The external debt of Nicaragua

 No. E-134 RETURN TO REPORTS V./1-r{J~,\,,1 If It I:: ~ t , ".;I 67057 This report is not to be published nor may it be quoted as representing the Bank's views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEY ELOPMENT THE EXTERNAL DEBT OF NICARAGUA January 15, 1951 Economic Department Prepared by: Andrew C. Huang  THE EXTERWUJ DEBT OF l'IJCA..ltAGUA Table of Contents Pag'e L Debt Outstanding 1 II. Service Payment s 2 III. Earlier developments of the Public External Debt of ~icaragua 3 Table A-I: List of the ~ternal Debt of ~icaragua. November 1950. Table A-2, Interest and Amortization Payments on External Debt of ~Ticaragua. Apnendix ! - Chief Provisions in the Bank of America Loan Agreement wi th lTicaragua. Appendix II A. The Composition of the Unpaid Private Commercial Credits of 1937. B. The Retirement Plan of the Frozen Commercial Credits of 1938.  THE EXTmR2:!AL DEBT OF IflCAHAGUA I. Debt Outs~andi,ng As of November 1950 the public external debt of Nicaragua amounted to the equivalent of US$4.4 million. Nearly 80%. or $3.5 million, of the obli- gation is composed of loans from the :Bank; of J~merica ($2.4 million) and the Eximbank ($1.1 million). The balance of $910,000 represents the principal Qut- standing on the sterling bonds of 1909 on \'1h1ch the aIlplication of sinking fund has been in defaul t since 1946. The structure of the indebtedness Sh01tTU in detail in Table A-I is summed up below. External; D!?bt of lUcaraguf3.* (in thousands of U.S. dollars) Amount outstandi;ng A. U.S. dollar ob1i~tions 1) J!% Baa~ of America loan 1947-55 2·380 2) 4~ Export-Import Bank loan 1941~55 1.115 Sub-total 3·495 B. Sterling loans 4% Bonds 1909-57 (formerly 6%) ........21Q "'* Grand total 4.405 * For footnotes and details see Table 1. ** Converted at $2.80 ~ ~l. A. U.S. dollar debt 1) In 1947 the Bank of America loaned $4.5 million against gold as collateral to the National Baak of Nicaragua to improve its exchange position. Of this amount $2,4 million is. currently outstanding. Service on this loan has been maintained according to an agreement whose principal stipulations are summarized in Appendix I. fI··I.".  -2- 2) The Eximbank loan of 1941, originally authorized for $2 million with $1.1 million now outstanding, was granted in connection with the building of the Pan-American Highway. This loan is also being regularly serviced. B. Sterling obligation The 4% sterling bonds of 1909 (known as the Ethelburga loan, formerly 6~) issued in the amount of ]:;1.25 million and no,., with ]:;325, 000 ($910.000) outstanding "lere oontracted for the follo\"1ing purposes: a) b500,OOO for the redemption of 1886 sterling bonds and the American loan of 1904. b) ~570,OOO for rail~~ys, construction. c) ~180.000 for various government purposes. The amortization of this loan has been suspended since July 1946 because the British Council of Foreign Bondholders rejected a further interest reduction to 3% p.a. HO'lrlever, 4% interest payments have continued up to the present. II. Service Paj~ents Projected service paymants due 1950-57 on the external debt of ~icaragua. (including service charges on the sterling loan on the contractual basis), tabulated in detail in Table A-Z. are s~~marized below. Estimated Service Payments on the 3xternal Debt of Hicaragua * (in millions of U.S. dollars) T o t s. 1 Service Pal1ts b;y: Currenc;,! Outst'g Amorti- Service Year debt zation Interest Paxments U.S. ~ debt J" de~t 1950 .5.2 1.0 0.2 1.2 1.1 0.1 1951 4.2 1.1 0.1 1.2 1.1 0.1 1952 3·1 1.0 0.1 1.1 1.0 0.1 1953 2.0 0·9 0.1 LO 0·9 0.1 19.54 1.2 0.7 ** 0.7 0.6 0.1 1955 0.5 0·3 *'" 0,3 0.2 0.1 1956 0.2 0.1 ** 0.1 0.1 1957 0.1 0.1 ** 0.1 0.1 I\< For footnotes see Table A~2. ** Averaging $16,000 yea.rly. ... / ...  - :3 - Total service requirements range from between $1.2 million during 1950-52 to $127.000 during 1956-57. The debt ca~ls for amortization at an annual rate of $1 million during 1950-52, $772,000 for 1953-54 and about $120,000 in 1956-57. Annual interest payments decline steadily from $140,000 during 1950-52, to $50,000 during 1953-54 and. about $10.000 in 1955-57. Pay- menta in U. S. dollars average about 80~of the total during 1951-5.5; there- after they "rill be applied entirely on the sterling debt. III. Earlier developments of the Public External Debt of ; i lJicara~ The first external loan floated by Nicaragua was the 6% sterling loan of 1886, amounting to ];,285,000. for the develol::lment of raihlays. 11 In July 1894 the interest on this debt fell into default. and in 1895 a settlement of the debt ..ras effected betl<reen the Governnent and the British Council of Foreign :Bondholders ",hich provided: a) Reduction of interest from 6p to 4p, beginning in January 1896. b) Certificates ,"'1ere issued in payment of the coupons in arrears at 50% of their face value. c) A 1% cumulative sinking fund on the principal, half to be applied to the redemption of the prinCipal and half to that of the certificates. (The redemption of the Certificates under the 1895 Arrangement "ras completed in 1904). In 1904 an American loan was negotiated for $1 million at 6%. This debt was service~ regularly and its ~rincipal amount outstanding, together with that on the 1886 sterling bonds, \"las refunded 1:Jith the proceeds of the 1909 sterling loan. as mentioned earlier in Section I. :Behfsen 1911-37 a succession of defaults occurred on the sterling loan of 1909. During the same period four debt settlement plans were put into J,./ A previous obligation consists of 2/1Z of the Central American Federation debt of 1,Z7.Z00 taken Over by Nicaragua in 1827 and paid partially by 1874 . . ../ ...  - 4 - operation, "lith the consent of the Council, of '<1hich the particulars are surnwarized below: Main Provisions of Debt Adjustment Plans respecting the 1909 sterling loan. Payment of service Extension of Interest ;;; , Bate arrears maturitl I" 1912 6~ reduced to 5% Full payment. 1\To change 1915 change l'lO Back interest paid at 20%. No change 1917 No change Principal in arrears paid Ira change in full. rlBack interest naid - at 30-100~ in cash and 5-year funding bonds. 1937 5% reduced to 4% Amortization at 1% p.a. on Extended from assented bonds. July 1944 to 1957. The full payment, under the 1937 Agreement, ,-.ras met until September 1941 when application of the sia~ing fund was a~in suspended. Sinking fund payment was resumed in January 1945 after more than three years' suspension. In July 1946, however, application of the sinking fund once mOre went in default and has remained so to date due to the Ooupcil!s rejection of the Government's proposal for a further interest reduction from 4p to 3% p.a. as mentioned in Section I. In addition to the external debts mentioned above, commercial debts totalling $28 million had acc~~u1ated between 1935~37. This represented unpaid private imports taken OVer by the Government. 1/ By ivlay 1937 the sinking fund on these commercial debts had gone into default and remained so until September 1938, ''Then a redemption plan involving cancellation of half of the debts was agreed 11 For the composition of this debt see Appendix II-A. . .. / ...  - 5- upon by the National Foreign Trade Council in Ue\"l York and the government. The other half of the debts was fully paid by July 1943. 11 Between 1938-50 three public external funded loans ",ere incurred by liicaragua. The first one - the $2 million 4% Eximban..lc loan of 1939 for the construction of the Pan-American higluvay - '-las fully repaid by early 1949; the other two - the Export-Import Bank loan of 1941 and the Bank of America loan of 1947 - are both still Qutstanding and have already been referred to in Section I. !I For the details of the Settlement see Appendix II-B,  Ta:ble A-l: LIST OF THE EXTERNAL DEBT OF NlCAR.iiGUA, NOVEMBER 1950 (In thousands) Issued Out- Service or standing Purpose Terms record authorized U.S. dollar obligations J 1/2~ ~ank of America loan,1947-55 $ 4,500 $ 2,380 To improve Secured by Serviced exchange pled.ge of regularly. reserve of gold values the National at $2 .. 75 :Bank of million. Nicaragua. 4% Export-Import l3ank loan, 1941-5.5 2.000 1,115 Oonstruction S .A. 4 1/2% Serviced of Pan Ameri- years from regularly. can high\vay. 7/14/50. Total U.S. dollar debt $ 6,500 $ 3,495 Sterling obligation 4% bonds, 1909-57 (The Ethelburga Loan fromerly 6%) ~ 1,250 J:: J25 Refunding of Secured Interest paid (1/1/50) old debts, against continuously government customs at 4%. Sinking purposes and receipts, fund suspended rail construe-. liquOl: and since July 1946. tiona tobacco monopolies, receipts, etc. Source I Annual report of the Oorporation of Foreign l3ondholders 1939-49. London. Revista Trlmestral, Del J3rulCO Nacional de Nicaragua, 1950. Reports, U.S. Oommerce Department.  Table A-2: Il~TDREST Ju"ID AMORTIZATION PAYMENTS ON LXT=m~.AL DEBT OF liTICil.RAGUA (Er~ressed in thousands of U. S. dollars} PAge 1 Bank of America Export-Im"Rort :Bank: Total dollar loans Amount PaY!Ilents Amount P&ments Amount _ P~yments Year out- Amortl- In- Ttl out- Amorti- In- T tal out- A..'11orti- In- Ttl . standing zation terest 0 a strulding zation terest 0 standing zation terest 0 a 1950 2,9.541/ 578 96 674 1,402 Y 375 53 428 4,356 953 149 1,102 1951 2.377 578 76 654 1,027 400 37 437 3,404 978 113 1,091 1952 1,799 578 55 633 627 369 21 390 2,426 947 76 1,023 1953 1,222 578 35 613 258 183 7 190 1,480 761 42 803 1954 644 519 15 534 75 50 2 52 719 569 17 586 1955 125 125 1 126 25 2-5 1 26 150 150 2 152 1956 1957 See footnotes on page 2.  Table A-2: IliJTlllEST AND AMORTIZATION PAYMJJNTS Olil EXTElUlAL DEBT OF NICARAGUA - Continued (Expressed in thousands of U.S. dollars) Page 2 ~storling bonds~ GJ.'and total Year Amount Payments Amount Payments out- Amorti- In- Ttl out- Amorti- In- Ttl standing zation terest 0 a standing zation terest 0 a 19.50 8.58 93 34 127 5.214 1,046 183 1,229 1951 765 97 30 127 4,169 1,07.5 143 1.218 19.52 668 100 27 127 3,094 1,047 103 1.1.50 19.53 567 105 22 127 2,047 866 64 930 19.54 462 109 18 127 1,181 678 3.5 713 1955 354 113 14 127 504 263 16 279 1956 240 11B 9 127 240 118 9 127 1957 123 122 5 127 123 122 5 127 11 The actual principal outstanding amounted to ~2t380tOOO as of 11/30/50. Y The actual principal outst::mding ar.lounted to $1,11.5,000 as of 11/30/50. II These bonds payable in London, and also in Faris at rate of fr 25.20 per;!;' sterling, converted into dollars at ~1 = $2.80. At the old rate of ~1 = $4.0275, annual service charges on this bond would be the approximate equivalent of $183,259.  APPEIIDIX I CHIEF PROVISIONS IN THE BANK OF MfERICA LOAN AGREENENT '.'IITH NICARAGUA The Bank of America loan totalling $4.5 million was extended to the National Bank of Nicaragua in accordance with an agreement reached on January 25. 1947 of ,-,hich the principal conditions precedent are: a) The creation or maintenance of a deposit account favoring National Bank of ificaragua 'Vlith the Ban..1t of America in the minimum amount of $750,000. b) The perfection of the pledge of 78,711 Ounces of gold, equivalent to $2.75 million, ("med by the National Bank of l:icaragua, and in the custody of the Federal Reserve Bank of New York, to the Bank of America as security for the loan. c) Upon any defaul t, the Bank of America may charge any out- standing amount of the loan against the deposit account. d) The amount of gold pledged may be reduced 'tlhenever i t is in excess of outstanding debt. The credit is guaranteed by both the Nicaraguan Government and the i-iortgage Bank of Nicaragua and is repayable beginning April 1947 itlith funds provided by the Government from the collection of a 5p tax on foreign exchange sales.  APPEiIDIX I I .A. . The Composition of the Unpaid Private Commercial Credits of 1237 a) $2.4 million of deposits in Nicaraguan banks a,1ai ting remittance abroad. made between January 1935 and V~y 1937 at the rate of 1.1 cordobas to the $1. * b) $200,000 of debts due to foreign firms. c) $200,000 of commodities held u~ in the customs pending exchange clearance. * The de~osi ts vfere provisionally accepted on the understanding that the importers would be liable for any exchange losses which might result from an increase in exchange rates when the funds were actually remitted. That contingency became a fact on March 15. 1937 'IIlhen the iiational 3ank of }:Jicaragua advanced the selling rate to 2 cordobas to $1. B. The Retirement Plan of the Frozen Commercial predits of 1918 a) Repayment in cordobas of unpaid c1ains. b) Repayment in dollars or pounds sterling at the rates of exchange at \-!hich the respective de:9osit "las made and accepted. Payment \,,111 be made in cash in the case of smaller claims up to a maximum of $500 provided that the sum of US$40,OOO set aside for this nUTnose was sufficient; cash in U.S. currency or sterling equiv~lent to 5% of the principal was to be offered for larger claims plus Nicaragua's Frozen Commercial Indebtedness Notes of 1938 due serially to September 12, 1946 inclusive for the balance of 95%. Furthermore, an additional 8~ of notes would be received for capitalized interest of 2~. c) Payment in cash. dollars or sterling, at the rate of exchange of $1 for each 4 cordobas or the equivalent of such rate in sterling. (Source: Hoody's Governments and Hunicipalities, 1938.-46)