SUNS  4322 Thursday 12 November 1998

Washington, Nov 10 (IPS/Abid Aslam) -- Nicaragua and Honduras, devastated by the deadliest Atlantic storm in 200 years, continue to rack up more than two million dollars per day in arrears to overseas lenders in what could become a litmus test for creditors.

"There's just no way that we're going to be able to survive" the double burden of servicing international debts while trying to recover from Hurricane Mitch, says Francisco Aguirre Sacasa, Nicaragua's ambassador to the United States. "The single most important measure that we need...is some form of urgent debt relief."

Mitch is estimated to have killed 11,000 people and left another 13,000 missing and feared dead. Officials expect the death toll to rise as cholera, malaria, and other diseases take up where floods and mudslides left off.

However, even a debt moratorium won't be able to put the region back on its feet. According to official estimates the hurricane has destroyed infrastructures, including roads and bridges, that might take 30 years to rebuild, according to regional officials and experts. The Central American heads, meeting in El Salvador, have called for a Marshal Plan for the region.

Economies have been ruined in Honduras, Nicaragua, Guatemala and El Salvador and reconstruction could take more than 30 years, government and aid officials warn. Fully one-fifth of Central America's 1998-99 harvest may have been lost.

These countries have some of the world's lowest incomes and highest debt burdens. Honduras and Nicaragua are classified as 'Heavily Indebted Poor Countries' (HIPCs) and Nicaragua is in line for some relief under the HIPC debt initiative. For now, however, international creditors still expect them to make debt service payments for 1998 of 450 million dollars and 300 million dollars, respectively, say economic analysts.

Against that dismal backdrop, British finance minister Gordon Brown and French Prime Minister Lionel Jospin have emerged among the champions of debt relief.

Lasting improvements, however, also will hinge on the Inter-American Development Bank (IDB) and World Bank, which are the region's leading multilateral creditors, the International Monetary Fund (IMF), which effectively controls the HIPC initiative, and the troubled nations' neighbours in Central and Latin America, who rank among their largest creditors.

Honduras owes most of its debts to multilateral lenders. Nicaragua owes them only about 27 percent of its $6.1 billion total, according to the central bank. It owes 11 percent to the IDB, compared to the World Bank's seven percent and the IMF's one percent. Paris Club members
account for another 27 percent of the total and commercial lenders, another four percent.

Latin American countries hold fully one-fourth of all claims against Nicaragua, with 8% owed to Costa Rica alone. Mexico cancelled much of its claims in 1996 and now accounts for only one percent of Nicaragua's debt.

Brown is urging action at the 'Group of Seven' industrial powers, of which Britain is current president. France says it will cancel all $9.8 million in official debt owed to it by Nicaragua and $9.4 million owed by Honduras.

The sums involved are relatively small, French officials acknowledge, but they hope other countries will follow their example. In addition, Jospin is urging fellow members of the 'Paris Club' of lending
governments to suspend the Central American countries' debt repayments for the next two to three years.

Until such a debt moratorium takes effect, however, Nicaragua and Honduras will continue to incur 2.2 million dollars per day in debt servicing, according to the non-governmental European Network on Debt and Development (Eurodad). "A moratorium is a very important first step," says Eurodad's Sascha Pichler. "But even if the moratorium lasts three years and the countries need 30 years to reconstruct, you need something to help them in the remaining 27 years."

The IMF calculates how much relief each country needs under HIPC based on assumptions about export performance and economic growth. Given the extent of devastation wrought by Mitch, lenders must agree at the onset to use the "breathing space" created by a debt-servicing standstill to make new calculations "based on a totally different economy," in Nicaragua and Honduras, Pichler told IPS.

Furthermore, the IMF will have to "adapt and adjust" its structural adjustment programme (SAP) in Nicaragua as well as economic plans for Honduras, which had hoped to qualify for HIPC treatment after signing an agreement with the Fund.

To become eligible for relief, a country must reach agreement with the IMF on economic policies deemed 'sound' and then must satisfy the Fund that it has implemented them faithfully for three to six years. In return, it may receive enough relief to reduce debt service costs to levels at which payments can be sustained and further arrears not run up - so long as all creditors agree to provide their proportional share of the relief.

IMF officials say it is too soon to say whether it will be necessary to take Nicaragua's HIPC case or the Honduran plans back to the drawing board. Non-governmental organisations here and in the two countries, however, blame SAPs for hindering development long before Mitch struck.

To receive budget support from the IMF, for example, Nicaragua this year had to close a state development bank specialising in loans to small farms. Whether such practices made people more vulnerable to Mitch's destruction is arguable but it is clear that it is now "impossible to ask them to make any more sacrifices," says Steve Hellinger, president of the Washington-based Development Group for Alternative Policies (DGAP).

In addition to suspending debt servicing, creditors also should agree to suspend the conditions tied to their loans, according to Hellinger. "To attach economic policy conditions right now would be inhuman and would advance an agenda that is totally inappropriate," he argues. "Any debt cancellation or suspension that brings with it structural adjustment conditions would be equally inhuman."

The international response so far has been assailed by aid agencies and the countries themselves as slow and insufficient. The IDB says it is fielding assessment teams and could redirect some of its 1.5 billion dollars in current loans to help affected countries meet relief and reconstruction needs. The World Bank is speeding up disbursements from existing rural infrastructure, social investment, and financial sector loans in Nicaragua and Honduras, allowing the money to be used for emergency needs.

"As the full extent of damage becomes clearer, the (World) Bank is also prepared to allocate resources for new emergency response loans" in Central America, the Bank says in a statement.

Meanwhile, the presidents of Nicaragua, Costa Rica, Honduras and El Salvador and Guatemalan Foreign Minister Eduardo Stein, at their meeting in El Salvador proposed a comprehensive reconstruction plan to pull the isthmus, once and for all, out of economic stagnation and poverty.

Nicaraguan economist Alejandro Martinez Cuenca, a former planning minister and current director of the International Foundation for the Global Economic Challenge, suggested an aid programme similar to the U.S. Marshall Plan which helped rebuild Europe in the wake of World War II.

"Central America will not be able to get back on its feet from this tragedy with projects and charity...the only way is through the promotion of a Marshall Plan-style initiative, because the countries of Central America were so destroyed it looks like a war took place," he told IPS in Managua.

At Monday's summit in El Salvador, the five leaders asked the World Bank, International Monetary Fund (IMF), Inter-American Development Bank (IDB) and Central American Bank of Economic Integration to participate in working out an integral reconstruction plan.

The Latin American Programme of Competitiveness and Sustainable Development, of INCAE, a Central American academic institution that works closely with Harvard University and its economic gurus, Michael Porter and Jeffrey Sachs, will be in charge of drawing up the plan.

The presidents and ministers also urged the international community to convene "an emergency regional consultative group to help provide Central America with the financial resources needed to implement the plan, in accordance with the damages faced by each country."

The presidents suggested that the multilateral lending institutions participate in the group, along with representatives of the Group of Seven industrial powers, the European Union and the United Nations.

The leaders also stressed the crucial need for Central American exports to enjoy free access to international markets. They called on the United States to commit to negotiating a free trade agreement with the region and the immediate expansion of the preferential terms of the Caribbean Basin Initiative (CBI).

The governments of Central America want the preferences extended to the region to be brought into line with those enjoyed by Mexico and Canada as partners of the United States in the North American Free Trade Agreement (NAFTA).

Central America has made innumerable efforts to obtain admission into NAFTA, or at least an expansion of the CBI, but to no avail. On a visit to Costa Rica last year, U.S. President Bill Clinton promised to sponsor an expansion of the CBI, but the initiative remains shelved.

"Now is the opportune moment to seek that expansion," economist and former foreign minister of Costa Rica, Fernando Naranjo, told the weekly 'El Financiero'.

The presidents also want the EU to lift the tariffs limiting Central America's agricultural and industrial exports.

Furthermore, the presidents urged the international community to issue a general amnesty for undocumented Central American immigrants worldwide - a request that was especially aimed at the United States, where millions of undocumented Central Americans currently reside.

In their final declaration released Monday, the leaders reiterated the requests for debt relief for Nicaragua and Honduras - which together owe more than 10 billion dollars - issued last week by presidents Arnoldo Aleman and Carlos Flores.

The requests have awakened an echo around the world. France, for example, announced that it was prepared to cancel the nearly 100 million dollars owed it by the two countries, which were hit hardest by Mitch.

French officials said that although the amount was small, the gesture was designed to set an example for other creditors to follow suit.

Cuba also announced Tuesday that it would cancel its claims against Nicaragua.

Cancellation of the foreign debt of Honduras and Nicaragua is crucial to their reconstruction, because debt servicing absorbs a large part of their national budgets.

Repayments on its foreign debt of close to $4 billion absorbs 40% of Honduras' annual budget, while around one-third of Nicaragua's budget goes to servicing its $6.5 billion debt.