Promising Early Results From Nicaragua's Bold Reforms

GRAPPLING with political instability and an economy on the verge of bankruptcy, the government of President Violeta Chamorro has received new support from the International Monetary Fund (IMF), the World Bank, and the Inter-American Development Bank (IDB) for an economic plan that may be the springboard for recovery and renewed growth in Nicaragua.A radical change of attitude among international lending institutions began in March, when Nicaragua introduced a concerted economic program with help from the IMF, the IDB, and the World Bank. The plan, according to IMF sources, is already bearing fruit by reducing inflation, improving public sector finances, and raising the country's international currency reserves. When Mrs. Chamorro took office in April 1990, she inherited an economy destroyed by years of mismanagement by the Sandinistas, who carried Nicaragua into record-breaking hyperinflation, and by the ravaging effects of civil war. Compounding the problem, there were trade problems and growing social tensions. Despite rifts in the alliance of various political parties that catapulted Chamorro to power, the government has forged a broad consensus for macroeconomic adjustment and structural changes. The first results of Nicaragua's 1991-92 economic plan are promising. Foreign donors have provided financing to help the country clear its arrears with the IDB - some $90 million, according to a bank official in Washington. And the IMF recently approved a loan for $55 million to support the plan, which aims to further strengthen the balance of payments, continue lowering inflation, and create the economic conditions for sustained growth. The program also includes measures to modernize banking legislation and assure sound operation of the financial system, which had been virtually nonexistent in recent years. To restructure the public sector, an agency of the World Bank granted Nicaragua a $110 million loan. The bloated bureaucracy, largely created by politically-motivated appointments made by the Sandinistas, is a key aspect of Nicaragua's economic plight. The nonfinancial public sector deficit was a whopping 14 percent of the gross domestic product (GPD) in 1990. This is to be reduced to 3 percent in 1992 through what the government euphemistically calls increased revenues (which normally means tax increase s) coupled to expenditure cuts, presumably including a large number of public servant layoffs. Divestment of some 350 state-owned enterprises will be accelerated along with trade reforms and a modification of price distortions which had affected food production. To buffer the inevitable social impact, Chamorro's economic team has established two social funds to shield people most likely to be affected by the changes. Funded by external donors and multilateral creditors, the funds will not only give credit to small enterprises, but also focus on primary nutrition, health care, emergency employment, and the retraining of workers for new industries and jobs. THE country's largest economic problem, however, remains its huge outstanding stock of external debt, which stood at about 10 times the GDP at the end of 1990. At $12 billion, Nicaragua's debt is the largest per capita in the developing world. But the country has no outstanding obligations with the IMF and is about to receive fresh technical assistance loans from the IDB. If Chamorro's program is successful, inflation will be drastically reduced in 1992. In that area, the plan is also giving good results. During most of 1990, consumer prices grew at 50 percent a month, but between May and August this year, inflation fell to an average of about 1 percent a month - a spectacular feat for Economics Minister Silvio de Franco Montalban, who masterminded the plan. The success of the plan may have a great impact on internal politics. If the government manages to stabilize the economy, it will be very difficult for the Sandinistas to mount a serious opposition and become a threat to the democratic forces in Nicaragua. Increasingly isolated after the demise of the Soviet Union - which had made large economic contributions to the former Sandinista government - the Sandinistas are torn by internal divisions between hard liners, who see Cuba's Fidel Castro as their only remaining hero, and moderates, who seek a more conciliatory attitude now that Moscow has lost most of its steam in Central American affairs and is pulling out of Cuba. The road to democracy may not be lined with roses, but Nicaragua seems determined to overcome all difficulties and pull itself up by its bootstraps. If it does, it may add its name to the growing list of Latin American countries that are staging this century's dramatic restructuring of the region's economic landscape, bolstered by an entirely new political climate.