On the economic front, in January Nicaragua was relieved of $5.1bn of debt under the Highly Indebted Poor Country Initiative (HIPC), an IMF-administered programme. The pardon will lower the debt burden to a more manageable $1.4bn, thereby slashing interest payments. In 2003 private analysts estimated that 85 cents of every córdoba, the local currency, paid in taxes to the government was used to pay off the interest and principal of internal and external public debt.
The temporary breathing space is welcome. “The HIPC shows outsiders that Nicaragua is in a more sustainable financial position,” Mario Alonso, Nicaragua’s central bank president told The Banker. “Internally, it frees up resources that we can apply toward social programmes, those that help the country’s most vulnerable groups.”
Debt relief
“Beyond the numbers, the HIPC allows Nicaraguans to look into the future with more optimism. More is possible now that we don’t carry such a heavy debt burden. That’s a psychological lift,” says Mr Alonso.
But the HIPC deal is not a cure-all. “We need to continue with the government’s national development plan. We need to encourage more trade with the US and Central American markets,” says Mr Alonso. “All of these efforts are needed to put us in a better economic situation and help us create jobs. The HIPC is not everything.”
Some analysts warn that poor countries now take debt-relief programmes for granted, an attitude that could allow governments to slip on their economic goals. Critics add that the HIPC funds often go towards paying down high levels of domestic debt, rather than being devoted to poverty alleviation as required under the HIPC.
Mr Alonso says that Nicaragua would hardly soften its economic austerity drive because it received the HIPC. “I don’t think it’s dangerous,” he says. “We’ll stick with our anti-poverty programmes; we have fiscal obligations with the IMF; and we’ve developed a debt law to improve our management of payments.”
With the debt relief agreement finalised, the government is now hoping to move its reform agenda forward. A proposal to revamp the country’s inefficient justice system is a top priority. Executives from every business sector complain of Nicaragua’s weak laws, which can muddle simple transactions, from guaranteeing payment on banks loans to securing property rights. “We have basic and primary reforms in place and now need to push on with second-generation reforms, and this means changes to the judiciary,” says Mr Alonso.
Efforts to strengthen Nicaraguan banks are under way. Banks must now comply with the Basel Core Principles and supervision is improving, with officials spot-checking banks’ deposit management and liquidity levels. For the most part, banks are reporting healthier bottom lines, but it will take time to rebuild a system that was nationalised and mismanaged during the Sandinista government in the 1980s.
Positive changes
“We’re seeing positive changes in the sector,” says Mr Alonso. “Nicaraguan banks are now expanding their operations throughout Central America and becoming more sophisticated.”
Judicial reform and efforts to modernise the banking sector would help Nicaragua catch the eye of investors. They would also put the country in a better position to reap the benefits of the US-Central America Free Trade Agreement, which could be ratified this year. “We’re a small country, a small market, but we’re putting the institutional reforms in place to be able to improve the present and future management of the country,” says Mr Alonso.
