Press Release No. 98/7

Press Release: IMF Approves Three-Year Arrangement Under the ESAF for Nicaragua

March 19, 1998

The International Monetary Fund (IMF) has approved a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF)¹ for Nicaragua, in an amount equivalent to SDR 100.9 million (about US$136 million), to support the government’s economic program for 1998-2000. The first annual loan, equivalent to SDR 33.6 million (about US$45 million), is available in two equal semiannual installments, the first of which will be made available March 25, 1998.

Background

Since peace was restored following the civil war in the 1980s, Nicaragua has made substantial progress in reducing economic imbalances and in moving toward a market-based economy. The government strengthened macroeconomic policies, eliminated most price controls, and liberalized the foreign exchange and trade system. As a result, inflation dropped to single digits in 1997, and real GDP growth accelerated to about 5 percent. Public finances deteriorated, however, reflecting large expenditure overruns and an increase in the public sector domestic borrowing requirement; and, in combination with a weakening of credit controls, led to pressures on net official international reserves.

Medium-Term strategy and the 1998 Program

The objectives of the government’s medium-term strategy for 1998-2000 are to move the economy toward sustainability of the public finances and the external sector, carry out structural reform, and promote economic growth in order to alleviate poverty and reduce unemployment. The fiscal program aims at increasing public savings by 6 percentage points of GDP during this period, and targets a small surplus in the combined public sector balance (after grants) by the year 2000. The basic macroeconomic objectives for 1998-2000 are to: (1) increase gross reserves to the equivalent of 3 months of imports; (2) achieve a rate of real GDP growth of around 6 percent by the end of the program period; and (3) bring down inflation to about 5 percent. Within this medium-term strategy, the 1998 program, supported by the first annual ESAF loan, seeks to: (1) increase gross reserves to the equivalent of 1.8 months of imports; (2) achieve a real GDP growth rate of 4.8 percent; and (3) limit inflation to 8.0 percent. To achieve these objectives, the government will pursue a fiscal policy designed to reduce the overall public sector deficit (before grants) to 9 percent of GDP from 9.7 percent in 1997. This will entail a reduction in the size of the public sector and an increase in central government revenues brought about by a broadening of the tax base, increased transparency of the tax system, and the elimination of a large number of discretionary VAT and customs exemptions. Also, central government expenditures will benominally frozen, and export subsidies eliminated. Monetary policy is designed to support the external sector and inflation objectives of the program.

Structural Reforms

The authorities plan to continue with public sector reforms to improve services and efficiency. They intend to implement a law that restructures the executive branch so as to reduce the number of government ministries and agencies reporting directly to the President. To improve governance and public accountability, the government is preparing a comprehensive judicial reform designed to improve legal procedures and enhance enforcement of contracts and property rights. The government will also phase out restrictions and eliminate discriminatory treatment against foreign and domestic investors. The authorities will complete the reform of the state banking sector and privatize public utilities, state oil distribution, and the services of the major ports.

Addressing Social Needs

The authorities’ social strategy is based on investing in human capital, by improving health and education, including through investment in social infrastructure in the poorest regions by the Social Investment Fund. To implement this strategy, the government will need to improve the targeting, quality, accessibility, and efficiency of these services while at the same time promoting their decentralization. Also, social expenditure will be protected although government expenditure as a share of GDP is cut, and the government will be able to increase social expenditure beyond that budgeted, as additional concessional financing becomes available.

The Challenge Ahead

Political demands for increased public expenditure pose risks to the program. Also, despite substantial progress in reducing Nicaragua’s external debt and debt service, Nicaragua continues to face a difficult external position in the coming year as a result of its large debt-service obligations. Sustainable improvements in the external debt situation will require strict adherence to the program and the eschewing of nonconcessional borrowing. Substantial concessional assistance for some years to come will be needed to support Nicaragua’s reform efforts.

Nicaragua joined the IMF on March 14, 1946, and its quota² is SDR 96.1 million (about US$129 million). Its outstanding use of IMF financing currently totals SDR 20 million (about US$27 million).