Press Release No. 08/204

Press Release: IMF Executive Board Completes First Review Under Nicaragua's PRGF Arrangement and Approves Increase in Financial Support by US$10 million

September 11, 2008

The Executive Board of the International Monetary Fund (IMF) has completed the first review of Nicaragua's performance under its Poverty Reduction and Growth Facility (PRGF) arrangement. The Executive Board also approved to increase financial support under the program by SDR 6.5 million (about US$10 million) to SDR 78 million (about US$120.4 million) to help Nicaragua cope with the negative effects of a series of natural disasters in 2007. Today's decision allows an immediate disbursement to Nicaragua of an amount equivalent to SDR 18.4 million (about US$28.4 million).

The Executive Board also approved waivers of non-observance of two performance criteria related to delays in the approval of the 2008 budget and the adoption of measures to discourage theft in electricity consumption. Nicaragua's PRGF arrangement was approved in October of 2007 (see Press Release No. 07/224).

Following the Executive Board discussion, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chairman, said:

"Nicaragua's macroeconomic policies remain prudent, and the implementation of the PRGF-supported economic program has been broadly satisfactory. However, against the backdrop of a more challenging external environment, growth has slowed and inflation has jumped to double digits, mainly on account of commodity price shocks. The current account deficit has widened, but strong FDI and external assistance have allowed the central bank to further accumulate international reserves.

"The authorities are to be commended for maintaining the fiscal position well within program targets through the first half of 2008. It will be crucial to control expenditures during the upcoming election period. The fiscal program for 2009 has been relaxed marginally in order to allow for larger-than-expected energy and transport subsidies, but a tightening may be needed should demand pressures arise. To preserve fiscal sustainability, generalized subsidies should be avoided and gradually replaced with better-targeted social programs.

"The central bank is committed to continuing its efforts to control inflation through the management of liquidity conditions, with a view to anchoring inflation expectations and limiting second-round price effects. Equally important, efforts should continue to implement the anti-inflationary strategy and contain wage pressures, including those related to ongoing minimum wage negotiations.

"Prompt re-establishment of the Central Bank Board is essential to allow for regular monetary policy management and to formally approve the recently reached bond-restructuring agreements with private banks. Safeguarding the stability of the banking system will require ensuring that banks continue to comply with prudential norms and improved accounting standards.

"The recent publication of a report on the sources and uses of all official aid is an important step toward the more transparent management of external assistance. The continued implementation of monitoring mechanisms will be key to better assessing any potential macroeconomic impact and ensuring the effectiveness of aid inflows.

"Structural reforms will continue to address bottlenecks to growth and ensure efficient and sustainable fiscal policy. In this context, it will be important to enforce the recently approved law against electricity theft, as well as to adjust electricity tariffs to reflect underlying costs. Progress on the fiscal front will include the timely implementation of a well-sequenced reform plan to overhaul public financial management, and the formulation of policy options to address the actuarial imbalance of Nicaragua's pension system.

"Steadfast implementation of the program will be particularly important to maintain confidence in the face of a more difficult external environment. Efforts should also continue to strengthen the business climate and attract private investment," Mr. Kato said.