Case study: Central America

Hurricane Mitch: Natural disaster on top of economic disaster

Click here to see a regional map showing aid and debt flows post-Hurricane Mitch.

By News Online's Dominic Casciani

If you have to go into hospital in Nicaragua, don't expect a fabulous service. You will be doing pretty well if you find even a well-paid nurse happy in her job.

Chris Baird, the Managua representative of the Nicaragua Solidarity Campaign, said that he had witnessed the decline of the country's hospitals over the last decade.

"If you need to go into a public hospital, patients need to provide the sheets on the beds, the syringes and even the contents of syringes - the medication," said Mr Baird.

"Many people decide it is not worth their while going into hospital and they stay at home."

The state of Nicaragua's hospitals is perhaps the most stark display of a ruined economy.

Nicaragua remains the region's poorest nation with the highest level of per capita debt in the world.

Each man, woman and child owes around $1,200 to external creditors with external debt totalling more than $6bn.

Gustavo Parajon, president of the Nicaraguan Council of Churches, said it was now a situation that had become untenable.

"More than 80% of people do not have access to two of the basic requirements for life, such as decent food and shelter," said Dr Parajon.

"The economic reforms in the last 10 years to try and deal with the debt have led to education and health spending falling by the wayside.

"Tens of thousands of children in our country will not go to school this year."

Regional crisis

In Honduras, Nicaragua's northern neighbour, between 35% and 40% of the annual budget goes on servicing debt.

Child poverty: Education levels low

Between 1987 and 1997 the government paid back $4.39bn - leaving its debt burden of $4.45bn untouched.

The social effects are stark. Around 12% of the population will never reach the age of 40 while, per capita, they owe $100 more than they earn for the nation every year.

In El Salvador, almost a third of the adult population is illiterate while per capita 60% do not have access to health services.

Origins

Central America's debt, totalling about $35bn, first emerged when Mexico (not included in this article's calculations) admitted in 1982 that it would not be able to repay its vast debt.

The region's governments borrowed heavily in the 1970s and benefited from high export commodity prices.

During the early 1980s interest rates rose and the value of key regional exports such as bananas and coffee beans dropped.

The World Bank and the International Monetary Fund insisted on liberalising economic reforms.

Then the hurricane struck.

Reaping the whirlwind

Hurricane Mitch, which hit land in October 1998, was perhaps the most devastating regional natural disaster this century.

27 October 1998: Mitch hits Honduras

At its peak, it achieved 180mph, the most severe "category five" status, and dropped an entire year's rainfall in 24 hours.

More than three million people were affected as entire towns were washed away. At least 8,000 died.

Honduras lost up to 90% of its crucial banana crop. Local agriculture was wiped out. Aid agencies assessed that the damage put back the region's development by 20 years.

Massive aid flows were pledged to the region - totalling at least £9bn - but the affected nations were still paying back $2.2m a day to creditors.

While the UK's International Development Secretary Clare Short controversially said that the debt crisis was "irrelevant" to Mitch relief, the aftermath has, ironically, given the region the best opportunity to lobby for debt cancellation.

Professor Victor Bulmer-Thomas of the Institute of Latin American Studies in London, said: "A major source of servicing hard currency debt is exports.

"The big problem in Honduras is that these crops were flattened.

The multinationals have decided to replant the banana crops and there will be some results next year."

But he added: "The extraordinary thing is that modest growth is predicted for Honduras as the inflows of monies have tended to go on reconstruction.

"While people may campaign to cancel the debt, the basic problems are still there. We have to be sure that the released monies are used productively.

"In Nicaragua, that means tackling corruption.

"The lending bodies or countries will want to impose conditions.

"In some ways it will be a case of out of the frying pan and into the fire."

Regional aid

Key lenders and donor countries, led by the Inter-American Development recently agreed reconstruction aid at a meeting in Stockholm.

But the package says little about the debt.

Peter Bate, spokesman for the IAB, said: "Debt is an issue for the creditors such as the Paris Club, the IMF and the World Bank.

"But there seemed to be an interest in doing something about it and to make sure that these countries which were hit by Hurricane Mitch get the benefits."

"This is not a problem has just dawned on the institutions," added Mr Bate "It is as plain as their noses on their faces.

"There is now perhaps the political will that was not there a few years ago."

The future

The Stockholm aid package includes strict conditions to deal with corruption, says the IAB.

Campaigners both inside and outside of Nicaragua say monies have previously disappeared while international lenders and civil society groups are both deeply concerned about an on-going power-struggle between President Arnoldo Aleman and the national auditor's office.

Jubilee 2000 has made financial transparency one of its key lobbying platforms and Honduras has been praised for its proposals in this field.

But the coming months are critical to the region's future.

Relief on the horizon?

Nicaragua and Honduras remain the only Central American countries which could potentially benefit from the controversial HIPC debt relief scheme.

Unless HIPC is reformed in September, its current rules will leave them waiting at least four years for relief.

Prof Bulmer-Thomas predicted that wholesale debt cancellation for Central America would probably not be agreed.

"What matters is that the countries have access to foreign exchange," he said.

"The options are access to grants, low-interest loans, restructuring payments or cancelling some of the debt payments.

"There is no particular advantage of one over the other."

But campaigners say this is not good enough.

"Even before Mitch it was impossible for the region to pay this debt," said Dr Gustavo Parajon.

"Jubilee 2000 has awakened the conscience of northern countries which must realise that the only thing that can work is cancellation.

"There are positive signals coming out ahead of the meeting of the G8 in Cologne.

"We hope for something good. It is all we can do."

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Central America: Debt, aid and Hurricane Mitch

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