Press Release No. 99/44

Press Release: IMF Approves Second Annual ESAF Arrangement for Nicaragua

September 16, 1999

The International Monetary Fund (IMF) approved the second annual arrangement for Nicaragua under the Enhanced Structural Adjustment Facility (ESAF),¹ in an amount equivalent to SDR 33.6 million (about US$46.1 million), to support the country's economic program. The
Executive Board of the IMF also had a preliminary discussion of the HIPC ² document for Nicaragua and considered the country eligible, in principle, for assistance under the Iniciative. Nicaragua's three-year ESAF arrangement was approved on March 18, 1998 (see Press Release 98/7), in the amount of SDR 100.9 million (about US$138.3 million), and in February 1999, was augmented by SDR 48 million (about US$65.8 million).

In commenting on the Executive Board ESAF-related discussion on Nicaragua, Stanley Fischer, First Deputy Manager Director of the IMF, said:

"Executive Directors expressed their satisfaction with Nicaragua's macroeconomic, structural, and social policies in 1998 and thus far in 1999, which were broadly in line with the objectives of the ESAF-supported program. Despite the adverse impact of Hurricane Mitch in late 1998, economic performance had strengthened in 1999, with more rapid GDP growth, a decline in inflation, an increase in net international reserves, and a further drop in unemployment.

"Directors endorsed the authorities' new three-year program for 1999 -2001. To enhance the basis for sustained high quality growth, the program aims at further fiscal consolidation, and places renewed emphasis on structural reforms and improved governance. Directors supported the fiscal objectives of mobilizing domestic and external resources to meet priority spending needs while improving the overall public sector balance on a durable basis. They stressed that the success of the program would depend heavily on increasing public revenue and shifting spending priorities from unproductive areas to the social sector.

"Directors endorsed the authorities' strategy for poverty alleviation and social development which focused on reforms of the public health and education systems, the strengthening of the social safety net, and the promotion of rural development. Reflecting additional international aid in the wake of Hurricane Mitch and donor support for the Supplementary Social Fund, total social expenditures are expected to rise to over 15 percent of GDP during the next two years.

"Directors welcomed the authorities' intention to give renewed emphasis to structural reforms, including the privatization program in the telecommunications and electricity sectors, as well as the reforms of the financial and social security systems. They strongly endorsed the authorities' intention to improve governance, through greater transparency in the management of public sector accounts, the accelerated resolution of outstanding property claims, the strengthening of an independent judiciary, stronger local government, and the enhanced participation of civil society," Fischer said.

Program Summary

Over the past several years, Nicaragua has made substantial progress toward macroeconomic stabilization, external viability, and the restoration of a market-based economy. From 1994 to 1998, economic growth averaged 4 1/2% a year, private sector investment expanded markedly, inflation remained near single digits, and the unemployment rate declined from about 18% to 13%. Notwithstanding improvements in the social conditions, poverty remained widespread, however, in a fragile macroeconomic context where the external position is weak.

In 1998, under the ESAF-supported program, the fiscal position improved more than envisaged, credit policy was tightened, and progress was made in reforming the financial system, streamlining the public sector, and setting the legal framework for the privatization of public enterprises. In October 1998, however, hurricane Mitch caused significant damage to the country, displacing families and destroying infrastructure and agricultural production.

The government's medium-term strategy for the remainder of 1999 and 2000-01 attaches priority to the process of reconstruction and expansion of public spending in the social areas. The program aims at further progress toward sustainability of the public finances and the external sector, and at strengthening the process of structural reform and governance, thereby enhancing the basis for sustained growth and improvement in social conditions. The macroeconomic objectives of the program include limiting the 12-month inflation rate to 7% by end-2001; raising GDP growth to 6.5% in 2000-01; and strengthening the net international reserves position.

To these ends, the fiscal program seeks to mobilize domestic and external resources toward priority spending sectors while improving the public finances on a sustained basis. The combined public sector deficit (before grants) is to be limited to 13.6% of GDP in 1999, and to decline to 10.2% of GDP in 2000, and to 8.2% of GDP in 2001, aiming toward fiscal consolidation. Achievement of the fiscal targets is based on expenditure restraint and the strengthening of tax administration. The monetary program is based on an increase in currency in line with nominal GDP growth.

During 1999-01, the government's structural and social policies agenda contemplates the consolidation of the reforms of the financial and public sectors, while a series of "second generation reforms" are introduced in the areas of social security and governance. A major reform of the social security system is planned with the objective of strengthening the financial position of the existing pension system and introducing a fully funded system of individual, privately managed capitalized accounts.

The main elements of social policy are the reforms of the health and education system, the strengthening of the social safety net, and the promotion of rural development. In the coming months, the government will evaluate its social and poverty reduction programs in light of the results of the recently completed Living Standards Measurement Survey for Nicaragua conducted with support from the World Bank. A revised social program, to be completed in the first quarter of 2000, will include an assessment of the appropriate level of social expenditures in 2000-01, taking account of the possible assistance under the HIPC Initiative.

Nicaragua joined the IMF on March 14, 1946; its quota³ is SDR 130 million (about US$178.2 million). Its outstanding use of IMF financing currently totals SDR 101.7 million (about US$139.4 million).