the 20%-22% was offered because that was country risk.  Well, it is a high-risk country and the country is unable to pay the four billion dollars in internal debt, so we’re going to drop it to 5% and also extend the term. 


Q – It’s an awful lot of money, isn’t it?


Some of it is very short term debt, coming due in 2003, 2004.  So extend it over a longer period of time.  He says that two banks here hold 60% of that internal debt.  One is BanPro and Noel Ramirez, the former head of the Central Bank who issued those CENIs at 22% after the elections had been held, is one of the principal shareholders of BanPro.  And Eduardo Montealegre, who is the current Minister of the Treasury, is a primary shareholder in BanCentro, which is the other bank, along with BanPro, that holds 60% of those shares.  So he is arguing that it is in the bankers’ interest to renegotiate the debt as well, because if they force that debt to be paid, it’s going to clean out the international reserves in the Central Bank which would cause a run on the Cordoba, because no one would want Cordobas, they’d want to change them into dollars, dollars would be scarce.


Q – Are the IMF and the World Bank the ones that make the decisions on this, is that why he’s going?


Yes, basically.  Everyone recognizes that economic policy is mandated by them.  Just like when the Congress, which is constitutionally able to make changes to the budget, did so and the IMF delegation in town at the time went very public and said, if you make those changes, there will be no money.  So the idea is to take it to the IMF and the World Bank.  Part of Nestor’s analysis is that the IMF and the World Bank, if they are competent at all, knew that all this was coming to a head.  They are the ones that allowed these CENIs to be built up, this internal debt to be built up to a completely unsustainable rate as a way of bolstering the foreign reserve rate in the Central Bank.  But it’s really a house built of straw and the IMF and the World Bank surely knew this was happening all along and that they were postponing a crisis.  So there is a lot of irresponsibility.


Q – So does he hope to expose that when he goes, to put them on the spot?




Q – So what would you say  is the larger significance of this effort of his?


Well, I think the larger significance is that you show, to a certain extent, the cynicism of the IMF and the World Bank in dealing with the Nicaraguan case, called by them the second poorest country in Latin America.  So it’s a country that should be getting policies that help alleviate the poverty, even from a financial point of view to attract investment.  And they’re not doing that.  When push comes to shove, they’re backing the financial sector inside the country.  The exterior financial sector is siding with the internal financial sector to make sure that the financial sector benefits even if everyone else loses.  And that’s been the most cogent argument against IMF and World Bank policies around the world.  That, in fact, they mask very self-interested policies, stacking the deck in their favor, as development for the country.  And if you can show that this happened in Nicaragua, then it challenges and unmasks their policies all around the world, because it’s the second poorest country in Latin America.  This is the one where they should be doing pro-poor policies, and the one place where they said they were doing pro-poor policies. 


Q – Do you have any idea of whether Joe Stiglitz’s book, Globalization and Its Discontents, has had any influence on IMF policy?  Because that’s what he argues.  There was an article in the New York Times summer before last that argued that the IMF represented and furthered corporate interests.


I think it probably has.  I’ve read it.  He puts together there, in understandable language, this whole process.  And the fact that he was an insider is crucial. He’s very critical of the IMF, not so critical of the World Bank where he worked

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